Prenuptial Agreements and Estate Planning

Take-Away: Individuals who expect to receive large lifetime gifts, or inheritance, often enter into a prenuptial agreement in order to protect their separate property. A prenuptial agreement can protect those separate property assets upon the owner’s death, but such a prenuptial agreement will have to survive the unconscionability ‘test,’ at the time the prenuptial agreement was signed, and under recent Michigan court decisions also at the time the agreement is enforced, i.e. on the death of the one spouse who owns, and wishes to protect, his/her separate property from the surviving spouse’s claims.

Background: It is often said that everyone who marries enters into a prenuptial agreement that is reflected in the state’s family and probate laws in which they live. Marriages end in two ways-death or divorce. A good prenuptial agreement will address both of these events. The potential for both death and divorce need to be considered, openly discussed, and drafted for in a prenuptial agreement if the goal is to protect an individual’s separate property from claims by their surviving spouse..

Prenuptial Agreement: A spouse can waive his or her rights under the Michigan Estates and Protected Individuals Code (EPIC) in a prenuptial agreement. More, however, can be waived, or agreed upon, than just a surviving spouse’s EPIC intestate share or his/her other elective rights. EPIC provides for the enforcement of a prenuptial agreement if there is a ‘full disclosure’ of assets prior to the execution of the prenuptial agreement:

“The rights of the surviving spouse to share under intestate succession, homestead allowance, election, exempt property, or family allowance may be waived, wholly or partially, before or after marriage, by a written contract, agreement, or waiver signed by the party waiving after fair disclosure. Unless it provides to the contrary, a waiver of ‘all rights’ in the property or estate of a present or prospective spouse or a complete property settlement entered into after or in anticipation of separate maintenance is a waiver of all rights to homestead allowance, election, exempt property, and family allowance by the spouse in the property of the other and is an irrevocable renunciation by the spouse of all benefits that would otherwise pass to the spouse from the other spouse by intestate succession or by virtue of a will executed before the waiver or property settlement.” [MCL 700.2205.]

Nor will MCL 700.2205 be construed to create an inchoate or choate right to the statutory rights that are described in MCL 700.2205 regarding the property of a spouse prior to that spouse’s death. [MCL 700.2206.]

Other EPIC Rights Waived: Other EPIC provisions and ‘marital rights’ can also often waived in a prenuptial agreement. Such a waiver might address: (i) the right to take as a pretermitted heir; (ii) the right to claim property that would pass from the deceased spouse by testamentary disposition in a Will that is executed prior to the prenuptial agreement, i.e. as an omitted spouse; (iii) the right to elect to take community property, or quasi-community property, against the deceased spouse’s Will if property was accumulated in a community property jurisdiction and later brought to Michigan; (iv) the right to be appointed as the Personal Representative of the deceased spouse’s estate; (v) the right to be appointed Funeral Representative for the deceased spouse; and (vi) a generic  ‘blanket statement’ that any other rights that might accrue on one spouse’s death are  also  waived, e.g. the default beneficiary under a transfer-on-death account or IRA under the custodial agreement.

Choice of Law: Another provision that needs to be included in a prenuptial agreement is the choice of law. States have different laws and burdens of proof when it comes to the enforcement of a prenuptial agreement on one spouse’s death. If the parties to the prenuptial agreement plan to move to another state, or country, a choice of law or choice of forum provision in the prenuptial agreement may not always be enforced if there no nexus with the state, and another state’s  court may not enforce that choice of law provision. Moreover, another court may find that a provision in the prenuptial agreement relates to a public policy issue and may choose not enforce the provision in the prenuptial agreement.

Other Prenuptial Provisions: Any rights that are created on the death of a spouse should be clear and specifically identified in the prenuptial agreement. The prenuptial agreement will also address the following issues: (i) who pays any federal estate tax; (ii) who pays any inheritance tax; (iii) the impact of any change in the size of the deceased spouse’s estate; (iv) the impact of a change in the type of the deceased spouse’s assets; (v) the changes in the governing  law; (vi) a waiver of a right to receive support if one spouse applies for Medicaid (highly unlikely to be recognized by the Medicaid authorities).

Portability: A new provision in prenuptial agreements in the past decade is the required obligation of the decease spouse’s estate to file a complete Form 706 Federal Estate Tax Return on which an election is made for the portability of the deceased spouse’s unused exemption amount (DSUEA) and who pays the cost for filing the Form 706, including any required appraisals.

ERISA Spousal Rights: Yet another prenuptial provision that often causes confusion is if one spouse is a participant in an employer sponsored qualified retirement plan, e.g. a 401(k) plan. An individual, planning to become a spouse of the participant, cannot waiver his/her rights to be the sole beneficiary of the participant’s ERISA covered retirement benefits, until he/she actually becomes a spouse, i.e. after the marriage. This means that the waiver of the right to be named as the plan participant’s qualified plan retirement account joint-and-survivor beneficiary, can only be executed after the marriage, which is often overlooked after the blissful parties return from their honeymoon. {I had one client who had his new wife sign her ERISA spousal waiver in the church immediately after their wedding vows were exchanged, but before they went to the wedding celebration at the Country Club. I often wondered how their honeymoon went?}

Unconscionability: A prenuptial agreement is more likely to be enforced on the death of one spouse than it is in the event that the spouses become divorced. Michigan divorce law makes it clear that the terms of a prenuptial agreement must neither be be unconscionable at the time the prenuptial agreement is signed, nor when the prenuptial agreement is sought to be specifically enforced in a divorce or action for separate maintenance. Note that MCL 700.2205 only refers to ‘after fair disclosure’ with no reference to unconscionability. Currently the Michigan Bar’s Probate and Estate Planning Section is closely looking at proposing that Michigan adopt the Uniform Premarital and Marital Agreement Act. That uniform law addresses the need for full and adequate disclosure as a condition to the enforcement of a prenuptial agreement on divorce or death. Some of the principles of that uniform law being considered include the following:

Governing Law- Significant Relationship: While the parties can choose which state’s law governs their prenuptial agreement, under the uniform law the chosen state must have a significant relationship either to the prenuptial agreement or to either party. [UPMAA section 4(1).]

Waiver Signed in a Separate Record: Under an earlier uniform premarital agreement law [the Uniform Premarital Agreement Act] , the prenuptial agreement was enforceable without consideration and disclosure could be waived. Under this new uniform law, which is effectively an amendment to the earlier uniform law, the waiver by a spouse must be in a separate record and signed by both parties. Thus, the waiver or rights upon a spouse’s death cannot be buried deep and hidden within a prenuptial agreement. [UPMMA section 9(d)(2).]

Free of Fraud, Duress, or Undue Influence: The parties owe a fiduciary duty to deal openly and fairly with each other in the formulation of the prenuptial agreement. As such, the prenuptial agreement must comply with certain formalities, including: (i) it must be in writing signed by both parties; (ii) the parties must have general contractual capacity; and (iii) the parties must enter into the agreement free from fraud, duress, and undue influence.

Unconscionable at Execution: These uniform laws provide that the party who seeks to enforce the prenuptial  agreement has the burden of proof, and the prenuptial agreement will be void if: (i) it was not entered into voluntarily; (ii) it was unconscionable before and at the time of execution of the prenuptial agreement and: (a) there was a lack of fair and reasonable disclosure of the property or financial obligations; (b) there was no voluntary waiver of any rights to disclosure; and (c) the party challenging the validity of the prenuptial agreement did not have, or reasonably could not have had, adequate knowledge of the property or financial obligations of the other party.

Conclusion: Practically speaking, if Michigan adopts the Uniform Premarital and Marital Agreement Act, it will be easier for a disgruntled surviving spouse to set aside a prenuptial agreement on the basis of unconscionability or lack of disclosure by the deceased spouse.