Pre- and Postnuptial Agreement Tips and Traps

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IN BRIEF

THIS ISSUE

June 2006

Issue No. 98

PRE- AND

POSTNUPTIAL

AGREEMENT TIPS AND

TRAPS

Many couples wish to define their

marital rights and responsibilities by en-

tering into prenuptial or postnuptial

agreements. The impetus for such an

agreement is frequently a reaction to a

bad dissolution of a prior marriage or a re-

sult of parental pressure. Some people

simply wish to carefully define their finan-

cial relationship. Whatever the couple’s

motivation, approach these agreements

with caution.

In Oregon, prenuptial agreements are

authorized by ORS 108.700 to 108.740.

Postnuptial agreements are not authorized

by statute, and their status is consider-

ably less certain than that of prenuptial

agreements. Because of the high inci-

dence of divorce, it is quite possible that

a prenuptial agreement you draft will be

“put to the test.”

PRENUPTIAL AGREEMENTS

Understand the Law. Prenuptial

agreements can be very comprehensive in

scope. Typically, they address both what

happens in the event of a divorce and

what happens in the event of death. They

can also examine any day-to-day financial

arrangements the parties may wish to in-

clude. The competent drafter must have a

good grasp of both estate planning and

domestic relations law. If you are inexperi-

enced in one of these areas, consult with

another lawyer who can provide the

needed expertise.

Represent Only One Party. Repre-

sent only one party to a prenuptial agree-

ment, and insist that the other party have

independent counsel. Even if the parties

say that they agree about every term of

the agreement, their interests are ad-

verse, and it is not permissible for one at-

torney to represent both parties. Inde-

pendent representation for each party

will increase the likelihood that the

agreement will be upheld and will provide

an often-helpful second set of eyes dur-

ing the drafting process. It is good prac-

tice, although not required, to have both

attorneys sign a certificate stating that

they have fully explained the agreement

to their clients and that they believe that

the clients understand the terms and how

their rights are being altered. There is no

required format for such a certificate. You

can find an example in the OSB CLE Fam-

ily Law, Volume II (Dissolution Practice),

Chapter 14: Formal Agreements.

Time Carefully. Although a prenup-

tial agreement in Oregon could be signed

just before theorgan starts to play the

wedding march, this timing makes the

parties vulnerable to the contention that

the agreement was signed under duress.

It is better to have both parties execute

the agreement a reasonable period of time

before the ceremony. Although Oregon

law does not define a “reasonable period

of time,” California law requires that

prenuptials be signed at least a week be-

fore the wedding ceremony.

Draft Carefully. During the drafting

process, advise clients that they are opt-

ing out of the complex bundle of marital

rights that has developed over centuries

and are trying to create a customized

bundle that applies only to their situa-

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tion. Take the time to describe exactly what will hap-

pen to complex assets, such as retirement plans,

stock options, intellectual property, and business as-

sets.

Consider Reasonableness of the Agreement.

Although a reasonable agreement that provides for

the needs of both spouses may produce a more

satisfying marital relationship than a one-sided

agreement, Oregon does not require that prenuptials

be reasonable. A prenuptial agreement is very diffi-

cult to set aside and is likely to be upheld under the

Oregon statute.

ORS 108.725 sets forth the two grounds under

which a premarital agreement is not enforceable. The

first ground is that the party did not execute the

agreement voluntarily. The second ground is that

the agreement was unconscionable when it was ex-

ecuted and, before execution, one party (1) was not

provided fair and reasonable disclosure of the other

party’s property or financial obligations, (2) did not

waive the right to disclosure, and (3) did not have or

reasonably could not have had adequate knowledge

of the other party’s property or financial obligations.

Clients challenging a prenuptial agreement will find

this an extraordinarily difficult standard to meet. Ab-

sent unusual circumstances, courts are quite likely

to enforce prenuptial agreements. This message is

particularly important for the “have not” spouse who

is frequently less sophisticated than the “have”

spouse, uncomfortable with the prenuptial negotia-

tion, and anxious to get married and put it all behind.

Although full disclosure of each party’s prop-

erty and financial obligation is not required by the

statute, it eliminates any attack based on unconscio-

nability, leaving only lack of voluntary execution as

a ground for setting aside the agreement. If the par-

ties choose the full disclosure approach, lawyers

customarily attach exhibits to the prenuptial agree-

ment, showing each client’s separate property and

any property they hold jointly or intend to make

joint following the marriage.

Keep File Notes and Letters to Clients. Take

reasonably detailed notes about your conversations

with clients and keep those notes in your files. This

is particularly wise when a client insists on doing

something that you think may not work out well or

that the client may later regret. Advise clients in

writing when they are acting contrary to your advice.

If the situation is crucial, consider having the client

sign off on the letter acknowledging your advice.

Retitle the Property. A prenuptial agreement

may be used to define the legal status of untitled

property. For instance, a prenuptial (or postnuptial)

agreement could state that all the parties’ household

furniture and furnishings are joint property, regard-

less of who brought such property to the marriage or

paid for it. This statement would effectively make

such property joint. A prenuptial agreement, how-

ever, cannot actually change the title to property.

Although it is possible to state in a prenuptial agree-

ment that the parties’ principal residence is joint

property, this may create an ambiguous situation

unless the title to the residence is also transferred at

the same time. Creating joint assets can be tricky,

particularly when one person is buying an interest in

an asset, such as a residence already owned by one

of the clients. Use available resources, such as the

OSB CLE on Family Law, as a starting point.

Advise Clients to Keep Records. A well-drafted

prenuptial agreement is only half the battle. The

other half consists of the client’s keeping careful

records, reviewing the agreement from time to time,

and doing his or her best to live within its terms.

Even the best-drafted prenuptial agreement will not

be helpful if the parties have kept poor records or

acted inconsistently with the document, such as

placing assets in joint names without intending to

make the assets joint for purposes of the agreement.

Modify in Writing. Prenuptial agreements can be

modified or terminated, but only in writing. Tearing

them up, throwing them in the fireplace, or otherwise

destroying them will not alter the agreement.

POSTNUPTIAL AGREEMENTS

Although many of the comments above about

prenuptial agreements also apply to postnuptial

agreements, the following additional considerations

come into play.

Include Consideration. A prenuptial agreement

requires no consideration to be enforceable, includ-

ing any modification or revocation of the agreement.

Postnuptial agreements are governed by contract

law, which requires consideration to enter into and

modify an agreement. The mutual alteration of mari-

tal rights may provide adequate consideration, but it

is safer to require additional monetary consideration,

no matter how minimal.

Clarify Application. Postnuptial agreements do

not enjoy the statutory authority of prenuptial

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agreements. Although carefully drafted and reason-

able postnuptial agreements may be enforceable,

they are considerably less certain than prenuptial

agreements. The recent case of In re Marriage of

Grossman, 338 Or 99, 106 P3d 618 (2005), had a chill-

ing effect on postnuptial agreements, although the

facts of that case are unusual and may not have

broad application. In Grossman, the parties executed

a postnuptial agreement while contemplating a

divorce. After executing the agreement, the parties

reconciled and continued to live together for some

years. They later divorced, and the validity of the

agreement came into question. The Oregon Supreme

Court ruled that the agreement was no longer effec-

tive, possibly because it would have resulted in an

extremely uneven division of property and it was not

clear whether the parties intended the agreement to

apply to anything other than the divorce impending

at the time they executed the agreement.

To avoid the result in Grossman, practitioners

should distinguish marital settlement agreements

from postnuptial agreements. The former are gener-

ally executed in contemplation of a divorce; the lat-

ter are not. A postnuptial agreement should clearly

provide that it applies to any future divorce, if that

is what the parties intend. If it is not their intention,

the parties should enter into a marital settlement

agreement, which should provide that it applies only

to their impending divorce.

Advise Clients About Lack of Certainty. If the

parties want to be certain of enforceability, they may

need to get divorced, sign a prenuptial agreement,

and then remarry. Obviously, this extreme solution

will not appeal to most clients. However, to protect

yourself, advise clients in writing that a postnuptial

agreement may not hold up.

Joshua Kadish

Meyer & Wyse, LLP

Our thanks to William J. Howe III, Gevurtz Menashe

Larson & Howe, PC, for his assistance with this article.