|Premarital Agreements - Hoping for the Best; Planning for the Worst|
Premarital agreements are commonly referred to as "prenups" and are often given a bad reputation based on misconceptions and lack of understanding. You would not enter into a business partnership with another person without clearly defining each partner's rights and responsibilities. Every marriage has financial implications, obligations, and rights that arise by virtue of the legal union between two people. According to the Centers for Disease Control, in 2009, 50% of all marriages in the United States ended in divorce. The legal dissolution of a marriage and a determination of the resulting financial implications can be lengthy and very costly to both parties at a time when emotions are at their rawest. Even though it may be a difficult topic to discuss with your future spouse or with your child who is contemplating marriage, a premarital agreement can define and control financial implications without the cost of lengthy litigation.
What is a Premarital Agreement?
A premarital agreement is a contract between two parties who intend to marry which deals with the rights of both parties at the end of the marriage. Pursuant to North Carolina law, certain rights are created and given to the husband and wife just by virtue of being married. Those rights include the entitlement to a distribution of marital property and debt, spousal support, certain inheritance rights and powers, and other benefits arising from death during marriage. Premarital agreements should deal with the consequences of the marriage ending by the death of one of the spouses or by separation and divorce. In North Carolina, a man and a woman can enter into a contract prior to marriage which determines the distribution of "property" at the end of their marriage. The term "property" is defined broadly to include traditional items of real and personal property as well as present and future interests, income, and earnings.
How Will a Premarital Agreement Protect Me?
If a marriage ends by separation and divorce, certain rights and obligations may arise as between the parties including child support and spousal support and the distribution of property and debt acquired by the parties during the marriage. A premarital agreement allows the parties to make determinations prior to the date of marriage about different matters such as how property and debts will be distributed; whether a party will be entitled to spousal support and, if so, how much and for how long; and whether a party will have the right to pursue an action in a court of law due to the dissolution of the marriage.
There are two types of property that parties can acquire during a marriage – separate property and marital property. Separate property is all property acquired by a spouse before marriage or acquired through inheritance or gift during the marriage (but not gifts between spouses). Marital property is all other property acquired by either spouse during the marriage and before the date of separation. At the dissolution of a marriage, the parties are entitled to an equitable distribution of all marital property, but not separate property. However, property titled in the name of only one spouse nonetheless may be marital property if it was acquired during the marriage.
A particular asset may have both a separate property component and a marital property component. For example, a closely-held business owned by one spouse before the marriage is that spouse's separate property. However, if the value of the business increases during the marriage, even if solely by virtue of that spouse's efforts, this increase in value may be considered marital property. Further, through the actions of one or both spouses, assets that begin as separate property may be converted to marital property. As an example, if one spouse inherits assets and then uses those assets to purchase the marital home jointly with the other spouse, absent a written agreement to the contrary, the inheritance invested in the marital home loses its separate property characterization and becomes marital property.
A premarital agreement can define clearly what is marital property and what is separate property, and can set forth parameters to help draw a bright line test for whether separate property has been converted into marital property based on the intentions of the parties involved.
A premarital agreement also can control whether either party will be entitled to spousal support upon the dissolution of the marriage. There are no true guidelines for spousal support in North Carolina. Once it has been determined that one spouse is entitled to spousal support, judges may consider multiple factors to determine the amount and duration of the support. On the other hand, the parties can contract in a premarital agreement as to whether either spouse will be entitled to spousal support, the amount of spousal support, and the duration of the support. Once married, the spouses cannot contract in any way to alter either party's rights with regard to spousal support.
Certain inheritance rights also arise by virtue of a marriage. For instance, if one spouse dies without a Last Will and Testament or premarital agreement which sets forth the rights of the surviving spouse, then the surviving spouse may be entitled to some, perhaps even all, of the real property of the deceased spouse without regard to how such property was acquired during the marriage or the wishes of the deceased spouse. A premarital agreement can set forth not only the rights of either or both spouses upon separation and divorce, but also the rights of a surviving spouse upon the death of the other spouse.
Who Needs a Premarital Agreement?
Any person who enters into a marriage could benefit from the ability to determine the financial rights and obligations of the parties upon the dissolution of the marriage. Additionally, premarital agreements can be very important in the following situations:
● The family wants to ensure that family property inherited by the husband or wife remains in the family and is protected from the possible legal effects of separation and divorce;
● A soon-to-be spouse with children from a prior marriage wants to ensure that certain property is retained for the sole benefit of those children; and,
● A soon-to-be spouse comes into a marriage with property that was acquired prior to the marriage.
While the topic of a premarital agreement may be difficult both for soon-to-be spouses and for a parent with a child who is planning to be married, it simply makes good sense to determine the financial ramifications of a union prior to entering into a marriage through the use of a premarital agreement.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Jan.28, 2011