Written by David I. Faust, Partner at Gallet Dreyer & Berkey, LLP.

Wedding season is just around the corner, which is a good time to reconsider pre-nups. What are the origins of these agreements and why can they be so tricky for attorneys to negotiate? David I. Faust, partner at Gallet Dreyer & Berkey, explores the legal basis for pre-nups and cohabitation agreements and that, far from being cynical, they’re a healthy way to build a solid foundation for a successful relationship.

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In New York, marriage has been characterized as an economic partnership. O’Brien v. O’Brien 66 N.Y.2d 576 (1985). Yet, how many grooms get down on bended knee to ask their intended: “Will you become my economic partner?”

The essence of both a marriage and an “economic partnership” is, or should be, an agreement by which two people enter into a defined relationship by knowingly agreeing to enumerated rights and obligations.
In traditional Jewish practice, a marriage is evidenced by a ketubah, a contract which states the parties’ mutual rights and obligations, financial and otherwise. Without a ketubah, a marriage is not recognized as under Jewish law and practice. Ketubahs may be viewed as religious pre-marital agreements.

As important as ketubahs are in the religious context, they are not civilly enforceable for a variety of reasons noted below and most of its references are irrelevant in today’s world, religious or secular. However, they do indicate an historical recognition that marriage is a fundamental contractual commitment, one to be discussed, planned and taken seriously by both parties.
In today’s context, is it realistic to hold people to an “economic partnership” with important financial consequences, enforceable in our civil legal system when, in the vast majority of cases, neither party has contemplated, much less understood or agreed to, any of the legally enforceable economic rights or obligations they will assume?
 

How Pre-Nups Work

The Domestic Relations Law (DRL) in New York provides for a wide variety of rights and obligations in the event of a divorce. These include the right of a spouse to maintenance for a post-divorce period and the division of marital property. The New York Estates, Powers and Trust Law (EPTL) provides for rights of a survivor in the estate of a deceased spouse. Other states have similar, though not necessarily identical, statutes.

As with any contract, if all goes well there is no reason for the parties to look to the contract or the relevant statutes, related regulations and the required cases which put flesh on the bones of the text of the legislation.
The DRL, EPTL and their related regulations are, for the most part, default provisions. They apply if, but only if, the parties have not established their own economic terms to the marriage.
Within specified limits, and subject to certain procedural requirements, parties can define the economic terms of their marriage by contract—a pre-marital agreement or “pre-nup.” They can limit, change and even eliminate various statutory rights and obligations, other than child support, but only if the pre-nup expressly refers to the specific rights being limited, changed or omitted and there is an express confirmation that the terms were explained by independent counsel. Child support is a wholly different matter, beyond the scope of this article.

To be valid, a pre-nup must clear certain procedural hurdles. It cannot be the product of untimely pressure. Each party must be represented by independent, identified counsel. It must be acknowledged by both parties with the formality of a deed. Each party must make a full and accurate disclosure of his or her financial status. This last requirement merits careful consideration.
 

Financial Disclosures

Stating basic historical income is easy. But what about earned deferred compensation? What about deferred compensation which is not yet vested, and subject to forfeiture, but which is highly likely to be received? What about an unusually large bonus? Do you disclose this but not the tax effects of someone who lives in New York but intends to move to Florida? What about the income of a medical intern or a law clerk for a judge who now has modest income, but has a realistic expectation of much greater income? What about contingent liabilities, for example, a guarantee of the debts of another? What about simply being in a high risk profession or owning a high risk business? Both overstatement and understatement can be a problem if the pre-nup is litigated.

The expectation of discretionary income from a trust in the foreseeable future or income which vests on some future date or event must also be considered. When listing assets, what about anticipated inheritance? Trusts present unusual issues which should move the preparer of a pre-nup to consult a lawyer familiar with trusts if either party is, or expects to be, the beneficiary of a trust.

The trust lawyer representing the beneficiary might suggest to their client (or to the parent who is often behind the pre-nup) providing in a trust that “no income or principal of this discretionary trust may be distributed to anyone other than grantor, the spouse of the grantor or the issue, by blood or adoption of the grantor.” However, if trust income is regularly distributed to a beneficiary who uses that income to support a certain lifestyle, such distributions could be considered by a judge in a divorce case in determining maintenance. If the beneficiary claims that he or she has no control over the trust and no legal right to distributions, a judge may still consider the trust distributions in awarding maintenance and direct payment out of other income or assets.

Practitioners who advise on pre-nups should consider footnotes to the financial statements explaining the nature of such foreseeable, but not quantifiable items. Failure to do so could lead to significant overstatement or understatement of a client’s financial picture which could undercut the protections of a pre-nup. Absent explanatory footnotes, the financial statements will be difficult to “explain” or amend in a court, particularly because of the formality with which they must be prepared and executed.
 

Beyond Money

Consistent with the view of marriage as an economic partnership, pre-nups typically deal exclusively with money matters bypassing or overriding, to the extent legally permitted, the provisions of the DRL and the EPTL. However, just as marriage is in fact much more than an economic partnership, a pre-nup need not be so limited.

Pre-nups between two young people planning on starting out life together are difficult enough to negotiate, particularly under pressure from parents. Pre-nups between people contemplating marriage later in life, perhaps with children from prior marriages and established careers and assets/liabilities, are more complicated. But in either case, the negotiation of a pre-nup need not be limited to “who gets what” in the event of a divorce.

Pre-nups are contracts. One of the most valuable functions of any contract is the negotiation process where the parties must articulate their priorities and concerns, distinguishing “wants” from “needs.” If done thoughtfully and candidly, this assures they have a mutual understanding of not only the strictly financial aspects of their intended relationship but also of at least some of the basic nature of how they will relate to each other going forward.

In the context of negotiating a pre-nup, topics to consider might include where the couple will live, will they both work, will either or both maintain separate bank or brokerage accounts which will include money earned during the marriage, work/career intentions, will one take a hiatus from work to pursue a degree or professional training, the decision to have or not have children and, if so, what financial considerations should these decisions reflect.
 

Cohabitation Agreements

It is increasingly common for couples, both heterosexual and single sex, to live together without being married, either as a prelude to marriage or as a deliberate lifestyle decision; to establish a household but not marry. They may acquire property together, invest together, share household expenses and even have children together. All of this without the legal status of marriage and, therefore, without the rights or responsibilities provided in the DRL and EPTL. “Marriage creates a personal status that carries with it non-transferrable rights, duties and obligations that are recognized and imposed by the state” Wade v. Kalbfleisch (58 N.Y. 282, 284) (1874). Yet when the commitment, which is the essence of a marriage, ends, all that remains between the couple is to provide for minor children and to deal with financial matters. It is within that context that the O’Brien court determined that what remains is to unravel an economic partnership.

These couples, too, benefit from a carefully designed agreement that establishes essential practical elements of their lives together, and how those elements will work for both partners if they choose to dissolve their relationship.

A tenancy-in-common agreement might cover the various aspects of owning real estate, but that is only one item to be considered by people establishing a household without a marriage. For this reason, co-habitation agreements are drafted to establish rights and obligation in the event of a break up which otherwise would not exist in the absence of a recognized marriage.

While the specific requirements for a valid pre-nup (independent counsel, financial disclosure, notarizations) may not apply to a cohabitation agreement, general principles of contract law will. Beware overreaching. The New York General Obligations Law, Section 5-311 provides that, subject to certain exceptions in the DRL, a pre-nup cannot absolve a spouse from supporting the other spouse as to “relieve either of his or her liability to support the other in such a manner that he or she will become incapable of self-support and therefore is likely to become a public charge.” DLR Section 236(3) provides for the validity of pre and post-nups provided that the terms regarding maintenance are “…fair and reasonable at the time of the making of the agreement and are not unconscionable at the time of entry of final judgment [of divorce].”

A totally unreasonable cohabitation agreement may no more likely be enforced than a totally unreasonable pre-nup. A practitioner starting to swim in this still largely uncharted water must be mindful of both legal and ethical considerations.
 

Conclusion

When done right, pre-nups and cohabitation agreements aren’t about the end of a relationship. Putting vital relationship and lifestyle issues on the table for candid discussion, and having a clear agreement prepared by knowledgeable counsel experienced in this matter, can avoid or minimize serious misunderstandings or disputes once married, or cohabitating. The process might also reveal fundamental differences which warrant reconsideration of the intended relationship.