The myth of the ironclad prenuptial agreement

Intolerable Cruelty, a lesser Coen Brothers movie, follows the courtship of an over-slick, high-powered divorce lawyer and a man-eating gold-digger, as they take turns getting over on the other. The plot’s Macguffin is the “Massey Pre-Nup,” an allegedly ironclad agreement that has never been successfully challenged. It is, obviously, a work of fiction.

Most folks seeking prenuptial agreements prior to entering wedlock assume that the agreement they will be entering is similarly ironclad. Experience teaches they never are. This doesn’t mean that every prenuptial agreement is challenged at the time of the marital dissolution. Sometimes the less powerful spouse simply doesn’t have the energy or desire to challenge the prenuptial agreement. Sometime both parties gain something from the prenup that they might not get from the family court which they consider valuable, and both are unwilling to risk a challenge. However when the less powerful spouse wants to challenge the validity of a prenup, a clever attorney can often help them find weaknesses.

There are two reasons for this: attorneys are human; spouses are human. Because attorneys are human, they cannot conceive every potential outcome. Unlike separation agreements (or most other domestic agreements), prenuptial agreement are written to address some hypothetical future event–either one spouse’s death or a marital dissolution. Other domestic agreements only need to address circumstances at the time of the agreement. Prenuptial agreements need to address an unlimited number of potential future pathways.

For example, a prenuptial agreement may intend to allow one spouse to keep a particular item of property separate. It’s very easy to draft a prenup to accomplish this. It’s easy to consider the possibility that this property may be sold, and the proceeds used to purchase some future property. It’s less easy, but still quite possible, to draft that prenuptial agreement. What if this premarital property is subsequently mortgaged and the proceeds used for part, but not all, of the purchase of a new piece of property? That’s harder to anticipate. What about a daisy chain of accumulated property? Unless all parts of that potential chain of property are rendered premarital under the prenuptial agreement, the final property is potentially marital. Attorneys simply cannot anticipate every potential eventuality.

And even if they could, clients might well bungle it anyway. A number of prenuptial agreements I’ve encountered have been partially vitiated because the more powerful spouse had better things to do during the marriage than continually reference the prenuptial agreement. A prenup may provide methods for keeping property separate, but if the spouse doesn’t follow those methods property can become marital. I once encountered a prenuptial agreement that allowed one spouse to fund certain retirement accounts from marital earning with those accounts remaining non marital. During the marriage that spouse–one of most savvy clients I’ve ever represented–opened a new retirement account and funded it heavily. He was shocked to learn that account was marital and ended up having to provide his spouse a substantial portion of the proceeds from that account.

Because no prenuptial agreement is ironclad, it’s best to view them as leverage in marital dissolution settlement negotiations. For sake of illustration, assume that the less powerful spouse would get $5 million in equitable distribution if there was no prenuptial agreement and would get $1 million in equitable distribution of the prenup is ironclad. The value of that spouse’s equitable distribution claim is somewhere between $1 million and $5 million.

If the prenuptial agreement wasn’t properly executed (no separate attorneys; no full financial disclosure), the claim’s value is likely very close to $5 million. If the agreement was properly executed, anticipated all the relevant contingencies that took place during the marriage, and the more powerful spouse complied with the terms of the prenuptial agreement to keep property separate, the claim’s value is very likely close to $1 million. However, in valuing the equitable distribution claim, good attorneys won’t simply be looking at how much the less powerful spouse is entitled to under that agreement. They will also be analyzing the value of the equitable distribution claim if the prenuptial agreement is invalid and determining how well and how strongly the agreement might be undermined.

Folks seeking prenuptial agreements with the expectation that this will be an ironclad agreement are likely to be disappointed when the marriage dissolves. Folks seeking these agreements in the hope that they can shield some of their assets from their intended are–assuming their attorney does a good job drafting the agreement and following the formalities in executing the agreement, and they do a good job following it–likely to be pleased with how well it shielded their assets during the divorce. An ironclad prenuptial agreement is a myth. Treating these agreements as leverage–sometimes very powerful leverage–in marital dissolution settlement negotiations is a more realistic view.