Prenuptial Agreements – Post-Allard

Take-Away: A couple of recent Michigan Court of Appeals decisions suggest that a prenuptial agreement that seeks to protect one spouse’s separate property might still be a viable estate planning tool, despite some earlier questions raised by the Michigan Supreme Court in its Allard decision to the contrary. While a prenuptial agreement can protect separate property on the owner’s death from their surviving spouse’s claims to it, it is still doubtful if a prenuptial agreement provides much protection if the owner is in a divorce and the judge finds the proposed prenuptial agreement’s division of assets to be unfair.

Background: Michigan is a common law state. Under the common law, an individual who brings their separate property into a marriage, along with property that the individual acquired during the marriage by gift or inheritance, is normally restored their separate property before the marital assets are divided by the divorce court.  Accordingly, assets that a spouse might be given or which might be inherited normally fall within the classification as that recipient’s separate property which should be restored to that individual if there is a subsequent divorce. Charlton v Charlton, 397 Mich 84 (1976.)

Separate Property Not Protected: Michigan has two separate statutes that permit a divorce judge to “invade” one spouse’s separate property. Under one statute, the “invasion” of the other spouse’s separate property is allowed when the other spouse demonstrates additional need such as when the property division of the marital estate otherwise would have been insufficient for suitable support in the manner to which the parties were accustomed, a needs basis “invasion.” [MCL 552.23(1).] The other statute permits the “invasion” of a spouse’s separate property in a divorce when the other spouse has significantly assisted in the acquisition or growth of the other spouse’s separate property, such that the contribution has a distinct value that is deserving of compensation, a contribution basis “invasion.” [MCL 552.401.]

Prenuptial Agreement is an Enforceable Contract: Michigan also has a statute that acknowledges the validity of a prenuptial agreement: “A contract relating to property made between persons in contemplation of marriage shall remain in full force after a marriage takes place.” [ MCL 557.28; See also Reed v. Reed, 265 Mich. App 131 (2005.)]

Allard Decisions: A series of decisions (Court of Appeals twice and one from the Michigan Supreme Court) with regard to the Allard’s divorce in the last few years raised serious questions about the efficacy of a prenuptial agreement that attempted to protect one spouse’s separate property from invasion by a divorce judge if the parties, after their marriage, were later in a divorce. In Allard v. Allard, 318 Mich App 583 (2017,  the Michigan Court of Appeals held that the parties, by the terms of their prenuptial agreement, cannot deprive the divorce judge of its equitable discretion under either MCL 552.23(1) or MCL 552.401.  In Allard, the Court had to balance the right to freely enter into a contract [MCL 557.28] with a court of equity’s ability to be free to “afford whatever relief is necessary to see done that which, in good conscience, ought to be done. [MCL 552.23(1) or MCL 552.401.] The Court in Allard went on to say:

“In concert, MCL 552.23(1) and MCL 552.401 clearly demonstrate that the Legislature intends circuit courts, when ordering a property division in a divorce matter, to have equitable discretion to invade separate assets if doing so is necessary to achieve equity…For this reason, parties have no discernible rights to waive under MCL 552.23(1) and MCL 552.401. Moreover, to the extent that parties attempt, by contract, to bind the equitable authority granted to a circuit court under MCL 552.23(1) and MCL 552.401, any such agreement is necessarily void as against both statute and public policy codified by our Legislature. Put differently, the parties to a divorce cannot, through antenuptial agreement, compel a court of equity to order a property settlement agreement that is inequitable. Although parties have a fundamental right to contract as they see fit, they have no right to do so in direct contravention of this state’s laws and public policy.”

The Allard decision, taken as a whole, led many estate planning attorneys to the conclusion that a wealthy individual, planning to remarry, could not fully protect that individual’s separate property through a prenuptial agreement if there was a subsequent divorce. Restated, a divorce court’s equitable powers could always trump the terms of the prenuptial agreement if the divorce judge thought that invasion of the separate property would lead to a more fair division of wealth. A couple of recent Michigan Court of Appeals decisions claim to provide some limits to the broad language used in Allard but probably do not provide the level of comfort estate planners would like to see to encourage the continued use of a prenuptial agreement.

• In Skaates v. Kayser, Michigan Court of Appeals, Docket No. 346487, slip op at 11 (2020), the Court addressed the scope of Allard with the following: “Defendant misreads and mischaracterizes our Allard decision. He does not possess a statutory right to invade plaintiff’s separate property; rather, the trial court possesses the authority to do so if equity demands it. That is why the Allard Court held that parties cannot through a marital agreement force a trial court to order a property settlement that is not equitable. See Allard, 318 Mich App at 601. Our holding presupposed an inequitable agreement; otherwise, there would be no issue in dividing the property through that agreement’s terms.
• In Ellis v Ellis, Michigan Court of Appeals, Docket No. 349962 (December 17, 2020), a married couple with disparate wealth entered into a 2004  prenuptial agreement. A key provision in that agreement provided: “[Defendant] recognizes that [plaintiff] is a person of substantial means, is possessed of substantial assets and will likely be the successor to a substantial family business enterprise either through inheritance, gift, purchase or a combination thereof. As such, it is foreseeable to [defendant] and envisioned by the parties that [plaintiff] will acquire substantially more separate assets during the marriage, that the separate assets will likely grow significantly more than [defendant’s] and that said growth is not unforeseeable and will not constitute a change in circumstances requiring a Court to void this Agreement.” The Ellis’ agreement thus provided that neither party would ask for a property settlement that would include an award of any separate assets belonging to the other party.

In 2018 the husband filed for divorce. The wife moved the court to set aside the prenuptial agreement, claiming that the agreement was unconscionable, unfair, and unreasonable.A The wife asked the trial judge for an equitable division of property “including by way of invasion of property deemed by the Antenuptial Agreement to be Plaintiff-Father’s.” The wife specifically claimed that that despite the prenuptial agreement, the divorce judge could not be stripped of his equitable powers to invade a spouse’s separate property based on either MCL 552.23(1) or MCL 552.401.

Trial Judge: The divorce judge denied the wife’s motion to set-aside the prenuptial agreement and it granted the husband’s motion to enforce that agreement.

Wife’s Appeal: The wife appealed. She claimed that the enforcement of the prenuptial agreement did not absolutely preclude the “invasion” of the husband’s separate property and that a court cannot enforce contractual terms that are against public policy. Citing Allard, she argued that despite the existence of a valid prenuptial agreement, divorce proceedings were still equitable in nature and parties could not contractually prohibit a court from exercising its authority to do equity under both MCL 552.23(1) and MCL 552.401.

Court of Appeals: The Court sustained the trial judge’s decision to uphold the prenuptial agreement. “From these statutes defendant [wife] seemingly believes she is entitled to an invasion of plaintiff [husband’s] separate assets under MCL 552.23(1) or MCL 552.401. However, such an argument ignores that these statutes simply empower the circuit court and do not provide an absolute right to invade the other party’s separate property….Considering that the property settlement reflected an enforcement of the specific contractual terms between these parties, that the parties also agreed to additional spousal support to be awarded to defendant [wife], that defendant’s total award was not insubstantial, and that there is no evidence that defendant cannot live comfortably on the amount she received, we are not left with a firm conviction that the trial court’s ruling declining to invade plaintiff [husband’s] separate assets under MCL 552.23(1) was inequitable.”

Aside: I wonder if the Court reaction was in response to the wife’s claim that her monthly budget included $300 for botox injections?

Conclusion: There is currently a Bill before the Legislature to adopt the Uniform Premarital and Marital Agreement Act, which it is believed would make a prenuptial agreement to more likely than not be enforced according to its terms. Until that Bill becomes the law we are left to deal with Allard. Neither Ellis nor Skaates repudiate Allard. All these cases say is that there is no right to “invade” another spouse’s separate property. In the end, ultimately the divorce judge will decide if the facts warrant an “invasion” of separate property assets, notwithstanding the terms of a prenuptial agreement that seek to restore to either or both spouses their respective separate property assets. As such, there is still not much protection that a prenuptial agreement can afford a wealthy individual who plans to marry, or an individual who expects to inherit or receive substantial gifts during the marriage. For now, the better protection would be to transfer the separate property to a Michigan Qualified Dispositions in Trust trust. That statute clearly provides that the divorce judge cannot invade the assets held in the trust for the one spouse’s benefit.