ADVANCED PRENUPTIAL DRAFTING
Patricia K. Ballman
Quarles & Brady LLP
411 East Wisconsin Avenue
Milwaukee WI 53202
414-277-5000
The experienced lawyer knows how to draft prenuptial agreements which properly
classify, protect and award Individual Property, and which usually will satisfy even
Wisconsin’s standards for enforceability at the time of divorce. But what many lawyers are
not experienced with are the mechanics of separating the spouses during a divorce, and the
incentives which can be built into prenuptial agreements to facilitate quick and inexpensive
enforcement of the agreement. This outline assumes that the reader has experience drafting
agreements, but suggests various provisions which may be added to the standard prenuptial
agreement to ease the divorce process for the client.
I.
INTRODUCTORY PROVISIONS
A.
Anticipate Substantial Changes of Circumstances.
Even if a prenuptial agreement is fair at the time of execution, it will not be enforced
at divorce if there has been a substantial unforeseeable change of circumstance making the
agreement unfair at that time. Button v. Button, 131 Wis.2d 84, 388 N.W.2d 546 (1986).
If one spouse shows that there was a change of circumstance, he or she will have a foot in
the door to attempt to prove that the prenuptial agreement is no longer equitable. A common
argument by the spouse who is attacking the agreement is that he or she is no longer
employed or has been sick, constituting a substantial change of circumstances which should
invalidate the agreement. To avoid such an argument, expand the standard clause on changes
of circumstances. Anticipate disability or unemployment, and agree to enforcement even if
there are such substantial changes, with language along the following lines:
“Each party understands that each party’s income and assets may
increase in the future, such as by reason of inheritances, gifts,
compensation, business profits, realized or unrealized appreciation,
accumulated income, or other increases or additions; or may decrease,
such as by reason of investment losses, business losses, general
market decline, illness or disability, loss of employment, or other
cause; and each party acknowledges that he or she agrees to the terms
herein regardless of the level of future income or value of assets.”
B.
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Avoid Transmutation.
There is an argument that inherited or gifted property, which normally is not divisible
at divorce, might be transmuted to marital or divisible property by the intention of the parties,
and that the intention can be inferred from the way the parties used the property. Popp v.
Popp, 146 Wis.2d 778, 795 fn4, 432 N.W.2d 600 (Wis. App. 1988). For example, if a party
hangs inherited art work in the family home, it could be argued that the party intended that
the art work become a marital or family asset. A similar argument could be made about
property which is classified as individual property in a prenuptial agreement. To avoid that
result, provide specifically that property can become marital or divisible property only in
specific ways, and not by how the property is used, with language along the following lines:
“An asset shall be marital, community or divisible property if such
classification is expressly stated in the title to the property, or
expressly stated in a written document signed by both parties. An
asset shall not become marital, community or divisible property
by any other means or use.”
C.
Maintain Control Over Individual Assets During Divorce.
Prenuptial agreements routinely provide that the parties have the right to unilaterally
manage and control their individual property. But upon commencement of a divorce action,
§767.085(1)(j) Wis. Stats. automatically enjoins the parties from disposing of assets without
court permission or agreement of the other party. In order for your client to maintain the
right to control individual assets during divorce, consider adding the following provision
after the “Management and Control” section of the prenuptial agreement:
“The above provisions shall constitute consent under §767.085(1)(i)
Wis. Stats., that each party may continue to unilaterally manage
and control his or her individual property after commencement of
an action to dissolve the marriage.”
II.
FINANCIAL DISCLOSURE
If your client is hesitant to disclose personal financial information, it is your job to
explain that under-disclosure of finances may invalidate the entire agreement.. Schumacher
v. Schumacher, 131 Wis. 2d 232, 388 N.W.2d 912 (1986). Do not wait until the last minute
to ask your client to prepare a financial statement, and do not blindly accept your client’s
statement. Make sure that the client has given you realistic numbers, and is not minimizing
values out of modesty. It is the lawyer’s job to review and revise the financial statement as
needed for clarity, to avoid later attack.
A.
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Date and Exchange Ahead of Time.
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If the agreement recites that the parties exchanged financial statements as of the date
of the agreement (which many standard agreements do), it would imply that the parties did
not know of the other’s finances until the last minute. Instead, date and exchange your
client’s financial statement prior to the date the agreement is executed, and recite in the
agreement that the parties previously exchanged financial information.
B.
Attach to Agreement.
In 1992, the Wisconsin Court of Appeals reversed a summary judgment dismissal of
an attorney malpractice action, holding that “If an attorney drafts a prenuptial agreement
without attaching a financial statement, the fact-finder could conclude that the attorney failed
to use reasonable care, that is, that the attorney was negligent.” Estate of Campbell v.
Chaney, 169 Wis. 2d 399, 410, 485 N.W.2d 421 (Wis. App. 1992). Always attach your
client’s financial statement to the prenuptial agreement, and recite in the agreement that “Mr.
Smith’s and Ms. Jones’ Memoranda of Assets, Liabilities and Income are attached hereto as
Exhibits A and B, respectively.”
C.
Review Documentation of Significant Assets
If it is important to your client that a certain asset be his or her individual property,
review the documentation of the asset. In Reichel v. Jung, 2000 WI App. 151, 237 Wis. 2d
853, 616 N.W.2d 118 (2000), the parties agreed in their Marital Property Agreement that all
assets disclosed in each party’s financial statement, including a certain annuity of the
husband, were to be the individual property of the respective party, and that each waived all
interest in the individual property of the other. When the husband died, his children were
distressed to learn that the annuity became the property of their step-mother, because the
annuity listed her as co-annuitant, and under the terms of the annuity, she became the owner
when her husband died. The lesson for the careful lawyer is that, unless special measures are
taken, the contractual wording of the asset’s document may override the intent of the
prenuptial agreement.
D.
Explain Basis of Values.
Your client is likely to provide you with a list of assets with dollar amounts . Ask
your client and clarify in the financial statement what the dollar amounts represent. For
example, when disclosing the value of a profit sharing account, state the date of the account
balance. If disclosing the value of a house, state “[Year] assessed value” or “[Date] Purchase
price.” Or if listing jewelry, state where the number came from, for example “Insured
value,” or “Estimate.”
E.
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Explain Value of Stock in Close Corporation.
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In a reported case from another jurisdiction, a prenuptial agreement was found
unenforceable because of an inadequate financial disclosure, where the husband had
disclosed that the value of his stock in a close corporation was X (accurately based on book
value), but a few years later he sold his company to a strategic buyer who paid about five
times book value.
If your client owns stock in a close corporation, disclosing a recent appraised value
is ideal, but obtaining a business appraisal just for the prenuptial agreement is not required
as long as the relevant information is made available. If book value is to be disclosed,
explain it, by stating, for example: “XX% of common stock in Acme Corporation, based
on12/31/XX book value; market value may be substantially higher.” See, Gardner v.
Gardner, 190 Wis. 2d 217, 527 N.W.2d 701 (Wis. App. 1994). Also, state in the paragraph
which recites that financial information was exchanged, that:
“Tax returns and year end financial statements for Acme Corporation
for years X and X-1 were provided to Ms. Jones, and Mr. Smith
offered Ms. Jones any other financial information concerning the
value of Acme Corporation which she might request.”
F.
Explain Trust Provisions.
If your client is a beneficiary of a trust, do not merely rely on another person’s
explanation of the trust, but review the trust agreement yourself or have another competent
attorney review it. Disclose the beneficial interest in the financial disclosure statement, and
either provide a comprehensive explanation of the beneficial rights, or attach the pertinent
provisions of the trust to the financial disclosure. Also, disclose the distributions that the
client has received from the trust in the recent past.
G.
Sign Admission of Receipt of Financial Statement.
There have been cases in which a spouse tried to nullify a prenuptial agreement at
divorce, by denying that he or she was provided with the other’s financial statement prior to
executing the prenuptial agreement. To avoid that argument, have the parties sign the other’s
financial statement at the bottom, with a date, attesting to receipt.
III.
SUPPORT OBLIGATION
A.
Avoid Impacting Child Support Obligations.
If either party has minor children from a prior marriage, use caution in specifying that
either party will pay all or a majority of the parties’ expenses during marriage. For example,
if the wife-to-be receives child support, do not state in the prenuptial agreement that the
husband-to-be shall pay the majority of the parties expenses, because then the woman’s ex-
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husband could argue that since his ex-wife no longer has to pay her own expenses, there has
been a substantial change of circumstances entitling him to a reduction of his child support
payments.
B.
Agree to Support Only Until the Dissolution Action is Commenced.
If the parties wish to provide that your client will support the other during marriage
or pay most of the expenses, be sure to state that the obligation shall terminate upon
commencement of an action to dissolve the marriage. Otherwise, the obligation would
continue throughout the divorce proceeding, probably requiring your client to support the
other spouse at the standard of living previously enjoyed during marriage.
IV.
MAINTENANCE
A.
Pay Lump Sum Upon Commencement of Action - to Facilitate Move Out
and Avoid Temporary Maintenance.
No court is going to allow the poorer spouse to be penniless during the pendency of
a divorce. So if you are representing the richer spouse and your client wishes to avoid the
uncertainties of a hearing for temporary orders, provide in the prenuptial agreement that the
richer spouse will pay the other spouse a lump sum within X days of commencement of the
divorce action, and that such sum is in lieu of any temporary (or perhaps, all) maintenance.
Then the poorer spouse will be unable to argue that temporary maintenance is needed, or
that he or she cannot afford to move out of the marital residence, and a hearing for temporary
orders may be avoided. A suggested provision is:
“In lieu of temporary maintenance, said maintenance being
specifically waived by both parties, Mr. Smith shall pay to Ms. Jones
within 30 days of service of a petition for dissolution, the following
amount: $xx,xxx for each full year of marriage, with the duration of
marriage measured from the wedding date to the date that a petition
for dissolution is served, but not less than $xx,xxx and not more than
$yy,yyy.”
B.
Waiver of Maintenance.
By statute, whatever a prenuptial agreement says about maintenance is merely a factor
for the court to consider in determining maintenance. §767.26(8) Wis. Stats. Nevertheless,
in recent years the Wisconsin Court of Appeals has upheld waivers of maintenance as if they
were presumptively enforceable. See, e.g., Gardner v. Gardner, 190 Wis. 2d 217, 247, 527
N.W.2d 701 (Wis. App. 1994) [awarding attorneys fees to husband for wife’s “frivolous”
appeal of trial court’s denial of temporary maintenance based on provision of prenuptial
agreement]. Since the Supreme Court has not dealt directly with the issue, caution should
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be maintained and there should be consideration for a waiver of maintenance, (perhaps more
generous death provisions than available absent an agreement). Further, the agreement
should say that the parties are estopped from seeking maintenance, because maintenance is
being waived in exchange for other substantial benefits under the agreement. Suggested
language is:
“In consideration for other substantial provisions in this Agreement,
both parties waive any entitlement to maintenance and each party
shall ask the court to deny maintenance to each of them. Each party
specifically acknowledges that by accepting the benefits of other
provisions of the Agreement, he or she is estopped from requesting
or accepting maintenance.”
V.
MEASUREMENTS
A.
Measure Length of Marriage Only to Commencement of Divorce.
If your client will be making a payment which will be calculated based on the length
of the marriage, always specify that the marriage will be measured from the date of marriage
to the date that a petition to dissolve the marriage is served. Otherwise, the marriage would
be measured up to the date of divorce, which would give the recipient spouse incentive to
stall the divorce. Suggested language is included in section IV.A., above.
B.
Specify Date to Value Assets.
Some agreements provide that the amount of a property division payment at divorce
depends, in part, on the value of a certain asset. In such a case, provide in the agreement that
the asset will be valued as of the most recent year-end prior to commencement of the divorce
action, so as to negate the presumption that all assets are to be valued as of the date of
divorce. Then the appraisal can be performed earlier, reducing the possibilities of delay in
the divorce proceeding.
VI.
OPTION TO PURCHASE
A.
Provide Option to Buy Spouse’s Interest in Joint Asset.
When the parties will be owning an asset jointly, add a provision which awards an
option for one spouse to buy out the other. Failure to do so invites litigation over who will
be awarded the asset. A sample provision is:
“Within 30 days of service of a petition for dissolution of marriage,
Mr. Smith may exercise the option to be awarded the principal
residence, by serving on Ms. Jones a written notice of intent to be
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awarded the residence. If he does not exercise said option, then Ms.
Jones may, between 30 and 60 days after service of a petition for
dissolution of marriage, exercise the option for her to be awarded the
principal residence, by serving on Mr. Smith a written notice of intent
to be awarded the residence. If the principal residence is to be
retained by one of the parties, its fair market value shall be
determined by an appraisal performed by a mutually chosen appraiser
(or in the event that they are unable to agree on the choice of an
appraiser, the court shall appoint an appraiser). If a party exercises
the option to be awarded the homestead he or she shall transfer to the
other party the percentage of the equity to which that other party is
entitled pursuant to paragraph xxx, within 60 days of receipt of a quit
claim deed to the residence executed by the other party. In the event
that neither party exercises the right to be awarded the residence as
part of the property division, then both parties shall cooperate in
selling the residence promptly, and the net proceeds (sale proceeds
less all mortgages, liens and other costs of sale) shall be divided
between the parties as provided in paragraph xxx.”
VII.
REMOVING SPOUSE FROM HOUSE
During divorce, getting the spouse out of your client’s house is not automatic or even
easy. The other spouse may not really want the house, but may resist moving out because
of the free rent as long as he or she stays in the house. To avoid litigation over who should
move out and when, include a provision along these lines:
“If the parties’ principal residence is jointly owned and one party
exercises the option to be awarded the residence, the other shall
vacate the residence within 45 days of receipt of the notice that the
option is being exercised. If the parties’ principal residence is solely
owned by one party, the other party shall vacate the residence within
45 days of receipt from the owning party of written request to
vacate.”
VIII. EFFECTUATING THE INTENT OF THE PRENUPTIAL
After completion of the prenuptial agreement, send your client a letter with
appropriate instructions how to effectuate the goals the client described to you. For example,
instruct the client what will happen if assets become jointly titled. (Unless there is a specific
provision to the contrary, jointly titled assets will be divisible at divorce.) Also, if wills or
trusts are necessary to effectuate the intent of the agreement, advise your client in writing of
the need to have them prepared, and offer to prepare them, if you or your firm do estate
planning work. In simple situations, a “Washington Will” provision in the prenuptial
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agreement may be all that is needed. (Consult with an estate planning lawyer for the needed
wording.)
ERISA retirement plan benefits payable at death are perhaps the trickiest assets to
retain for the benefit of someone other than the new spouse, even with a carefully drafted
prenuptial agreement. Under federal law, the widow or widower is entitled to the death
benefits, regardless of the designated beneficiary, unless he or she has signed a spousal
waiver. If your client wishes to leave the retirement plan benefits to someone other than the
spouse, instruct your client in writing to obtain the ERISA spousal waiver form from the
employee benefits department at work, instruct your client to have his or her new spouse sign
it after the wedding (because it must be signed by the “spouse”,) and since certain plans
required a second waiver to be signed at the time of retirement, instruct you client to ask the
Plan Administrator in writing if any other requirements must be met to defeat the claims of
a surviving spouse.
IX.
CONCLUSION
Prenuptial agreements are not appropriate for every couple. Even when they are
appropriate, prenuptial agreements cannot prevent conflict over custody, placement or child
support. But almost every other divorce dispute can be addressed and at least alleviated by
careful drafting. If you want to do your prenuptial client a favor, do not merely use a form
agreement, but rather give thought to what disputes are most likely to arise for that particular
client, and provide your client with solutions to those disputes in the prenuptial agreement.
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