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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Previous posts regarding prenuptial agreements have discussed the validity of premarital agreements in very general terms, focusing on the broad concepts of procedural and substantive unfairness.  Procedural unfairness creates a very real risk that the agreement might not be enforced. Substantive unfairness is not so important, but it can create risk when the unfairness is extreme, or when the procedural fairness of the agreement is a close question.

This post will take a look specifically at the law of North Carolina. Twenty-seven states, including North Carolina, have enacted the Uniform Premarital Agreement Act (“UPAA”), a draft statute written by the Uniform Law Commission to standardize the law of premarital agreements.

The key statute governing the validity of premarital agreements is N.C. Gen. Stat. (“G.S.”) § 52B-7. Under that statute, there are two distinct grounds upon which a premarital agreement can be successfully attacked.

The first ground provides that the agreement is invalid if the party attacking the agreement “did not execute the agreement voluntarily.” Id. § 52B-7(a)(1). There is no statutory definition of involuntariness; the issue is left entirely to the courts. This ground is where the procedural fairness of the agreement becomes critical. If procedural unfairness reaches critical mass, the agreement will be deemed involuntary and the court will not enforce it.  The fourth post in this series discusses procedural unfairness in more depth.

The second ground is more complex. It requires, to begin with, that the agreement be unconscionable. Unconscionable means, in effect, extremely unfair. One can see, again, the critical importance of procedural and substantive fairness in determining the enforceability of the agreement.

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Previously, we highlighted the risks of asking a future spouse to sign a substantively unfair agreement. These risks are not triggered merely because the terms of the agreement are not exactly equal. Rather, substantive unfairness is present only when the agreement passes some minimum threshold of inequality.

So how far can an agreement go, in terms of creating inequality between the parties, before it is substantively unfair? There are no fixed rules, but a few guideposts exist. First, it is generally proper to exclude from division gifts, inheritances, and property acquired before the marriage. As the second post in this series noted, this property would not be divided even without an agreement.

It is a closer question whether an agreement becomes unfair if it prevents appreciation in these assets from being divided. The result is clearly permissible where the appreciation did not result from marital efforts. Where the appreciation did result from marital efforts, the exclusion is somewhat unfair. But if other property is subject to division, provisions excluding all appreciation in separate property from division are usually enforceable.

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Our last premarital agreement post discussed the fairness of the procedures used when a premarital agreement was signed. This post will discuss the substantive fairness of the agreement itself.

As noted previously, courts give considerably more attention to procedural fairness than to substantive unfairness. As long as fair procedures are used, the courts are willing to enforce agreements that contain considerable substantive disparity. In particular, agreements that waive the parties’ interests in substantial property, or that waive alimony completely, are often enforced in the courts, so long as they were signed freely and voluntarily.

But substantive fairness still has a role to play when the court reviews an agreement. To begin with, extreme substantive disparity can be a problem in itself. For example, if the agreement is so disparate that it leaves one spouse on public assistance, the court may not fully enforce the agreement. If the court must choose between having one spouse supported by the other and having one spouse supported by the public, it is likely to choose the former.

In addition, substantive disparity can be relevant even where it is not extreme. The courts face many cases in which it is a close question whether an agreement was fair procedurally. For example, there may be a situation where one spouse’s knowledge of the other’s assets was incomplete, or borderline pressure tactics were used, or where there is reason to doubt whether a spouse truly had a fair opportunity to obtain counsel.  In these close cases, the court is more likely to enforce an agreement if the agreement is substantively fair.

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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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