PERSONAL FINANCIAL PLANNING

June 2002

Legal and Accounting Considerations of Antenuptial Agreements

By Mohamed E. Bayou, Alan Reinstein, and Laurel Stuart-Fink

Antenuptial agreements, also commonly called prenuptial agreements (prenups), are no longer only for the rich and famous. Just as companies often require their employees, suppliers, and affiliates to sign similar types of agreements before committing to certain employment and contractual relationships, couples planning marriage now often seek the benefits of such agreements.

Antenuptial agreements have become increasingly common, especially with the increased numbers of second or “blended” families, where spouses look to protect their children’s inheritances from these new relationships. Such agreements also help to reduce protracted divorce litigation, providing welcome relief to congested family law dockets.

Antenuptials seek to define prospective spouses’ financial rights, duties, and obligations during marriage and in the event of death or divorce. They are generally legal and governed by both common-law principles and specific legislation.

Reasons for Antenuptial Agreements

Antenuptial agreements are normally designed to accomplish several objectives:

Lowton asserted that “[n]o court would enforce that kind of provision, and it could spur the judge to toss the whole thing out.”

Some parties seeking antenuptial agreements misconceive the objects they want to protect. For example, many such objects may not need an antenuptial agreement, as state laws already provide the necessary protection, such as joint tenancy and testamentary devices.

About 5% of all first marriages and 20% of remarriages entail antenuptial agreements, thereby making such contracts an attractive means to deal with potential disputes over property, liability valuation, and distribution. Indeed, antenuptials may be the only guard against increasing uncertainty and risk.

Conditions of a Valid Antenuptial Agreement

In 1976, the Uniform Antenuptial Agreement Act (UPAA) first provided uniform guidelines to govern the issues involved in a valid antenuptial agreement contract. Antenuptial agreements have features different from regular contracts. For example, the UPAA provides that as long as such agreements do not violate public policy, they can include any contractual agreement except child support and custody. Moreover, the wisdom and fairness of the bargain of an antenuptial agreement may be argued and even decided on conditions existing at the time of performance, rather than at the time of contracting. While such “soft” issues as agreeing on who will cook or wash the dishes are virtually unenforceable, the UPAA states that an antenuptial agreement may address such issues as—

In addition, enforceable antenuptials should observe certain conditions:

Based upon the above criteria, an antenuptial agreement should include the following provisions, subject to modifications of individual situations:

States’ Enforcement of Antenuptial Agreements

The 50 states treat antenuptials differently. Until 1970, all states had dubious enforcement provisions for antenuptials, because applicable laws were not well developed. However, all states now uniformly enforce such agreements, subject to statutory restrictions or common-law contractual concepts. By 1993, at least 18 states had adopted some variation of the UPAA. According to Lindey and Parley on Separation Agreements and Antenuptial Contracts (2nd ed., 2001), 21 states have “substantially” adopted the UPAA: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Kansas, Maine, Montana, Nevada, New Jersey, North Carolina, North Dakota, Oregon, Rhode Island, South Dakota, Texas, Utah, and Virginia. Eighteen states and the District of Columbia recognize the validity of antenuptials, using common-law principles: Alabama, Alaska, Delaware, Florida, Indiana, Kentucky, Maryland, Mississippi, Missouri, Nebraska, Ohio, Pennsylvania, South Carolina, Tennessee, Vermont, Washington, West Virginia, and Wyoming. Eleven states have enacted statutes other than the UPAA: Georgia, Idaho, Louisiana, Massachusetts, Michigan, Minnesota, New Hampshire, New Mexico, New York, Oklahoma, and Wisconsin.

Michigan courts enforce antenuptial agreements that otherwise meet the prerequisites of a valid contract (e.g., not fraudulently induced or arising from coercion or a mistake). Even if a Michigan court finds an antenuptial unenforceable, it may still refer to the agreement as critical evidence of a spouse’s intent, particularly where disputes arise over distribution of a deceased spouse’s estate.

Legal Advice

Attorney fees to draft antenuptial agreements depend on such factors as the attorney’s experience, the agreement’s complexity, and the value of the marital estate involved.

Some married couples would like to draft or modify their own agreements based on pro forma, standard forms available in bookstores or libraries, then ask an attorney to review their form to check for invalid statements or contradictions. However, in our opinion, a lawyer representing both parties in drafting an antenuptial agreement unquestionably contradicts ethical precepts, even if the parties seem amicable, and may face malpractice liability by a potentially aggrieved party to the antenuptial agreement. Similarly, both parties may well use separate CPAs, such as for an opinion on the appropriateness of a pro forma agreement that already contains most financial details.

Each party should obtain independent legal advice, especially when one party has substantial assets, burdensome debt, children from prior marriages, or where a party harbors uncertainty about the other party’s circumstances, intentions, or motives in seeking such agreements. Independent legal advice protects both parties. By ensuring fairness, challenges to enforceability are far less likely to occur or succeed.

The Role of Accountants and Lawyers

Given their separate duties and areas of expertise, accountants and lawyers can and should team up to develop effective and valid antenuptial agreements, such as by jointly—


Mohamed E. Bayou, PhD, is an associate professor of accounting in the School of Management at University of Michigan-Dearborn.
Alan Reinstein, DBA, CPA, is the George R. Husband Professor of Accounting at the School of Business of Wayne State University.
Laurel Stuart-Fink, JD, is an attorney practicing in West Bloomfield, Mich

Editors:
Milton Miller, CPA
Consultant

William Bregman, CFR, CPA/PFS

Contributing Editors:
Theodore J. Sarenski, CPA
Dermody Burke & Brown P.C.

David R. Marcus, JD, CPA
Marks, Paneth & Shron LLP


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