The CPA Journal

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:

Protect identified assets from transfer to the other party upon cessation of the marriage in the event of divorce or death;
Protect the rights of children from prior marriages (e.g., to preclude a business owner’s children from a prior marriage from losing certain business rights to the new spouse);
Avoid disputes related to such issues as opportunity costs, ambiguous valuation methods of properties, liabilities and contingencies; and
Avoid improper provisions. For example, Stan Lowton (a lawyer for Donald Trump) noticed a client imposing a $1,000 penalty for every pound a wife gained.

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—

Modifying or eliminating spousal support;
Allocating property upon separation, marital dissolution, or death; and
Ownership rights in the disposition of proceeds from a life insurance policy.

In addition, enforceable antenuptials should observe certain conditions:

No coercion. As in any other type of contracts, evidence of coercion will void the contract. For example, signing the contract one day before the wedding day could indicate that one spouse signed the contract under duress. On the other hand, the court will look at the overall fairness of the circumstances. For example, in Michigan, even an antenuptial agreement signed after the ceremony on the same date as the wedding was considered enforceable [Storey v. Storey, 275 Mich 675, 267 NW (1936)], based on evidence that the parties negotiated the contract at arm’s length. Moreover, a Massachusetts appellate ruling recently enforced an antenuptial agreement re-signed several months after the marriage ceremony (Rosenblatt vs. Rosenblatt, 39 Mass. App. Ct. 297; 655 N.E.2d 640; 1995 Mass. App. Lexis 795). Ultimately, the two parties should establish a clear record of unimpeachable facts to support their voluntary decisions prior to and at the date of signing the contract.
Fairness. Fairness is extremely critical to invalidate allegations of coercion, fraud, or other improprieties. For example, if one spouse is expected to be the sole wage-earner and the other the children’s primary caretaker, the court may view an antenuptial agreement purporting to bar spousal support as inequitable unless sufficient assets are allocated to the homemaker spouse to ensure future financial security. In any event, marriage in and of itself is sufficient consideration for an antenuptial agreement, although additional consideration is commonly present, such as each party giving up some property interest in the marital estate. Consistent with general contract principles, the courts generally will not look at the sufficiency of the monetary consideration in the absence of an allegation of fraud or mistake.
Full disclosure of assets and liabilities. Full disclosure is the key to a solid antenuptial agreement. Agreements that fail to disclose major valuable assets or known debts can be rescinded. Writing in the ABA Journal (January 1993, pp. 85–86), Ira Lurvey advised that the unique circumstances of each marriage relationship militate against the use of boilerplate or “short-cut” agreements. An attorney should represent each party, and each attorney must counsel the client to disclose fully all of his or her assets and liabilities, lest the agreement be successfully challenged. Attorneys lacking complete information regarding their clients’ assets, liabilities, and other unique circumstances cannot effectively advise their clients regarding the fairness of antenuptial agreements.
No contradiction to laws. Antenuptials should not attempt to override the judicial process regarding child custody, parenting time, or child support. This condition follows the legal principle that parents may not barter away their obligations regarding children’s support or what is in the children’s best interests. Such agreements should also not minimize a spouse’s unlimited liability in such community property states as California.
Antenuptial agreement and a waiver of survivor benefits in retirement plan. While the Employment Retirement Security Act of 1994 (ERISA) allows waiving certain benefits, prenuptial agreements cannot supersede such requirements. In Peter Hurwitz v. Joan Lear Sher, 982 F 2nd 778 (2nd Cir., 12/28/92), before their wedding, Hurwitz and his wife entered into an antenuptial agreement in which each spouse waived all rights to the other’s property. Hurwitz died while married to his wife. After death, his son, who was named as the primary plan beneficiary, sued the wife, asking the court to determine that he was the sole beneficiary of his father’s interest in the plan. He claimed that the wife’s signing the antenuptial agreement constituted consent to waiving the spousal survivor annuity. A district court held for the spouse, ruling that her consent did not meet the IRC section 417(a) requirements, which require a “spouse” to sign the waiver, and that the couple were not married at the time that they signed this antenuptial agreement. Despite an appeal, the appellate court upheld the district court decision.

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

Declaration of underlying reasons for parties to enter into agreement;
Statement of consideration (which often includes the marriage itself and additional promises of acknowledged value);
A statement of each party’s rights and powers relating to premarital assets;
A statement of each party’s waiver as to assets separately owned by the other party;
A statement of limiting liability for the other party’s debts, including an indemnification agreement;
Detailed description of the specific provisions relating to termination of marriage;
A statement that the agreement overrides the laws of intestacy, dower, and right of election;
A statement that each party has fully disclosed to the other party all assets and liabilities;
A statement that each party has had the opportunity to review the agreement with legal counsel of his/her own choosing, and has received independent advice regarding the legal and financial, tax, and inheritance effects and consequences of the agreement;
A statement that each party acknowledges that the agreement entitles the party to less than he/she might otherwise be entitled to of the other party’s assets, in the event of death or divorce;
A statement that each party enters into the agreement freely and voluntarily (i.e., without coercion);
A statement that no modification shall be made or be enforceable unless in writing, dated, witnessed, and notarized; and
A statement identifying which state’s laws control the agreement.

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—

Identifying objects of concern the parties seek the agreement to protect (e.g., properties existing before the date of marriage, or such future-earned values as pensions, social security payments, and accretion of farm animals). At this stage the professionals should distinguish between significant and insignificant items.
Developing an inventory of all significant assets, tangible and intangible. Tangible assets have physical substance, such as cars, furniture, jewelry, and consigned goods if the spouse’s business is the consignor. Intangible assets lack physical substance (e.g., copyrights, trademarks, patents, pension funds, and life insurance surrender value). Writing on antenuptials in Forbes magazine in 1994, T. Gutner recommends including compensation and all financial assets, and excluding extraneous provisions such as who will get the pets.
Developing an inventory of debt, including mortgage loans, education loans, promissory notes payable, credit card debt, open accounts payable, IOUs, and contingent liabilities (e.g., discounted notes receivable with recourse, and product warranties). Even “innocent” omissions of assets or debt could void the whole contract.
Using precise language. For example, assets, liabilities, expenses, revenues, income, and losses have precise meanings when agreeing on the value of such businesses as a restaurant, gas station, or printing store that the parties in the antenuptial agreement own.
Using consistent measurements. Accounting measurements have such dimensions as—
- Absolute value vs. percentages. Should periodic support payments to a spouse be stated as monthly dollar amounts or as percentages of the payer’s monthly salary?
- Spousal support vs. property settlement. Under spousal support recapture rules, payments become income for income tax purposes (taxable to the recipient and deductible by the payer). However, spouses seeking to use the antenuptial agreement to ensure that all transfers made after divorce avoid both income and gift taxes should have the agreement make all payments conditional on their inclusion in the divorce decree.
Interplay between spousal support and child support. The spousal support provision in an antenuptial agreement should not conflict with court-ordered child support. For example, if a child support arrearage arises and a risk exists that spousal support payments made pursuant to an antenuptial agreement will be applied by the court to the child support arrearage, the situation may give rise to a material breach of the antenuptial agreement provision for support.
Market or book value. Most agreements should use the book value, which equals the property’s original cost less the accumulated depreciation up to the point of division. The book value is more objective than market value because it is verifiable. Disputes regarding market value can also arise, as when divorcing couples jointly own a machine used in the business with different “replacement cost” and “forced liquidation” values. Gutner’s article in Forbes quoted Raoul Felder, who recommended “inflating your net worth 10% to 20%. That way your spouse can’t argue later that anything was undervalued.”
Tax and trust issues. The accountant can provide valuable professional advice on such issues as minimizing taxes on capital gains, allocating assets to minimize tax liabilities to spouses and their children, and coordinating trust and prenuptial agreements to benefit all parties.

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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