Marital Agreements

A Marital Agreement is a contract made before marriage (in which case it is often referred to as a “prenuptial agreement” or “antenuptial agreement”) or after marriage (sometimes referred to as a “postnuptial agreement”) between two parties for the purpose of settling in advance certain rights of either or both of the parties. As discussed below, the agreement usually defines the rights of each spouse to certain property, the right of a spouse to “take against the will” in the event of the death of the other, and the respective rights and liabilities of the husband and wife to property and maintenance in the event of a divorce.

A Marital Agreement may be particularly appropriate in the following situations:

üin advance of a second marriage as a means to protect inheritances for children from a prior marriage;
üto preclude or reduce the high conflict aspects of divorce which a person may have experienced in a prior marriage;
üin marriages where there is a great disparity of wealth or wealth attainment prospects between the parties, or significant pre-existing debt or liabilities obligating one or both parties; and
üin marriages involving heirs to family businesses or significant inheritances
Furthermore, business owners, including professionals and members of partnerships and limited liability companies, use these agreements to protect their businesses/practices from spousal claims in divorce or probate proceedings, and also to protect spouses not involved in those businesses from the claims of business creditors.

A Desire for Financial Order - Not a Lack of Trust

Notwithstanding the utility of a marital agreement, a party's request for such an agreement will often result in an emotional response and controversy because the agreement contemplates the failure of the relationship. However, if the requesting party can convey that it is not a lack of love or trust that motivates the request, but a desire for financial order and continuity that will benefit both parties, a marital agreement can, in fact, add to the solidarity of a marriage.

A valid marital agreement will allow a couple to fashion their own property division rules and avoid state laws governing such divisions in the event of dissolution of their marriage. Colorado is an “equitable distribution” state, not an “equal division” state. Thus, unless otherwise agreed to by the parties, courts are free to award assets as they see fit. This can result in an unequal distribution of marital property.

State law does allow certain exemptions for separate (non-marital) property, such as property owned before the marriage or property acquired during the marriage by gift or inheritance (so long as that property has not been commingled with marital property). However, because of ever changing judicial interpretations and applications of the laws controlling property issues in divorce, many legal principles have developed which permit a court to "transmute" separate property into marital property, even if the title to such property remains in the sole name of one party. As a result, a party may be successful in claiming a marital interest in premarital, gifted and inherited property, including real estate, bank accounts, publicly traded and closely held stocks, pensions and other retirement funds and business interests. A well drafted marital agreement can block such a claim.

Frequently, divorce and probate litigation may involve a family business. Issues often arise as to whether the increase in value of a business interest is property subject to division, even if the business interest was acquired before the marriage, or even after the marriage by gift or inheritance. This is why knowledgeable family business owners often insist that their children invoke the protection of a marital agreement. Although it is unclear whether such an agreement can always insulate the financial affairs of a family business from the invasive discovery process that accompanies a domestic proceeding, a marital agreement can help prevent the disruption of a business if a divorce or death occurs.

Marital Agreement -- A Preventative Measure

Nevertheless, a marital agreement cannot be viewed as an insurance policy against subsequent litigation or successful claims against property and income. Rather, it should be viewed as a preventative measure. A spouse who is eager to marry may enter into a contract that becomes less palatable over time as circumstances change, the marriage sours or a wealthy spouse dies. As a result, challenges to the validity of marital agreements are not prevented merely by the existence of a marital agreement. However, a properly drafted and executed agreement can reduce the likelihood of such a challenge being undertaken, or, if undertaken, succeeding.

Colorado has enacted laws governing the validity of marital agreements. Colorado courts have developed standards for determining the validity and enforceability of these agreements under our statutes. If an agreement is entered into freely, fairly, knowingly, with understanding, in good faith and with full financial disclosure, it is generally upheld by the court. During the preparation of the agreement, each party should be represented by their own, independent legal counsel-one attorney should never represent both parties.

An exception to the likely enforceability of a marital agreement in Colorado is that provisions dealing with spousal support (alimony/maintenance) may, as a matter of public policy, be invalidated if, at the time of enforcement, they are determined by the court to be unconscionable.

Allow Ample Time for Review and Signing

While no one can give an iron-clad guarantee that a marital agreement will withstand a future challenge, such agreements serve a useful purpose and are typically upheld by the courts if prepared and executed properly. Furthermore, persons entering into a marital agreement can take certain practical steps to increase the likelihood that a marital agreement will be enforced. In addition to being represented by their own legal counsel, the parties should allow ample time to finalize the details of the agreement. In prenuptial agreements, this means ample time should be allowed in advance of the wedding-the longer the time between the signing and the wedding, the better. Also, each party must make full financial disclosure to the other party and their counsel, including detail descriptions and valuations of all of their assets and liabilities, as well as their income. Finally, to avoid a breach of contract claim, a spouse doing estate planning after the agreement is signed should make sure that the terms of the estate planning documents comply with the provisions of the marital agreement.

Whether to use a marital agreement is a personal decision. Marriage today is an economic as well as an emotional partnership. The cost of a marital agreement depends on the nature, amount and complexity of the assets involved, as well as the extent of the negotiation and drafting process. The cost, which can include the fees of attorneys, accountants and qualified appraisers, may be significant. However, a properly drafted agreement can prevent a protracted divorce that culminates in an unanticipated distribution of property or an unfair division of family and personal assets, or both, and can help ensure that “family” businesses or other “family” assets remain family assets for future generations.