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WE LAW — Postnuptial agreements: Do you need one?

WE Law is a continuing legal series written exclusively for the Mississippi Business Journal by lawyers of Watkins & Eager PLLC.
SUSAN STEFFEY

SUSAN STEFFEY

Asset protection planning is a well-known concept in business circles, but seldom considered in a family context. And when discussed in the non-business context, the discussion is more likely to involve either a prenuptial agreement, property settlement in divorce, or estate planning.  The postnuptial agreement is an asset protection planning device used during marriage.  In fact, it can be used to strengthen or restore a marital relationship.

What is a Postnuptial Agreement?

Postnuptial agreements are similar to prenuptial agreements, but are entered into after marriage. The contract can address a host of issues, including ownership of assets and responsibility for liabilities from the date of the agreement or in the event of divorce or death.

In Mississippi, postnuptial agreements require consideration or value in addition to the marriage itself, but they otherwise follow the typical requirements for entering into a valid prenuptial agreement.  They must be entered into voluntarily; there must be disclosure of assets and liabilities; and they must not be unconscionable – procedurally or substantively.  “Consideration” simply means the spouse forfeiting his or her rights to an asset must receive something in exchange for it.  Courts, however, do not typically look at the adequacy of the consideration, only whether value or benefits were exchanged.

Postnuptial agreements are often limited to specific items as opposed to addressing how all assets and liabilities are to be held.  The agreement can address current ownership or future ownership in the event of a divorce or death.    Postnuptial agreements can also run the gamut.  The scope of the agreement will depend on whether a party wants (or needs) limited or comprehensive asset protection.

An Upward Trend

A March 10, 2016 article in The Wall Street Journal by Veronica Dagher (“Why Postnuptial Agreements are on the Rise”) discussed the growing popularity of this planning tool.   Cited examples include:  (1) updating a prenuptial agreement; (2) maintaining family harmony where the older generation or siblings are concerned about assets or businesses staying within the family; (3) “punishing” a spouse (for example, to address infidelity while preserving economic leverage in attempting to save the marriage); and (4) perhaps the most common reason, documenting a prenuptial “agreement” that was never reduced to writing.

Appropriately drafted and thought-out postnuptial agreements can, and often do, facilitate and promote marital harmony and security.

Limited Asset Protection

Postnuptial agreements addressing only limited assets and/or liabilities are most routinely used when a married person needs to present evidence to a third-party that an asset belongs solely to one person and is not subject to marital rights or claims of another person.  For example, parents may want to leave a child a family asset or business, but the parents want to be sure the gifted asset stays in the family in the event of divorce.  In such a case, the parents may require their married child to enter into a postnuptial agreement (with the child’s spouse) before transferring the asset to the child.  The goal, of course, is to eliminate or limit marital rights and claims of the “in law” to the asset.

Business arrangements and loans where one spouse is obligated to provide a promissory note, guaranty or similar contractual obligation may create a need to consider a postnuptial agreement.   The agreement might be used to provide a lender the necessary assurance that assets backing the net worth won’t later be subjected to spousal claims or entanglements.

Importantly, risks and liabilities can also be structured where they are allocated to one spouse pursuant to a postnuptial agreement.  Like with any contract, postnuptial agreements are only valid between the parties and do not control third party rights and obligations.  By way of example, in a situation where an entrepreneurial husband wants to make a large investment in a business venture that the wife feels is too risky, a postnuptial agreement can put the risk and the benefit on the husband and provide safeguards to the wife.  Similarly, when a large business deal is on the horizon and a couple is struggling in their marriage, a postnuptial agreement may allow the spouses to continue working on the marriage, while exempting or allocating the assets and liabilities that flow from the proposed transaction.

Creativity Abounds

As with prenuptial agreements and divorce marital settlement agreements, postnuptial agreements are largely limited only by the client’s and lawyer’s creativity.  As with all contracts, there are important public policy and legal limitations that should be considered.

Belt And Suspenders

Postnuptial agreements are designed to complement and not replace other prudent estate and business planning efforts. A postnuptial agreement will often necessitate changes to a party’s last will and testament, beneficiary designations, and form of ownership of assets. Postnuptial agreements may receive greater scrutiny by a court than prenuptial agreements, and it is important the parties receive advice of counsel and thus assure validity of the postnuptial agreement. In almost all instances, the spouses should have separate counsel.  As with other comprehensive estate planning, it may be prudent to involve a CPA in discussions.

Conclusion

Postnuptial agreements are increasingly used in effective asset planning strategy.  It should be considered in connection with asset protection, transfers of assets, marriage reconciliation, and estate planning.

» Susan L. Steffey is a member of Watkins & Eager’s Domestic Relations & Family Law practice group.  Susan is recognized by Best Lawyers in America in the area of family law and holds an AV rating from Martindale-Hubbell.  Additional information is available at www.watkinseager.com.

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