Premarital Agreements and the Gray Divorce

By Linda J. Ravdin

EXECUTIVE SUMMARY

Mature couples planning to marry can benefit from a premarital agreement that determines their economic rights and obligations if the marriage ends in separation or divorce.  This article discusses a number of issues that the lawyer for a mature client should consider in planning for the contingency that the marriage will fail, including structuring property rights at divorce, options for treatment of a marital home, terms to provide for a weaker party when there is a big wealth disparity, spousal support, legal fees at divorce, the problem of the couple who divorce in a state other than the state whose law governs the contract, and confidentiality. It also discusses the option of binding arbitration of a dispute about construction or a claim of breach.  Because an obligation for a former spouse to make transfers or payments after divorce can have gift tax consequences, it discusses the importance of including a provision for a spousal agreement incident to a separation or divorce.

INTRODUCTION

With boomers living longer, and marrying multiple times, the argument for premarital agreements in the planning for these couples is compelling.  Not all marriages between mature people will last until death.  Lawyers engaged in planning for their mature clients considering marriage should be asking them to consider a premarital agreement to determine their rights and obligations when the marriage ends at death or dissolution.  There are a number of issues to address in such an agreement. The material below focuses on the divorce scenario.

TREATMENT OF PROPERTY RIGHTS AT DISSOLUTION

When an older couple decides to marry, and to have a premarital agreement, the key terms must address their property rights if the marriage ends in dissolution.  A premarital agreement will typically provide for each party to retain exclusive rights to existing assets and assets acquired during the marriage by gift or inheritance.  Parties must decide whether they want a title-controls type of agreement, so that each retains exclusive rights to all property he or she owns, or whether they want to share the fruits of their labor, including property acquired with earnings even if titled in one party’s name.  

When both parties come to the marriage with substantial assets and both are still working, with the ability to continue to build their nest eggs, a title-controls type of agreement is often appealing.  It allows each party to fulfill pre-existing legal or moral obligations to children and others, to make decisions about spending and saving independent of the other spouse, and to decide when to retire.  Many people entering into a late-life marriage have been divorced and have split up property; they often do not want to do that again.  Someone whose prior marriage ended in death, and who inherited from a late spouse, often wants to protect their exclusive rights, including to income from inherited assets, and to preserve the right to pass the assets to the children of the prior marriage.  A title-controls agreement can allow for a clean break with a minimum of legal fees (assuming the agreement is well-drafted and that there is not a dispute about validity).

When there is a substantial disparity in earnings from employment, and the stronger party is employed, a property-sharing type of agreement can be appealing to a weaker party, as it would allow him or her to benefit from the accumulation of assets resulting from the high-earner’s work.  Nevertheless, there are pitfalls for the lawyer to consider.  The high-income spouse with a substantial premarital estate may choose to retire, cutting off the accumulation of shared assets.  Or he or she may erode the shared pool of assets by spending, gifts to children, obligations to a prior spouse, or charitable contributions, all while preserving the nonmarital assets intact.  The lawyer for the weaker party can consider some options for terms to address these concerns, for example:

  • Pre-existing obligations must be paid from nonmarital assets;
  • An annual limit on gifts to third parties, including adult children, from marital assets;
  • An annual limit on charitable contributions from marital assets;
  • Provisions for setting aside a percentage of earnings into jointly titled savings and investments that cannot be used without joint agreement;
  • If the high-income spouse retires, he or she will contribute nonmarital assets equal to some portion of the foregone earnings into marital property for a specified period or until the other spouse retires.

Another approach is a title-controls type of agreement with specific property rights carved out of a wealthy party’s nonmarital property to provide for the economic security of a weaker party.  This is especially appropriate when a weaker party is expected to leave paid employment to travel with a wealthier party who is already retired or about to retire, or when there is a significant age gap and the younger and economically disadvantaged party is expected to care for an older spouse.  Provisions for a weaker party can include:

  • A cash property settlement in the event of dissolution;
  • A provision for joint ownership of a home paid for by the wealthier spouse;
  • An annual cash gift to the weaker spouse to be used for savings and investment, and/or an annual contribution to his or her IRA;
  • Creation of other jointly titled assets, such as a jointly titled securities account, to be divided at dissolution.

THE OPERATIVE EVENT UNDER THE PREMARITAL AGREEMENT

It is common for a premarital agreement to provide that a marital separation (not entry of a judgment of divorce) is the event that triggers the dissolution rights and waivers; if a spouse dies after separation, the survivor’s rights are the dissolution rights, not the typically more generous rights of a surviving spouse.  Some issues to consider in drafting such a provision:

  • When the agreement provides that separation is defined as living apart, does a spouse’s residence in a nursing home, or other healthcare facility, constitute living apart?  The agreement could include:  “A party’s residence in an assisted living facility, nursing home, hospice, group home, or similar facility, shall not, in and of itself, constitute living separate and apart.”
  • When the agreement provides that the delivery of a separation notice constitutes the triggering event, is delivery sufficient, or should the parties have to also actually live separate and apart, and does it have to be under separate roofs? The agreement could include:  “and such separation, in fact, commences, including a period of living separate and apart under the same roof after such notice (and without regard to whether living separate and apart under the same roof constitutes grounds of divorce.”
  • Should a gravely ill spouse be able to trigger a separation through issuance of a deathbed notice, cutting off the survivor rights of the other spouse, whether on his/her own initiative or with the encouragement of others?  The agreement could provide that the notice is only effective after the passage of a specified period, such as 60, 90, or 180 days.
  • Should an agent be able to issue a separation notice and trigger the dissolution rights, cutting off the surviving spouse’s post-death rights?  The following text can be appropriate:  “provided further that any such notice may only be made by a party in his or her individual capacity and no such notice may be made by an attorney-in-fact, guardian, trustee, or other legal representative.”

LIVING EXPENSES AND MONEY MANAGEMENT DURING MARRIAGE 

A provision regarding parties’ obligations for payment of their own personal and the parties’ common expenses during marriage is not an essential part of a premarital agreement. Many couples prefer to deal with such matters informally in much the way they would if they had no agreement. Whether addressed in the agreement, or not, how parties handle savings and spending decisions during the marriage can have a profound effect on the resources available to each party if they divorce, with fewer years left to rebuild after divorce.

When parties want to address living expenses in the agreement, options include:

  • One spouse or partner agrees to be solely responsible for all the parties’ living expenses;
  • One spouse is responsible for certain expenses, such as the mortgage and maintenance of the home, and other living expenses left to be worked out informally;
  • Parties agree to pool income and pay some or all expenses from their common income;
  • Each party agrees to contribute to common expenses without a specific formula;
  • Each party pays his or her own personal expenses and one party pays common expenses;
  • Each party pays his or her own personal expenses, and common expenses are shared according to a formula, such as pro rata; or
  • All expenses (household and personal) are shared according to a formula, such as pro rata.

When one party will be contractually obligated to pay all the common expenses, or all common expenses and all of both parties’ personal expenses, there are several issues of concern to the attorney for that party, including what level of support will be required and for how long. It will probably not be realistic to incorporate a detailed specification of the level of support the supporting spouse will be expected to provide during the marriage. In Ex Parte Hall, the agreement required the husband to pay the wife’s living expenses throughout the marriage. The trial court interpreted the agreement to require the husband to pay all of the wife’s living expenses, whether they were reasonable or not. The agreement should give the payor-spouse some discretion about the level of expenditure he or she must fund. It should acknowledge that changes in circumstances, such as a payor’s retirement, will permit him or her  to reduce the level of expenditure.

An agreement that provides for payment of expenses should take account of a variety of possible circumstances, including:

  • An arrangement where a party pays the mortgage on a home that is his or her separate property while the other party pays for routine living expenses can be quite disadvantageous to the latter in the event of dissolution as it allows one party to build equity at the other’s expense.
  • An agreement to share expenses pro rata could unduly burden one party if the other party decides to quit work or to retire before the other spouse is ready to do so.
  • The agreement should be clear about when the obligor’s contractual duty to support the spouse comes to an end. Will it end upon separation or only upon entry of a judgment of divorce?
  • When the parties will both be obligated to contribute to a common account, the agreement should be clear about whether that obligation continues after a marital separation.
  • How parties choose to allocate expenses may change and evolve over time. A rigid requirement for a formal amendment may not serve them well. An acknowledgement that they may make informal changes to their arrangements without the need for a formal amendment is better aligned with how most people behave.

As a practical matter, a party who voluntarily pays more than his or her contractual share of expenses  does not have an effective legal remedy if the parties divorce. If a party acquiesces in the disproportionate payment over an extended period, he or she may not be able to recoup as part of a divorce. 

Extraordinary Healthcare Expenses.  It is especially important that an agreement that imposes an obligation on one party to pay personal expenses of the other clearly define the scope of the obligation. For example, in Homra v. Nelson, the premarital agreement required the husband to pay for “daily necessities.” The appellate court concluded that, because the wife needed nursing home care, her nursing home care was a daily necessity and the husband had to pay for it. The dissenting judge argued that the term applied only to routine expenses, e.g., toiletries. The agreement could have clearly distinguished extraordinary necessities from routine necessities. Its failure to do so imposed a burden on the husband that neither party may have intended.

The Necessaries Rule.  Even when a premarital agreement requires each party to pay his or her own medical and other healthcare expenses, a spouse may still have exposure to a suit for those expenses. The common law necessaries doctrine, codified in some states, generally provides a remedy for a third-party creditor that provides necessary goods or services to an impecunious spouse. There is little authority directly addressing the extent to which a spouse may, through a premarital agreement, limit his or her liability to a third-party provider of necessary goods or services to the other spouse. The agreement could provide that each party must spend down his or her own resources before looking to the other party for payment. This would not necessarily be binding on a third-party provider but could at least give a payor-spouse a cause of action against the other spouse.

Provisions for Long-Term Care Insurance. If long-term care insurance is available at an acceptable cost, this may be especially appropriate for one or both spouses when the couple is older and entering the years when assisted living or a nursing home may become the greatest financial need.  As discussed above, because of the risk to both parties’ financial security of high nursing home costs, a provision requiring a party to maintain such insurance and allocating the cost can benefit both. A stronger party may agree to pay the premiums while the parties remain married.  The agreement could provide that each will be responsible for the premiums after divorce, or a stronger party might agree to pay the premiums for a period of time after a divorce.

PROVISIONS REGARDING SPOUSAL SUPPORT AFTER DIVORCE

Parties entering into a late-life marriage with a premarital agreement have several options regarding spousal support:

  • A blanket waiver of all post-divorce support;
  • A reservation of support so that one party, or either, can seek an award;
  • A provision for a predetermined amount and duration of support;
  • A predetermined amount of support payable indefinitely;
  • A lump sum in lieu of periodic payments.

Spousal support can be appropriate where an economically weaker spouse will be moving from another geographic area or giving up his or her employment to accommodate the wishes of the wealthier party, or where he or she will lose spousal support from a prior spouse as a result of remarriage. If the provisions for property will provide adequate financial security for a weaker party, he or she may be persuaded to forego spousal support.  A wealthy party may consider a predetermined amount and duration of support acceptable because it provides certainty without the necessity for litigation (and the risk of being ordered to pay the payee-spouse’s legal fees in addition to his or her own).   It will almost never be in the best interests of a wealthier party to agree to a reservation of spousal support; a reservation means the potential for an open-ended obligation and potentially high litigation costs.  As appealing as a reservation may be to a weaker party, the benefits may be illusory.  Alimony typically terminates on the payor’s death.  Moreover, it is generally modifiable upon a change of circumstances, such as retirement, meaning that a payee could face another round of expensive litigation.  A predetermined amount and duration may not look as good to a weaker party as the right to seek indefinite spousal support, but certainty can have real value.

Provisions for Life Insurance to Secure Spousal Support.  When the agreement includes a provision for spousal support payable over time, the payee’s lawyer should consider including an obligation for life insurance in an amount sufficient to cover the obligation in the event the payor dies before completing all payments.  If there is to be a life insurance obligation, and the support payor does not already have adequate life insurance that he or she can maintain indefinitely, parties should determine whether the payor is currently insurable at a reasonable cost and, if so, the agreement could provide for getting the insurance immediately upon marriage.  Waiting until a dissolution may mean adequate insurance is not available at that time at a reasonable cost.  The lawyer for the payee should consider a provision that ownership of the policy be transferred to the payee in the event of a marital separation so that he or she can control the beneficiary designation and insure premium payments are made.

Payment Obligation to Extend to Payor’s Estate. In lieu of life insurance, the agreement could provide that the payor’s death is not a terminating event for alimony. In that case, the obligation would remain binding on the payor’s estate.  This is a viable option as long as the alimony payor’s estate will have  sufficient assets.

Insulating a Waiver of Alimony from Successful Attack. While the majority of states enforce premarital spousal support waivers, a waiver is vulnerable to attack when a spouse will be impoverished upon divorce.  Property transfers can insulate a support waiver by providing an alternative means of support. Similarly, where an agreement provides a meaningful amount of spousal support, the provisions are more likely to be upheld even when they provide for a post-divorce standard of living less luxurious than what the wealthy spouse can afford. If the property provisions of the agreement allow the economically weaker party to acquire assets from which he or she may derive support, a spousal support waiver or a limitation on spousal support is less vulnerable at divorce. 

CONSIDERATIONS IN DRAFTING PROVISIONS FOR THE MARITAL HOME

In drafting provisions relating to a shared residence, counsel will need to consider a number of issues:

  • Will the agreement apply only to an existing residence, or also to a later-acquired residence?
  • Will special provisions for a residence apply only to the principal residence or to additional homes that the parties may use together?
  • Will one spouse be able to evict the other spouse from a solely owned home in the event of separation?  What provisions should the agreement make to protect the interests of the non-owner spouse?  What if the non-owner spouse is elderly and moving would threaten his or her health or would otherwise be very burdensome?
  • Will the sole owner be able to sell the home over the objections of the other spouse? 

Options for Ownership and Defining Rights in the Primary Home

There are a variety of options for treatment of ownership of a primary home and disposition in the event of divorce, including:

  • One spouse retains sole title and sole interest in an existing home and the other party never acquires any rights to the property (unless the owner elects to transfer title). In this scenario, the agreement should say whether the titled spouse is solely responsible for payment of the mortgage on the property from his or her separate property. A nontitled spouse needs to understand that if he or she makes a financial contribution to the acquisition or maintenance of the property, he or she will not have the right to be reimbursed at divorce nor will he or she acquire an equitable interest unless the agreement so provides. The titled spouse needs to understand that unless the agreement provides otherwise, a voluntary transfer of ownership into a survivorship form is a gift to the marital estate and the other spouse will be entitled to one-half of the equity upon dissolution. Gifts cannot be taken back if the marriage fails unless the agreement provides for a transfer back.
  • One spouse retains sole title to an existing home, but the other spouse acquires an equitable interest over time. In this scenario, nothing would prevent the titled spouse from mortgaging or selling the property unless the agreement expressly limits his or her rights to dispose of the property or requires that he/she preserve the proceeds.
  • A spouse who owns a home agrees to transfer title into a survivorship form after the marriage. The agreement could provide that the original owner is entitled to a transfer back upon dissolution, with or without a cash payment to the other spouse, or it could provide for an equal or other percentage division of equity.  
  • The parties agree to purchase a home together, on titling the property in a survivorship form, or as tenants in common with equal or unequal ownership shares, and on the allocation of their interest in the equity in the event of dissolution.
  • Whether a residence will be owned by one party, or jointly, the agreement may provide for a formula to allocate each party’s financial interest in the property upon dissolution according to his or her monetary contribution to acquisition costs. Such a formula can provide for contributions of separate property from each party as well as contributions of marital property.

Provisions for Sale or Buyout; Disposition upon Separation

When the agreement provides for joint ownership of a home, counsel should consider whether to include specific provisions for a sale in the event of a marital separation. Particularly when one party will have a right to buy out the other party, it will be in the interest of the latter for the agreement to have specific terms for buyout. In that event, counsel should consider the following:

  • The agreement should include a provision for an appraisal to determine fair market value. 
  • If the parties may become joint obligors on a mortgage, the agreement should address whether the buyer will be obligated to refinance to remove the seller as a joint obligor. Absent an express obligation to refinance, the transferee-spouse can retain the mortgage with the other spouse as joint obligor until it is paid off.
  • Consider whether net equity should be reduced by imputed costs of sale (broker’s commission, transfer taxes) that would be incurred upon sale to a third party. The buyer-spouse may feel this is fair because eventually he or she will sell to a third party and incur these costs at that time. The seller may argue that he or she will incur the cost of moving and transition, including, potentially, the transaction costs of a new home, and not imputing costs of sale mitigates this burden to some extent (although the burden could also be mitigated by a lump sum cash payment for transition costs).
  • When a spouse will transfer title to an existing home to joint ownership, he or she may want to have the first option to buy out the other party in the event of dissolution; without such a provision, the parties may compete for the right to buy out the other and a court could order a sale.
  • When the agreement gives one party an option to buy out the other party, it should provide for a third-party sale in the event the buyout does not happen within a reasonable amount of time.

Provisions for One Party to Have Exclusive Use of Primary Residence upon Separation

Following are some considerations in drafting a provision that will give one spouse the right to exclusive use of a home in the event of a separation.

Notice. The agreement should require that the nontitled spouse be given an adequate amount of notice to move out. What is an appropriate notice period will depend on a number of factors, including how long it is likely to take the moving party to find another place to live and arrange for packing and shipment of possessions. Thirty days’ notice is the minimum that could be deemed reasonable. Sixty to 90 days is certainly better for a party being forced to relocate.  When a spouse may have children in the home who are in school, the agreement should take account of the possible need for a longer transition period.

Transition Expenses of Moving Party.  The owner may agree to provide funds for the other party’s moving and resettlement costs. The agreement could provide that the spouse exercising the right to exclusive use will pay all reasonable costs of resettlement without specifying a dollar amount, pay all reasonable costs of resettlement with a specified limit, or pay a specified dollar amount.

Coordination with Buyout and Other Terms.  Counsel for the party who will be required to move out should give some thought to the provisions for buying out that party’s interest, if any, in the home or other provisions for that party and the timing of payments.  The moving party may need all of the cash from the buyout to immediately purchase another residence instead of being forced to move to temporary housing and then move again when he or she is able to buy. Thus, a buyout that allows the other spouse to delay payment, even for only a few months, can increase the difficulty of relocating for the spouse who must move. Similarly, if the departing spouse is entitled to a lump sum cash property settlement, counsel for that party should consider the timing of that payment. Allowing the payor to delay payment until a divorce is entered, for example, may not be appropriate from the perspective of the party who must find and pay for alternative housing. It may also be important that the stronger party be required to immediately refinance a joint mortgage to enable the other party to qualify for a loan.

LEGAL FEES IN DIVORCE LITIGATION 

In general, the so-called American Rule holds that each party to a legal dispute must bear his or her own attorney’s fees and costs.  However, in the domestic relations arena, are many exceptions to the American Rule so that courts may order one spouse in a divorce to pay some or all of the fees and costs of the other party.  In a suit for divorce involving a premarital agreement: 

  • One party may seek an advance fee award to enable that party to challenge the validity of the agreement as a whole.
  • A party may seek a fee award where there is a disagreement over the interpretation of the agreement insofar as it determines disposition of property at divorce or relates to spousal support, or about implementation, for example, a dispute over valuation of a divisible asset or the terms for the buyout of a marital home.  
  • A party may not challenge validity of the agreement as a whole but may seek a fee award to challenge the enforceability of certain provisions, such as a spousal support waiver.
  • Where the agreement does not predetermine spousal support, a support claimant may seek a fee award to litigate the claim.

In divorce litigation, in the absence of a valid contractual waiver, a court may order the economically stronger party to advance monies to the weaker party to enable the weaker party to litigate his or her claims, or may be able to award that party his or her fees at the conclusion of the litigation. 

Contractual Waiver of Fees at Divorce

A premarital agreement may include a provision requiring each party to bear his or her attorney’s fees and costs incurred at divorce, including fees to implement the agreement, and that each party waives the right to apply to a court for an award of fees from the other party. Such a waiver should be broad enough to encompass fees incurred to challenge the validity of the agreement itself. Such waivers are generally enforceable in the majority of states where courts have ruled on the question. Courts in some states have interpreted their statutory provisions for fee-shifting to permit an award despite a waiver when there is a significant disparity in resources. Other courts give effect to such a waiver if the agreement is valid as a whole. 

Notwithstanding any uncertainty about enforceability, it is appropriate to include a provision mandating that each party bear his or her legal fees for a divorce and to implement the terms of agreement by paying such fees from his or her separate property. Alternatively, if there will be marital property, the parties could agree to pay fees for implementation from marital property monies before division. Any such provision should require that a spouse bear his or her own fees incurred to challenge validity.

Prevailing Party (i.e., Loser-Pays) Provisions 

A proponent of an agreement may wish to discourage future litigation over validity by forcing the other party to weigh the uncertain outcome against the potential for being required to pay the fees incurred by both parties. Even when validity is not in dispute, parties may incur legal fees if one party breaches the agreement, or when there is a dispute about breach. Only a few cases arising out of divorce litigation have addressed a fee-shifting provision in a premarital agreement requiring the loser to pay the fees of the prevailing party. When the losing party is the spouse who is disadvantaged by the agreement, some courts have been reluctant to enforce such a provision even while acknowledging general enforceability. Other courts have been willing to enforce the contractual obligation. A fee-shifting provision for breach or for a failed attack on validity is generally in the best interests of the stronger party. However, a weaker party seeking to enforce his or her rights against a breaching wealthy party can also benefit from such a provision; without it, a weaker party may be less able to pursue a valid claim of breach at divorce.

THE MIGRATORY OLDER COUPLE AND CHOICE OF GOVERNING LAW

What happens when a couple with a premarital agreement with a New York choice-of-law provision retires to another state, New Mexico, for example, and then divorces.  Will the court in the state of residence  determine a dispute about validity or enforceability in accordance with the chosen law or that of the forum, even when the result under the law of the forum would be different.   General choice-of-law principles permit parties to choose the law governing their contract, including a dispute about whether the agreement is valid, as long as there is a nexus between a party or the contract and the chosen state.  Courts generally honor these provisions.

Notwithstanding the parties’ express selection of governing law, if a party seeks to enforce at divorce in a state other than the state of chosen law, the agreement as a whole, or a specific provision, may prove unenforceable if the court of the forum state determines that application of the law of the chosen state “would be contrary to a fundamental policy” of the forum state and where the law of the forum would be the applicable law in the absence of the parties’ choice.  

Because almost every state permits parties to effect a full and complete disposition of property at divorce in a premarital agreement, it seems likely that, with rare exceptions, a court will accept the parties’ choice of law governing their agreement insofar as it determines property rights at divorce. However, some states’ standards of validity allow a court at divorce (but apparently not after death) to consider whether an agreement has become unconscionable as a result of events during the marriage.  There is little guidance about whether courts in these states will treat this difference in standards for validity as a matter of fundamental public policy.  In those states that limit parties’ rights to fix or waive spousal support, the issue tends to be viewed as a public policy matter in which the state has a significant stake. Thus, a court in a forum state may not give effect to a waiver of spousal support when the forum’s law does not permit a premarital waiver, or which otherwise limits parties’ contractual rights in this area, even though valid under the law selected by the parties.

Despite any uncertainty, best practices dictate that the agreement include a choice-of-law provision.  However, both parties are likely to be best served by a process of entering into the agreement that adheres to the highest standards for validity of premarital agreements.  Both are also likely to be better served if the substantive terms of the agreement will not leave one spouse impoverished if the parties divorce.  When both parties have adequate resources going into marriage, an agreement that allows each to leave the marriage without a financial obligation to the other can be appropriate.  When there is a big wealth disparity, the wealthy party can insulate the agreement from successful attack, even in a state with more demanding standards for validity, by making provisions for the economic security of the other spouse.

It is common for premarital agreements to include a confidentiality clause.  There are several distinct concerns that parties may wish to address in a confidentiality provision of a premarital agreement including:

  • The existence and terms of the agreement and the negotiations leading to it;
  • Each party’s financial disclosure;
  • Information about a party’s business learned prior to execution, or that a party may subsequently learn, that could be of interest to a competitor, regulatory authorities, or the press;
  • Other information about financial affairs gained during the marriage;
  • Information of a personal nature, facts about a party’s personl conduct before or during the marriage.

A confidentiality provision could be limited to each party’s financial affairs or could be broader and include information of a personal nature.  A voluntarily executed confidentiality agreement is generally enforceable as a contractual obligation.  However, the effectiveness of such a provision depends largely on parties acting in good faith.  Whether or not a court will enter a protective order in the event of divorce litigation between the parties depends on the law and rules of that jurisdiction.  

Some thought should also be given to the pool of persons with whom a party is permitted to share otherwise confidential information.  Certainly, each will need to be able to disclose it to his or her attorney, financial advisors, and possibly mental health professionals.  The lawyer will need to consider whether to permit disclosure to family members of a party, close friends or business associates.

A client entering into a negotiation for a premarital agreement may have some concerns about inappropriate financial disclosures during the negotiations, or he or she may be sensitive to disclosing information about a family business.  In that case, the lawyer should consider requiring the other party and counsel to sign a pre-execution confidentiality agreement.

The confidentiality clause can include a provision that, in the event of a divorce filing, the parties will consent to entry of a protective order that prohibits parties from disseminating protected information to the press or third parties.  It could also provide that parties will consent to entry of a court order that permits submission of financial information in pleadings or exhibits under seal, but such a contractual arrangement is not binding on the trial court if the law or rules of that jurisdiction do not permit it.

DISPUTE RESOLUTION

Parties to a premarital agreement may wish to consider providing for binding arbitration in the event of a dispute about interpretation of the agreement, about the specific protocols for implementation of the terms, or about a claim of breach.  Courts have upheld and enforced these agreements.  Because there is no appeal from the decision of an arbitrator as a result of legal error, it will generally not be in the best interest of the proponent of the agreement to agree in advance to binding arbitration of a dispute about validity; he or she should retain the right to appeal an adverse ruling on validity.  

Binding arbitration can have benefits for both parties.  In jurisdictions with crowded dockets, parties may be able to get a quicker resolution.  Arbitration proceedings are generally not open to the public; thus, parties may be able to better preserve their privacy.  Assuming the lawyers can agree, they can hand-pick their arbitrator and can choose an experienced domestic relations lawyer, avoiding the potential of being assigned a trial judge with no experience and no interest in domestic relations matters.

CONTRACT FOR IMPLEMENTATION OF AGREEMENT

Most premarital agreements are not self-executing. Parties will need to enter into a marital settlement agreement in the event of separation or divorce to state the specific terms for dividing any marital property, for the sale or spousal buyout of real estate, for allocation of tangible personal property, to confirm or determine spousal support, and other necessary terms. Moreover, parties may need a marital settlement agreement to avoid gift tax consequences with respect to payments or transfers that the agreement requires to be made after divorce.  I.R.C. Section 2516 provides:  

Where a husband and wife enter into a written agreement relative to their marital and property rights and divorce occurs within the 3-year period beginning on the date 1 year before such agreement is entered into (whether or not such agreement is approved by the divorce decree), any transfers of property or interests in property made pursuant to such agreement—
(1) to either spouse in settlement of his or her marital or property rights, . . . .
(2) . . . .
shall be deemed to be transfers made for a full and adequate consideration in money or money’s worth.

A premarital agreement may not qualify as an agreement between spouses concerning their marital or property rights under Section 2516; whether it does, or not, is beyond the scope of this article.  If it does qualify, as the three-year window begins one year before signing and ends two years after signing, only in the rare case where the divorce occurs very quickly after the marriage would the parties not need a confirming marital settlement agreement.

A provision such as the following is appropriate: 

             The parties understand that they may need to enter into an additional agreement or seek a court order addressing disposition of property, confirming spousal support, or to otherwise carry out the terms of this Agreement; however, the parties’ rights shall be determined only in accordance with the terms of this Agreement. Further, SPOUSE ONE shall not be obligated to make any payment or transfer required under this agreement that is to be made after entry of a judgment of divorce until the parties have executed an additional contract that meets the requirements of Internal Revenue Code § 2516.

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