PERSONAL FINANCIAL PLANNING
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 childrens 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
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 owners 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;
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
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 arms
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 childrens
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. 8586), 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
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 childrens
support or what is in the childrens best interests. Such agreements
should also not minimize a spouses 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 others 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 fathers interest in the plan. He claimed that the wifes
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
Statement of consideration (which often includes the marriage
itself and additional promises of acknowledged value);
A statement of each partys rights and powers relating
to premarital assets;
A statement of each partys waiver as to assets separately
owned by the other party;
A statement of limiting liability for the other partys
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 partys 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 states laws control
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 spouses
intent, particularly where disputes arise over distribution of a deceased
Attorney fees to draft antenuptial agreements depend on such factors as the
attorneys experience, the agreements 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 partys 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 spouses 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 payers 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
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 propertys 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. Gutners article in Forbes quoted Raoul Felder,
who recommended inflating your net worth 10% to 20%. That way your
spouse cant 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
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,
Milton Miller, CPA
William Bregman, CFR, CPA/PFS
Theodore J. Sarenski, CPA
Dermody Burke & Brown P.C.
David R. Marcus, JD, CPA
Marks, Paneth & Shron LLP
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