Articles Posted in Premarital Agreements

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13062458_1042739802458603_2436945721037467362_nBy: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Now let’s change the hypothetical of our Greensboro couple – Petunia and Rocky – in one respect. Recall that Petunia’s parents wanted her to have a premarital agreement regarding Home Grown Lawn Care, but Petunia and Rocky did not sign one. Maybe a few years into her marriage, Petunia realizes that she wants to keep Home Grown Lawn Care in the family and that Rocky and her parents just do not get along. So Petunia executes a will, leaving her shares of Home Grown Lawn Care to her parents and the remainder of her estate to Rocky.

Under this scenario, Petunia’s parents would receive her shares of Home Grown Lawn Care, valued at $125,000.00. Rocky would receive the 401(k) worth $15,000.00. Rocky may decide that he is entitled to a larger share of Petunia’s estate. He can then exercise the right to elective share, which is a two-step calculation. First, you have to determine what percentage of the total net assets the surviving spouse receives. Second, you have to determine the amount of the elective share, based on the percentage calculated in step one.

Let’s take this step-by-step. The North Carolina legislature has determined that the percentage of the total net assets should vary based on the length of the marriage. Thus, the longer the marriage, the higher the percentage of the total net assets. The below chart shows the percentages, based on the statutory language in N.C.G.S. §30-3.1:

 

Number of Years Married Share of the Total Net Assets
Less than five years 15%
At least five years, but less than ten years 25%
At least ten years, but less than 15 years 33%
15 years or more 50%

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13062458_1042739802458603_2436945721037467362_nBy: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Now that we have the details and definitions out of the way, we can return to our Greensboro couple Rocky and Petunia and take a look at what happens to Petunia’s estate. Recall that Petunia died without a premarital agreement, without children, and without a will. Since Petunia died without a will, this means that she has died intestate, and her property will pass via intestacy, with Rocky as the administrator of her estate. Also recall that Petunia died with an interest in Home Grown Lawn Care worth $125,000.00 and a 401(k) worth $15,000.00, of which Rocky is the beneficiary. Also, Petunia died in a car accident five years into the marriage – this will be important later on.

Without a will, the share of the surviving spouse is governed by statute. There are other factors to consider, though, namely is the decedent (Petunia) survived by any children or her parents? The presence of either surviving children or parents reduces the share of the surviving spouse under the statute. In this case, there are no children, but her parents survive Petunia.

N.C.G.S. §29-14 (a)(3), provides for the surviving spouse’s share of   the real property as follows: “If the intestate is not survived by a child, children or any lineal descendant of a deceased child or children, but is survived by one or more parents, a one-half undivided interest in the real property.” Based on those facts, and the statute, Rocky gets ½ undivided interest in the real property. Under the facts of our hypothetical, there is no real property, meaning that Rocky gets ½ of nothing. If for example, Petunia owned a parcel of land, Rocky would get ½ of that parcel, and her parents would get the remaining half.

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We previously discussed ways to protect gifted or inherited property from the claims of a child’s spouse, from the viewpoint of the parent making the transfers. It noted that the law already protects the amount of the gift or inheritance, plus any appreciation not caused by marital funds or efforts.

A need for protection does exist to the extent that the transferred property experiences “active appreciation” after the transfer—appreciation that is caused by marital funds or efforts. The best way to protect active appreciation from marital claims is to ask your child and your child’s spouse to sign a premarital agreement waiving these claims.

What if your child is unwilling or unable to sign an agreement? You can achieve a similar result by use of a trust.  Money or property placed in trust is managed by a third person, the trustee, for the benefit of your children. The law requires the trustee to act with your child’s interests in mind, and the instructions in the trust document must be followed.

Unfortunately, you cannot avoid a claim by your child’s spouse simply by creating a trust. As previously stated, there is not a need for a trust to protect the initial amount transferred to your child, plus future appreciation not caused by your child’s funds or efforts. The purpose of a trust would be protect active appreciation. But if your child simply has an interest in the trust, active appreciation in value of your child’s interest in the trust can be marital property. Continue reading →

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The previous two posts on premarital agreements have addressed future spouses who are considering signing a premarital agreement. The final two posts in this series will address the future spouses’ parents.

In particular, this post is directed at parents who have worked hard enough, and been fortunate enough, to accumulate significant property. You desire, naturally enough, to leave that property to your children. But you do not want that property to pass to your children’s spouses. How can this goal be accomplished?

Understand initially that you may not need any special measures. When a marriage ends in divorce, most states give special treatment to property acquired by gift or inheritance. In North Carolina, gifts and inheritances are defined as separate property that the court lacks the power to divide. N.C. Gen. Stat. (“G.S.”) § 50-20. Separate property includes not only the initial amount of the gift or inheritance, but also any future “passive appreciation” in that gift or inheritance—growth caused by market forces, and not by the funds or efforts of your children after they are married.

For example, assume you have investment stock, bonds, or a bank account. If by gift or devise, you transfer this property to your children, the property transferred will be separate property. Any future passive appreciation in the gift or devise will be separate property also. Upon divorce, your child’s spouse will not have any claim to separate property.

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A premarital agreement, of course, requires the consent of both future spouses. Sometimes future spouses will disagree about whether to sign a premarital agreement. The last post in this series considered this situation by addressing the spouse who wants an agreement. This post will consider the situation by addressing the spouse who does not want the agreement.

Understand initially that this is very serious issue that will affect your life forever. The decisions you make regarding this agreement will play a very important role, possibly even a critical role, in determining your financial future.

Many future spouses, especially women, when confronted with a strong request for a premarital agreement, have swallowed their reservations and signed it. Years later they discover that the effect of the agreement is to allow their spouse to leave the marriage at any time, leaving them with no property and no spousal support. Few decisions have been regretted as intensely as the decision to sign a substantively unfair premarital agreement.

Your financial future is your responsibility. You are not required to sign any premarital agreement. While many couples have such agreements, many couples also do not. You have the power to accept the famous advice of former First Lady Nancy Reagan: “Just Say No.”

You should also recognize that decisions regarding this agreement are too important to be made without assistance. You need to know what your rights would be without the agreement. You need to know the value of your future spouse’s property. You need to know what the agreement says. Do not lightly assume you know that; a trained lawyer can include provisions that seem meaningful, but are actually worth nothing. An agreement to agree, for example, is not legally enforceable. You need the advice of an attorney to guide you in making decisions about the agreement.

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The first few posts in this series discussed when prospective spouses should sign a premarital agreement. Simply stated, a premarital agreement should be signed when both parties want to apply different rules to divide their property and award support after the marriage than the law would otherwise provide.

In a perfect world, all prospective spouses would agree on this issue. But the world being the imperfect place that it is, prospective spouses sometimes disagree. This post will address options available to the spouse who wants an agreement when the other spouse refuses to sign one.

There is an obvious starting point here: Do not attempt to coerce the other spouse into signing the agreement. We have seen that the single most important factor in determining the validity of the agreement is whether it is procedurally fair. A coerced agreement is not procedurally fair. Don’t use improper threats to force your prospective spouse to sign an agreement.

You can, of course, tell your prospective spouse that you will not marry him or her without an agreement. You are not required to marry anyone, so threatening to call off the marriage is not an improper threat.

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Previously, we have discussed judicial attitudes toward premarital agreements. In short, premarital agreements are favored by modern law, but only when they were signed using procedures that the court sees as fair.

How do the courts define a fair procedure? Three factors are important. First, the parties must sign voluntarily and not under unreasonable pressure. To take an extreme example, a premarital agreement signed under a threat of physical violence would certainly be invalid for duress. Other improper acts include threats to falsely accuse a spouse of a crime or to interfere with a spouse’s immigration status.

Threats make an agreement procedurally unfair only if the threats are improper. One recurring issue has been whether the agreement is procedurally unfair if one spouse threatens not to marry the other unless an agreement is signed. But no one is required to marry anyone. A threat to cancel an engagement unless a premarital agreement is signed is therefore generally not viewed as wrongful.

Second, while the parties must be free to make a voluntary decision whether to sign the agreement, the power to make a voluntary decision does not mean much if a spouse lacks access to relevant information. In particular, since almost all premarital agreements require the parties to give up rights in one another’s property, it is essential that each party have a reasonably accurate understanding of how much property the other owns.

It is not absolutely necessary that the couple engage in financial disclosure. Actual knowledge of the other spouse’s assets, from any source, is sufficient to avoid procedural unfairness. But disputes over knowledge tend to turn into “he said, she said” issues over who knew what, and judges will sometimes find a lack of knowledge in these cases, especially if the agreement is substantively unfair.

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Previous posts regarding premarital agreements have discussed what a premarital agreement is, and why an engaged couple might want to sign one. Simply summarized, a premarital agreement is a good idea when both parties want to change the rules of law that would otherwise apply when their marriage terminates upon divorce or death.

Assuming that the parties agree to sign a premarital agreement, is a premarital agreement likely to be enforced by the courts?

There is no single answer to this question, because there are many different types of agreements and many different procedures that can be used to sign one. Before discussing premarital agreements further, it is useful to consider these agreements briefly from the viewpoint of a judge who is asked to decide these issues in a divorce or probate case.

Most trial judges have very busy dockets, and they are grateful for anything that reduces their workload. Premarital agreements resolve issues that would otherwise have to be decided by judges. Judges also often note that an agreement between the parties usually resolves an issue better than the judge could, as the parties themselves are more familiar with their situation and their financial lives than a judge could ever be. Most judges therefore like premarital agreements, and tend to enforce them as they are written.

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….But was that a smart decision for someone worth $400 million??

A premarital agreement is an agreement that changes the rules that the law normally applies when a marriage ends in divorce or death. Do you need a premarital agreement? You must determine whether you need to change the rules that the court normally applies to these matters.

The previous post in this series considered whether you might want an agreement to change the rules that apply to division of property at divorce. This post will consider whether you might want an agreement to change the rules that govern support of a spouse, or the rules that govern division of property upon death.

Upon divorce, the law normally requires the wealthier spouse  (the  “supporting spouse”) to pay support (traditionally called “alimony”) to the less wealthy spouse (the “dependent spouse”). N.C. Gen. Stat. (“G.S.”) § 50-16.3A.  Alimony is often not awarded after short marriages.   After medium-length marriages, alimony is often limited in both amount and duration.    After a long marriage,  however,  alimony can be a  significant obligation, especially if the dependent spouse has been out of the workforce for many years.

If the parties would prefer not to be responsible for the support of one another, the duty to pay alimony can be waived in a premarital agreement. Id. § 52B-4(a)(4).

When the court divides property upon death, it does not divide the property into marital property and separate property. Instead, if the deceased spouse has no will, the surviving spouse simply receives a percentage of the deceased spouse’s property. The exact percentage varies according to the type of property involved, and according to whether the deceased spouse is survived by children and/or parents, but it is rarely less than one-third. The percentage applies to all of the deceased spouse’s property, not just to marital property. Id. § 29-14.

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A premarital agreement is a contract, signed by two persons who are about to be married. It sets forth rules that will apply when the marriage ends, either in death or divorce. It can also set forth rules to govern how the parties will deal with their property during the marriage.

Married persons do not have to sign a premarital agreement. The law already provides rules for dividing property and awarding support upon divorce, and rules for dividing property upon death. If the two people do not have a premarital agreement, these normal rules apply. The purpose of a premarital agreement is to contract out of the normal rules, and to apply different rules in their place.

To understand whether you need a premarital agreement, you need to first understand the rules that will apply if you do not have an agreement. If those rules are acceptable to both parties, there is no need to sign a premarital agreement. If those rules are not acceptable, and the spouses can agree upon a different set of rules that they both like better, there is reason to sign a premarital agreement.

The rules that apply without an agreement vary from state to state. This blog post will discuss the rules that apply to division of property upon divorce, and why spouses might want to sign an agreement that applies different rules.

In North Carolina, when a marriage ends in divorce, the court divides the parties’ property into two categories. “Separate property” which is usually property acquired before the marriage, or property acquired by gift or inheritance during the marriage. Separate property is not divided upon divorce. “Marital property” is everything that is not separate property, and it is divided equitably between the spouses. The presumption is that an equal division is equitable, but the presumption can be rebutted by proof that another decision is fairer.  See generally N.C. Gen. Stat. (“G.S.”) § 50-20.

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