What is a Prenup?
A prenuptial agreement is a contract between two people who are planning to marry or have a civil partnership. The contract, sometimes referred to as a prenup or premarital agreement, is designed to clarify and protect the financial interests of both parties. The contract will explain how the parties’ income, assets, debts, and property would be treated in the event of a divorce or separation .
Specifically, a prenuptial agreement can contain provisions on how property is distributed in the case of a marital breakup, how marital debt is divided, and whether or not spousal support will be paid in the event of divorce.
So in short, it establishes what is fair and equitable if a relationship does not stand the test of time. It does not represent an assumption that the relationship is doomed to fail; rather, it is a precautionary measure. Like having a will, it is wise planning.
How Prenups Impact Inheritance
A prenuptial agreement can be used to protect the assets you currently have, including those you may yet inherit in the future. Or, it can be used to waive your right to inherit from your spouse. While waiving a right to inherit is not as normal as protecting an inheritance, it is a possibility and it is important it be done properly. If you would like to preserve any future interest you may have, you should make sure your prenuptial agreement includes provisions that state what portion (if any) of your spouse’s inheritance you would like to receive if they died while married. Any such provisions would apply only if you outlive your spouse. In addition, it is a good idea to address what will happen in the event that you are legally separated from your spouse at the time of death or if you and your spouse divorce. However, it is very important to remember that you cannot adversely affect a third party such as an estate administrator under a will unless that person has agreed to this in some way. It may be that your spouse has a will which specifically bequeaths something of value to you. Your spouse would have to change his or her will for you to receive nothing in order for Paragraph B to be effective. In that situation, Paragraph A would be.
Paragraph A
If spouse dies while married to you, you shall be entitled to the sum of $_________.
Paragraph B
If spouse dies during separation, the above Paragraph A shall not be effective and you shall not inherit anything from spouse’s estate.
The purpose of Paragraph C is to require the spouse to change his or her will, if necessary.
Paragraph C
If spouse has a will that specifically bequeaths something of value to you, your spouse shall make a new will revoking that bequest.
The following provision is intended to protect the rights of the spouse who may someday inherit property after the death of a relative. The clause preserves the right of inheritance and would not take effect until the current spouse dies.
Paragraph D
This agreement shall not be construed to preclude either party from receiving an inheritance from a relative or any gifts during the marriage from either party’s relatives.
Writing Your Prenup With Inheritance Considerations
If your prenuptial agreement is drafted with inheritance in mind, it can make your life much easier down the road. There are a number of key terms that you should include so that your wishes are clearly stated and the terms of your agreement cannot be challenged later by your surviving spouse. Some of these terms pertain to your existing assets and some pertain to your future assets. The purpose of your prenup should be to protect the assets that each spouse is bringing into the marriage, as well as to indicate which assets are going to be considered joint property and which are going to be considered separate. If you are planning on having children in the future, you may also want to include language about how your marital assets are going to be divided in the event of divorce or if one spouse passes away.
Your prenup should also address if you plan on acquiring life insurance. It should highlight who is going to be the beneficiary of this policy and if the beneficiary is going to change, it should require that notice be given and a new prenup be executed.
Some people wait to get a prenup until they are already married, however, the estate planning involved is much easier if you execute the agreement before the marriage. This way you have peace of mind that your wishes are clear and that they are enforceable.
Legal Issues and Exceptions
When it comes to issues surrounding inheritance and prenuptial agreements, there are a few important legal considerations to keep in mind. In Ontario, as long as any inheritance received during the marriage is kept in a separate account, not commingled with assets from the marriage, there is no direct claim by the surviving spouse to the inherited assets. However, proving that the legacy has not been dissipated will require significant evidence.
For the most part, the entitlements created in a Canadian Prenuptial Agreement are enforceable; however, there are legal limitations . Notable developments in Ontario involving foreign pre-nups indicate existing Court trends. For example, since Ontario Courts have no authority to divide a pre-marital asset of a non-resident spouse, where a prenuptial agreement has been made in Quebec, the Ontario Court is bound to reject it if, for instance, the agreement purports to waive spousal support in Ontario.
Thus, it is important that both parties and their respective legal representatives review the structure and basic tenets of a marital/non-marital property pre-nup before obliging the document with their signatures.
Case Examples: Prenup and Inheritance Conflict
The intersection of prenuptial agreements and inheritance can lead to lengthy court proceedings. In 2012, the Michigan Court of Appeals ruled in Waller v. Waller that documents signed prior to the marriage that apparently waived the former spouse’s claim to inheritance are enforceable even when there is an existing divorce action pending. The parties had executed a quit claim deed prior to their marriage giving them each a 50% ownership interest in the marital home. In 2003, a divorce action was initiated and the parties stipulated that they "had reached an agreement regarding certain financial issues." In relevant part, the stipulation of settlement stated: [H]usband and wife confirm that the property known as [address redacted] . . . is currently held 50/50 as tenants in common (the current market value of [the house] is approximately $210,000.00). Husband shall have no responsibility to Wife for any equitable distribution of real estate. After the husband died in 2007, the wife sought a declaratory judgment as to her rights in the real property. The Wayne County Circuit Court concluded that the spouse’s waiver of any interest in the marital estate by entering into the quit claim deed prevented the ex-wife from receiving an inheritance from the estate of her deceased former husband pursuant to MCL 700.2801a. The Court reasoned: Upon the death of husband, the ownership interest that was held by tenant-in-common became the property interest of husband’s remaining heir under [MCL 700.2801a]. Because the Judgment of Divorce determined that wife had waived her right to an equitable share of the value of the property at issue, wife was not a mandatory heir of husband under MCL 700.2801a such as to inherit the property from his estate. The circuit court therefore erred in concluding that wife had an interest in the property at issue and improperly entered a judgment of ownership in her favor. In 2010, the highly publicized case of Marital Trust for the Benefit of Anna Horton v. Herbert W. Comstock IV et al. involved a dispute over inheritance rights that revolved around the settlement of the divorce between Martha and Herbert Comstock III. At issue was whether Herbert W. Comstock IV, the son of Martha and Herbert Comstock III, received his father’s entire estate or whether he could only receive what he and his siblings were entitled to pursuant to the distribution provisions of their parents’ separation agreement and divorce judgment and judgment of divorce. The dispute was exacerbated by Martha’s estate planning process five years after her divorce. Martha Comstock executed several estate planning documents that gave her children unconditional bequests. In addition, she created a Medicaid qualifying irrevocable trust that was funded with nearly all of her assets and granted her son Marcus enhanced trustee powers. Marcus would be able to make distributions in his sole discretion to himself and his siblings as "Incidentals" of his authority. The beneficiary designation of the trust specified that upon Marcus’s death, even if he removed the property from the trust, his brothers and sister will receive their shares of the trust property. Once the litigation became publically available via PACER, Michigan lawyers weighed in on the dispute.
Legal Consultation: The Importance of Legal Counsel
It is fascinating to me how people will hire an attorney to draft a Will and Trust for them, but when faced with a proposed prenup they kind of toss it off and think they don’t need to hire an attorney to review it.
I can’t tell you how often long-term clients of mine have come back after signing a prenup and have told me they only did it because it was so important to their new spouse, and they really didn’t think about it, or they had an attorney who they thought they could trust, but was actually a friend of the new spouse who didn’t go through the prenup with them, just had them sign it. These clients end up coming to me after facing a divorce where they lost out on a substantial amount of property in California, or they are facing a divorce in another state and now need to try to fight the prenup in order to survive. It’s sad because if they had come to me when they were originally presented the prenup, I would have strongly advised them to sign one that included terms that would allow them to remain somewhat independent and to keep inherited property, without following a formula of what was fair.
California continues to follow the community property system, meaning that anything acquired during marriage is presumed to belong equally to both spouses (as well as half of debts). This presumption doesn’t apply to things that were acquired before marriage, or gifts or inheritances acquired by each spouse during marriage.
One of the major issues I see when advising clients on negotiating and preparing prenups is with respect to how a prenup will affect a person’s estate plan. People don’t seem to realize that the prenup will likely have an impact on their estate plan, either before or during marriage, or impact their plans when one spouse dies. I have had multiple times where a client starts to tell me about joint property they have , such as an account in both of their names. The client then says they will put that account in one name or another after they get married. So my question is, why are they not doing that now? It’s simple – there isn’t enough money in the account now for it to matter. However, if they are getting married and then some large amount of money goes into the account, and the title is changed to the name of the spouse who didn’t put the money in the account, and they die, what happens? Especially for a business account that is owned by both spouses, should the widow or widower have to give over the entire account to the heirs of their deceased spouse?
Another example involves real property. Say two people get married. Together they buy a house that is tenanted by one person. When the tenant moves out, the spouse who didn’t house hunt for the property will get a watchful eye to make sure the property is priced correctly and sold in a manner meant to optimize the value of the property. But the spouse, who did do the leg work, may get more excited about a new opportunity and want to sell it quickly and for a lesser price. If the higher price is not paid, the funds might be deemed "marital" property and split. But if the sale goes through for the agreed upon price, would that spouse who did all of the legwork be entitled to a larger share of the money from the sale? Even if the house was titled only in the selling spouse’s name?
These are just a couple potential examples of how a prenup can impact an estate plan. The best option is to consult with an attorney before the prenup is presented, and allow yourself a "cooling off period" as to whether you really need to sign a prenup. A prenup isn’t necessarily fair, and assets that can be easily separated out sometimes aren’t. In addition, if one party feels they are being rushed to sign a prenup, it’s likely not a good prenup to sign.
