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Premarital Agreements: Inequality vs. Unfairness

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.

The hardest question is when the agreement prevents division of any property, even property acquired during the marriage. A complete waiver of all property division is a significant change from what the law would normally provide. If both spouses work and are financially independent, the result may still be fair. But if only one spouse works—and the role  played  by  parties  during  a  marriage  can  change,  sometimes  in  ways  the  parties themselves do not initially foresee—a complete waiver of property division can leave one spouse with little or no property after the marriage ends. A complete waiver of all property division is therefore unsafe; it creates a material risk of significant substantive unfairness. Many premarital agreements balance the risk of a complete waiver of property division by allowing certain property to be divided. An agreement can allow division of the marital home, or of certain stated assets, or of all jointly titled assets.

Another option is to give the less wealthy spouse a lump-sum award. Such an award normally gets larger as the marriage gets longer. This way, the wealthier spouse is not required to make a large payment after a short marriage, but the agreement still does not limit the less wealthy spouse to a small payment after a long marriage.

Perhaps the best way to summarize the situation is: The agreement should give both parties a reasonable path forward to have a respectable life and earning capacity even after the marriage ends in divorce or death. A complete waiver of all rights may not do that. A well-drafted agreement will allow division of enough property, or payment of enough support, to give both spouses a reasonable chance to rebuild their lives in the event that the marriage ends.