Parties to a premarital agreement are free to make decisions during the marriage that alter their financial circumstances so long as they meet their contractual obligations. Post-execution actions can strengthen the validity of the agreement, result in a claim that the agreement has been revoked, or leave the agreement intact but change the economic outcome.
Conduct that Strengthens Validity
The low standards for validity create opportunity for a claim of duress, especially when a proposed agreement is presented close to the wedding or a weaker party does not get legal advice. (These claims rarely succeed.) Contract law acknowledges that a party may ratify a contract, thus waiving a duress claim. Acceptance of the benefits of a contract is generally considered ratification. When the agreement requires a party to make provisions for the other party during the marriage, such as transferring title to a home into joint names or changing a beneficiary designation, he or she should carry out these obligations promptly.
Another method to achieve ratification is a formal ratification document after the wedding. A waiver of survivor benefits under a private qualified retirement plan must be done after the wedding; a premarital waiver is not effective. When a party with a 401(k) gets the spouse to sign such a waiver, arguably, that action ratifies the contract as a whole, though there is little case law on this question.
Another approach to ratification is a formal amendment. The amendment can improve the terms for a weaker party and, as discussed above, allow a stronger party to carry out the terms and for the weaker party to accept the benefits. It will acknowledge the validity of the premarital agreement.
Conduct that Can Create a Claim of Revocation
General contract law permits parties to orally revoke a contract, even when the agreement says it cannot be revoked orally. Virginia cases hold that only a signed revocation is valid. In most states the general rule remains viable. Claims that parties orally revoked a premarital agreement have been litigated multiple times, but rarely succeed.
Among the rare circumstances where a claim of revocation has been taken seriously:
- The party relying on the agreement cannot produce it. Whether this constitutes revocation or merely a party’s failure to prove the existence of the agreement, the result is there is no agreement to enforce. A party who relies on a premarital agreement for estate planning or in the event of dissolution must secure it in a safe place.
- In an entertaining New York case, the husband, who would have come out better under the premarital agreement, forgot to mention it until he was on the witness stand at the divorce trial. The court treated the agreement as revoked.
- In another entertaining case from New Jersey, the premarital agreement was quite generous to the husband. He hired a hitman to kill the wealthy wife and got caught. The court strained the legal analysis to hold that the agreement was revoked.
- When parties entitled to retain exclusive rights to their nonmarital property elect to pool and commingle all of their assets, their actions are tantamount to a revocation of the agreement.
Many claims of revocation are based on a change of circumstances or decisions made during the marriage. The flaw in the argument for revocation is that a premarital agreement is designed to apply at the end of the marriage, come what may. For example, a weaker party retires early to travel, makes bad investment decisions, or does not receive an expected inheritance; these do not cause revocation of the contract. Similarly, a wealthy party’s change of fortunes, so that a contract has become burdensome, does not constitute revocation. The one circumstance where a court may decide to declare an agreement revoked is where serious domestic violence renders a victim unable to support him- or herself; but there are few examples in the case law and thus little guidance for the practitioner.
Actions that Change a Party’s Economic Circumstances without Affecting Validity of the Agreement
A variety of post-marriage events may alter parties’ economic circumstances. Nevertheless, they are bound by the contract. One type of premarital agreement provides for parties to maintain exclusive rights to nonmarital property but to share the fruits of their labor. When parties consume marital assets on lifestyle while a wealthy party preserves nonmarital assets the agreement remains enforceable as written. An agreement can anticipate this possibility and make provisions to address it. The party who needs to build a nest egg with the fruits of his/her labor must do so and not expect to rely on the resources of the wealthy party.
Wealthy Party Makes Disadvantageous Decisions and Then Regrets
A wealthy party may choose to be more generous to a spouse during the marriage than the agreement requires, for example, by creating joint accounts or survivorship real estate, or by transferring assets to the other party. Premarital agreements acknowledge each party’s right to give and receive gifts from the other. Neither is entitled to revoke a gift.
A Party Fails to Maintain Adequate Records
When a premarital agreement provides that a premarital IRA or 401(k), plus growth, is a party’s nonmarital property, and that marital contributions, plus growth, are to be shared equally at divorce, the owner must maintain all account statements from the date of marriage forward so as to be able to identify the nonmarital share. If he/she fails to do so, the entire account may be divided equally at divorce.
Spouse Takes Advantage of Ill or Incapacitated Party
A spouse with a financial power of attorney could use it to transfer assets or change a beneficiary designation. Such actions may constitute a breach of fiduciary duty, but there could be substantial litigation expenses to resolve a dispute and it could occur after a death or incapacity. Even without a power of attorney, a spouse could exploit a weak or ill party to revoke a premarital agreement, change the terms, or make excessive asset transfers. The wealthy party should work with his/her estate planning lawyer to devise the best way to handle incapacity.
Weaker Party Makes Disadvantageous Decisions and Then Regrets
A weaker party may make disadvantageous decisions during the marriage. These decisions will not alter the rights and obligations under a premarital agreement. A party who leaves the workforce before building an adequate nest egg, without written assurance that the other party will provide financial security, must live with the consequences. A party who uses separate property income to pay routine expenses while other party pays the mortgage on a solely titled home will be disadvantaged; his/her income will have gone to consumption while the other party builds equity. He/she is not entitled to rely on purported oral promises of the other party to make provisions, such as a more generous will, not required by the written contract.
Issues in Planning for Death
When a premarital agreement creates obligations to a surviving spouse, parties must see to the execution of estate-planning documents – the will; beneficiary designations – while both are alive. When a spouse was previously divorced, he/she must update beneficiary designations; a failure to do so may result in a former spouse receiving life insurance or an IRA that parties intended go to a new spouse. A spouse who is entitled to life insurance under a premarital agreement should see to the payment of premiums so that the policy does not lapse.
A premarital agreement can be useful for many couples, especially those who have been married before, want to avoid a contentious divorce and to provide for both a spouse and children. However, such an agreement is only useful when parties take the steps necessary to carry out their obligations and make appropriate decisions during the marriage.