As an Arizona State Bar Certified Specialist in family law matters in Arizona, I have been involved in preparing many prenuptial agreements. After initially exploring whether or not a prenuptial agreement is needed in a particular case, the conversation then turns to discussing what should and what should not be included in the prenuptial agreement.
While every case will be different, based upon the two individuals who plan to marry and their unique circumstances, there are still categorical issues that should be considered, and other categorical issues that cannot be included in a prenuptial agreement.
A PRENUPTIAL AGREEMENT CANNOT PRE-DETERMINE CHILD RELATED ISSUES:
Under Arizona Law, it is against public policy and the court will not enforce a prenuptial agreement or other contract that pre-determines parenting time, legal decision making authority, or child support. Any prenuptial agreement purporting to lock in agreements on these child related issues is likely unenforceable, at least to the extent of the terms addressing these issues.
Arizona law considers child support to belong to the child, and therefore the child (born or unborn) is legally unable to enter into a contract. Therefore, a contract related to the child’s child support will generally not be enforced by the court as the child lacks the legal capacity to enter into the contract (children are deemed incompetent to enter a contract until they turn 18). Moreover, the two parents (or future parents) signing a prenuptial agreement are not the owners of the child support, and therefore lack the authority to contract over the child support.
Arizona does recognize certain minor exceptions to this, such as allowing a parent to waive a claim for already incurred child support arrearages. However, they cannot prospectively waive future child support or future child support arrearages.
In a similar fashion, any orders as to parenting time, legal decision making, and child support, are always modifiable under Arizona law, and parents cannot agree to have “non-modifiable” orders or agreements governing these children related issues. While in certain circumstances it may make sense to allow parents to contractually agree to a once and for all final agreement for parenting issues, so that neither parent can ever drag the case back into court, these non-modifiable agreements for parenting issues are not enforced because of the risk to the child.
Arizona law recognizes that neither parent (nor the Judge) can see the future. Therefore, if parents enter an agreement, or a Judge enters orders, such agreement and such orders are based upon the world as it exists today and based upon the current facts and current circumstances. However, many things can change as time passes, children grow, and parents make various life decisions. As an extreme example, imagine for a moment that two parents agreed to a non-modifiable schedule, and imagine if Arizona law allowed the parties to divest the court of jurisdiction to modify such orders by agreement, and then imagine that shortly afterwards it was discovered that one parent or the other physically, sexually, or emotionally abused the children. For these unforeseeable reasons, Arizona law allows either parent to return to court based upon a change in circumstances and seek a modification of existing orders.
Returning to the prenuptial agreement, for these same reasons it would be pointless for parties to enter into an agreement before they are married, before they have children, and expect that such agreement would be enforceable and binding regardless of what may occur in the future.
A PRENUPTIAL AGREEMENT SHOULD ADDRESS ANY MARITAL RESIDENCE
Over the course of a long-term marriage, the parties may reside in various houses. The houses may belong to both parties jointly, or may be the sole and separate property of either spouse. A well-thought out prenuptial agreement should consider and address the housing situation. Will the disposition of a house used as the marital residence in a divorce or legal separation be governed by the title and ownership of the residence? Will either spouse be able to bring a claim for money spent on the payment of the principle owed on the mortgage during the marriage? Will either spouse be able to bring a claim for improvements or enhancements to the residence during the marriage? Will the spouse owning the house be able to bring a claim for the fair market rental value of the house during the time the parties used the home as the marital residence?
It is certainly much easier to discuss these difficult and complex issues prior to marriage, at a time when the parties are able to communicate and get along, and when both parties are compassionate and sympathetic and can see these issues from not only their own perspective but the perspective of their future spouse.
A PRENUPTIAL AGREEMENT SHOULD ADDRESS INCOME DURING THE MARRIAGE
Arizona is a community property state, and accordingly income earned during the marriage is generally considered to belong to the marital community, and in a divorce situation is generally divided equally.
In some situations, the parties may wish to still share a financial community, and have a shared interest in all income earned during the marriage. In other situations, it may be fairer to include in the prenuptial agreement that all income earned during the marriage remains the sole and separate property of the spouse earning the money.
There is no right or wrong answer, and this should be considered based upon the unique circumstances of each case.
If the parties plan for one spouse to be primarily a ‘stay at home spouse’ or ‘stay at home parent’ so that the other spouse can maximize his or her income potential, perhaps the parties may wish to have marital earnings joint to recognize the team effort.
If the parties each have their own careers, and are both well advanced in their income earning potential, they may not be marrying for financial security, but for other reasons. In such cases it may make much more sense for each party to remain the sole and separate owner of his or her income.
A PRENUPTIAL AGREEMENT SHOULD ADDRESS WHETHER THERE WOULD BE FUTURE SPOUSAL SUPPORT
While parties cannot contract away a future child support obligation, the parties are free to include as a part of a prenuptial agreement whether or not there would be spousal support, and if so, how much for how long.
However, even if the parties agree to absolutely no spousal support, the law in Arizona does allow the Court to impose some spousal support if one spouse would be so impoverished as to be on Arizona State welfare programs. However, such awards are generally much less in amount and for much shorter durations than if there were no prenuptial agreement at all.
Whether or not to include a spousal support provision is a case by case analysis, and depends largely upon the plans of the parties and purposes of the marriage.
One option is to agree that there would be no spousal support (again, subject to the Court having some ability in extreme cases discussed above). This may be most appropriate in cases where the parties are further along in their careers, or when one or both spouses are retired or will soon retire.
Another option would be to agree that the issue of spousal support would be determined in future by agreement or by court order in the event of a divorce or legal separation. While this “punt the ball down the field” approach has some risks, it may be appropriate in some cases where the future is more uncertain. With a younger couple getting married, where there is uncertainty of one spouse will be a ‘stay at home spouse’ or uncertainty as to whether or not they plan to have children, the fairness of spousal support may also be uncertain, and it may be very difficult to contractually agree years ahead of time what amount and what duration of spousal support may be best.
A third option would to be to agree upon a specific amount, or formula, for spousal support. This is very risky as such agreements are generally non-modifiable or only modifiable based upon agreement of both parties. Imagine a scenario where Wife is the far greater wage earner at the time of marriage, and Wife agrees to pay $50,000 per year support for five years in the event of a divorce. Imagine that Wife then experiences a debilitating disease and loses her job or business and has no further income. In such scenario, unless both parties agreed, Wife would remain contractually liable under the terms of the prenuptial agreement. Remember also, that while normal people in their right mind would likely agree to waive spousal support in such a scenario, people who are angry and feel wronged and are going through a divorce do not always behave as ‘normal people in their right mind.”
When parties agree that there should be some spousal support, the agreement may include a set amount, or may include a formulaic approach. The risk with a set amount, for example $100,000 in spousal support, is that in theory one day after the marriage the other spouse could file for divorce, and demand the agreed upon $100,000 in spousal support. Not a bad return for a one day marriage. Some formulas are therefore tiered such as if the marriage lasts less than 1 year, then $X.00, or if the marriage lasts 1-5 years, then $Y.00, and if the marriage lasts more than 5 years then $Z.00. While this eliminates the risk of the $100,000 per day of marriage example, it may create other problems.
Every marriage will experience good times and bad times, and will have ups and downs. Tiered support awards can cause certain levels of distrust. For example, imagine that as the couple is getting close to the five year marriage mark, they have a large argument. Shortly thereafter, Husband comes to Wife and apologizes. Knowing that there is a 5 year tier coming up, Wife may doubt the authenticity of Husband’s apology and of his resolve to fix the marriage, and may wonder if he is simply trying to keep the marriage together long enough to get to the next tier of spousal support and that it is ‘all about the money.’ Wife, on the other hand, seeing that the 5 year tier is approaching, may be undecided if the fight was enough to require a divorce, but in order to avoid paying more in support may rush to file for divorce to beat the five year tier, pushing an otherwise salvage
able marriage into an unnecessary divorce situation. Use caution in imposing tiers which may have unintended behavioral consequences.
A PRENUPTIAL AGREEMENT SHOULD ADDRESS BUSINESS INTERESTS
A properly drafted prenuptial agreement should address each party’s ownership interest in any current or future businesses. What happens if one spouse assists with the other spouses business? Would helping with some bookkeeping or mailing a few letters be sufficient to give the other spouse some equitable interest in the business in a subsequent divorce?
If the parties have agreed that income during the marriage would be joint or community, the parties also need some agreement on how to distinguish between income from employment and appreciation of business assets (remember the IBM Stock and McDonald’s income example from the prior article).
Generally a prenuptial agreement will affirm to each party his or her own businesses with no right to claim an equitable interest. This simplifies the matter, and limits arguments of creative attorneys in a subsequent divorce situation. However, the non-business owning spouse may wish to insist upon being placed on the payroll and paid for the bookkeeping, letter mailing, or other services being provided.
A PRENUPTIAL AGREEMENT SHOULD ADDRESS DEBTS AND LIABILITIES
Part of the discussions as to the content of a Prenuptial Agreement should include how debts will be treated. With or without a prenuptial agreement, debts from prior to the marriage remain the sole and separate property of the party incurring such debt under Arizona law. However, the prenuptial agreement should address whether debts incurred during the marriage will be treated as joint or community debts, or if they will be the sole and separate property of the spouse incurring such debts.
If the parties agree that income earned during the marriage will be joint or community, but one spouse comes into the marriage with significantly larger debts, the parties should discuss whether or not the joint income can be used to pay the pre-existing sole and separate debt of one spouse.
By agreeing that debts during the marriage will remain the sole and separate debts of the party incurring such debts (and so long as the prenuptial agreement or a Notice of Prenuptial Agreement is recorded with the County Recorder) third party creditors may not be able to seek to recover debts of one spouse from the other spouse. Without a prenuptial agreement, either spouse has the authority to bind the marital community, and a third party creditor can come after the income or assets of either party to pay the community obligation.
A PRENUPTIAL AGREEMENT SHOULD ADDRESS RETIREMENT CONTRIBUTIONS
Similar to other assets and income during the marriage, parties to a prenuptial agreement should discuss how retirement contributions during a marriage will be treated. In many divorce cases where there is no prenuptial agreement, the retirement assets of the parties are among the largest assets to be divided in the divorce, often having a greater value than the equity in the marital residence.
In some cases the parties may wish pre-marital retirement accounts to remain the sole and separate property of each spouse, but contributions to retirement accounts during the marriage to be joint accounts to benefit both spouses. This may make sense if one spouse has greater access to retirement accounts, or in situations where one spouse is a ‘stay at home parent’ or ‘stay at home spouse’ and cannot contribute to his or her own retirement due to the lack of earned income.
In other situations, each party may have adequate access to retirement accounts and may wish to keep such accounts separate.
A PRENUPTIAL AGREEMENT SHOULD ADDRESS HOUSEHOLD EXPENSES
Especially in cases where the parties are agreeing that the income earned by each party remains the sole and separate property of that spouse, some provision must be included as to how household expenses, groceries, utilities, vacations, and such costs are to be paid.
Often this is as simple as an agreement to have a joint account used to pay the household expenses.
In some cases the parties desire a specific agreement as to how much money each spouse is obligated to contribute each month to the account, or in what percentage each party must contribute. Generally I advise against such specifics, as neither party can foresee the future. Budgets may increase or decrease (more often increase) over time. Each parties income may increase or decrease over time. Amounts or percentages that make sense now may be completely inappropriate in a few months or years.
Moreover, if the parties cannot agree on something as simple as contributions to a joint account to cover household bills, they may have much bigger issues that the best worded prenuptial agreement cannot fix. Both spouses should be discussing a joint budget on a monthly basis.
In order to prevent co-mingling, each party would keep his or her own financial assets in sole and separate accounts. The only account that would be held in the name of both parties would be the joint account used for paying household expenses. If this is followed, the only account that will have been comingled would be this one account, and so the risk of comingled assets would be limited to one month’s worth of joint expenses.
A PRENUPTIAL AGREEMENT SHOULD ALLOW GIFTING
While the prenuptial agreement would provide each party protections and cause each parties sole and separate assets to remain sole and separate, as time goes on one party or the other may wish to gift certain financial accounts, certain automobiles, or real estate, to the other spouse, or to both spouses jointly. The provision should indicate that such gifts should be done in writing so as to avoid ambiguity later.
If, for example, husband buys a new car around Valentine’s Day, and to be cute puts a bow on the car, should this be considered a gift to wife such that upon filing for divorce she keeps the vehicle? A properly worded gifting clause would require such a gift to be documented in writing either by titling the vehicle in Wife’s name (or both parties names), or some other written instrument. This will help avoid later confusion and reduce unnecessary attorney fees.
Similarly, each party should be able to gift to the other spouse upon his or her death. Such gifts would need to be done through a will, trust, or other estate planning documentation, but the prenuptial agreement should indicate that such would be allowed (not necessarily required).
If you or your friends or family members are engaged or close to getting engaged, and if you have determined that you need experienced legal representation, please call 480 733-6800 and ask to speak with Douglas C. Gardner.