Premarital Agreements: Essential Protection for Some Marriages

by Walter S. Chidester

Premarital agreements are often used by parties with children by a former marriage whose interests they wish to protect upon the termination of a subsequent marriage. Premarital agreements are being used more frequently in today’s society than in the past. People live longer; people remarry more often; people have more money to protect; and estate planning is more common than it was in the past.

But some people are torn between love and a commitment to a new spouse while wanting to make sure their children or their heirs are protected with what property they bring into the marriage. Having a properly executed premarital agreement may be just as essential to a strong marriage as your love for your new husband or wife. A basic understanding of premarital agreements, coupled with simple and basic planning, can avoid potential problems to either you or your heirs.

What is a Premarital Agreement?   A premarital agreement is a legal contract by which a husband and wife, prior to their marriage, agree as to their property ownership both during their marriage and upon the marriage’s termination by death, dissolution or legal separation.

A premarital agreement (what we used to commonly know as a prenuptial agreement) is an agreement between prospective spouses that is executed in contemplation of marriage and becomes effective upon marriage. It must be in writing and must be signed by both parties.

In a premarital agreement, a wife and husband may contract with each other concerning the rights and obligations of each in any property of either the wife or husband or both. A wife and husband may contract for their rights and obligations whenever the property is acquired or wherever the property is located.

Property in a premarital agreement, by Indiana law, means “an interest, present or future, legal or equitable, vested or contingent, in real and personal property, including income and earnings.” By way of example, this includes real estate (including your residence and rental properties), savings accounts, money market accounts, certificates of deposits, mutual funds, stocks, and bonds.

In a premarital agreement, a husband and wife have flexibility in choosing ways of handling their assets. A husband and wife can agree to keep separate during the marriage all or some of the assets each owned prior to the marriage. They can also agree to keep separate assets acquired prior to their marriage but pool together assets and income accumulated during their marriage. A husband and wife can pool together some, but not all, of their assets each owned prior to the marriage. A husband and wife can agree on whatever method of handling assets meets their joint approval.

Why do you need a premarital agreement?   Quite simply, to protect your property for your children or your heirs. Marriages, especially second marriages, may have problems when they end by death or divorce. If you have properly planned for, and contracted for, the handling of your property, your heirs will get what you have planned for them to receive.

Failure to properly plan ahead, however, may invite disaster. When a person with children remarries a spouse who also has children, sharing emotions is sometimes easier than sharing money with a new spouse. If a husband and wife have not discussed the handling of their property prior to their marriage, this may later result in a conflict between the spouses or between a surviving spouse and the deceased spouse’s children. Many people who remarry want to make a commitment to their second husband or wife, but they also want to make sure that their children are protected as well.

Basic and simple planning can avoid a lot of headaches during your lifetime. It can also avoid headaches and heartaches for your children after you are gone. The need to plan, and to consult, applies to nearly all of us, not just the well to do.

Who Needs a Premarital Agreement?   While any individual may wish to consult with an attorney prior to marriage, anyone with children who marries or remarries should consult with an attorney experienced in estate planning and family law in order to protect assets for his or her heirs, usually the person’s children.

The amount of money you have does not matter. What is important is protecting your assets for your children or for other beneficiaries to whom you wish to leave your estate.

When should you have a premarital agreement?   A premarital agreement must be drawn up and signed prior to marriage. It is best to consult with an attorney well in advance of any wedding date so that you can discuss, in an objective manner, precisely how you wish to handle your assets in your marriage. It is best to plan with your head, not your heart. Rushing to an attorney’s office a few days before the wedding is an emotional process, not an objective one.

A premarital agreement is drawn up to preserve the status quo as to property interests existing before marriage. What happens if you sign a premarital agreement after you marry instead of before? Post-marital agreements do not protect your assets in the same manner that a premarital agreement does. An agreement signed after you marry may not prevent your spouse from claiming a share of your estate if you die first or from claiming part of your property in the case of a divorce. By way of example, say you owned real estate in your name only with a value of $100,000 and you failed to execute a premarital agreement before your marriage. Even though you and your spouse signed an agreement after you married for handling your property, at your death your spouse could be entitled to a life estate in one-third of the value of the real estate. A premarital agreement would have the entire $100,000 go to your children.

Where Should the Premarital Agreement be signed? Premarital agreements should be signed in the office of a lawyer experienced with premarital agreements and who is qualified to advise and discuss with you estate planning issues and family law issues for your premarital agreement. Each spouse should consult with his or her own lawyer. A lawyer cannot advise both a husband and a wife on the planning of a premarital agreement.

Can a Premarital Agreement be amended or revoked?   After marriage, a premarital agreement may be revoked or amended only by a written agreement signed by both the husband and the wife.

Will a Court Enforce All Premarital Agreements?   A Court will not enforce a premarital contract if a person against whom enforcement is sought proves that the party did not execute the agreement voluntarily or the agreement was unconscionable when the agreement was executed.

A Court may also require a party to provide spousal maintenance to the extent necessary to avoid extreme hardship if a premarital agreement modifies or eliminates spousal maintenance and that modification or elimination causes extreme hardship not reasonably foreseen when the agreement was signed.

What about Medicaid?   Some people are under the mistaken impression that a premarital agreement will protect a spouse’s property and assets from Medicaid in the event the other spouse is forced to go on Medicaid. Regardless of whether or not a husband and wife have a premarital agreement, Medicaid will count the resources, property and assets of both husband and wife when making a financial determination for Medicaid eligibility for one spouse. For a spouse who needs Medicaid, a premarital agreement cannot and does not protect a spouse not needing Medicaid from having Medicaid count the property and assets of both spouses.

What if there is no Premarital Agreement?   If you do not have a premarital agreement and your marriage ends in a divorce, then your spouse may be entitled to some of the property or assets you brought into the marriage, as well as an increase in the value of the property or assets you brought into a marriage. By way of example, if you own your home in your name only prior to the marriage, and it is worth $80,000 when you married, and your marriage ends in divorce five years later, then your spouse may be entitled to one-half of the increase in the value of your house during the time of the marriage. If your home increases in value to $120,000 at the time of the divorce, then your spouse may get $20,000.00, or one-half of the $40,000 increase. A properly executed premarital agreement could prevent such an occurrence.

Without a premarital agreement, if you die and have children from a prior marriage, your second spouse could receive one-third of your personal property and a life estate in one-third of your real estate, as well as a $15,000.00 surviving spouse allowance. Again, a properly executed premarital agreement could prevent such an occurrence.

Summary

1.      Plan your premarital agreement
2.      Meet with an attorney experienced in premarital agreements
3.      Sign a premarital agreement before you marry