Prenuptial Agreements in Michigan
For many years now Michigan has respected the right of marital partners to waive the statutory rights that are conferred upon them upon the death of a spouse. For example, if a spouse dies and leaves by their Will all of their assets to their children, the surviving spouse could, under Michigan law exercise “rights” that are conferred upon them as the “surviving spouse,” including, electing to take “against the decedent’s Will,” and take a portion of the decedent’s estate.
There are other rights that are available to a surviving spouse under Michigan law, including, the right to live in the home for one (1) year after the decedent’s death; the right to claim a “homestead allowance,” “family allowance,” and “exempt property allowance” totaling up to $64,000.00 in 2017. These rights can also be waived in a prenuptial agreement.
Some general principles have evolved over the years with regard to prenuptial agreements to improve their chances of withstanding challenges, particularly in the event of a divorce. Some of those basic general principles include:
- Separate Legal Counsel. Both spouses should have separate legal counsel at all times during the negotiation and execution of the agreement.
- Disclosure Assets. Financial statements need to be prepared and attached to the prenuptial agreement and incorporated by reference as Exhibits A and B. These financial statements should be as detailed as possible. To the extent that appraisals have been obtained or have been relied upon in the past those appraisals should be appropriately “flagged” in the financial statement and copies provided to both spouses and legal counsel.
- Arms Length. All negotiations should be done on an “arms length” basis. While prenuptial agreements are obviously distasteful and most folks try to avoid bringing up their need or existence until immediately prior to the marriage ceremony, the more time that passes between the execution of the Agreement and the date of your marriage, the more likely it will be deemed to be valid because it will not be considered to be the product of duress, undue influence, or coercion.
- Involvement in Process. The more involved we can get your spouse and their attorney in actually drafting the provisions of the Agreement, i.e., the more arms length negotiations that occur, the more likely the agreement will be construed by the court as the product of both of your desires and efforts, and not unilaterally imposed by you on your spouse.
- Details. The more detail that can be provided in the Agreement with respect to each spouse’s earnings, with respect to their assets, debts and financial commitments, the more likely it is that the court will find the necessary “full disclosure” of the parties’ financial affairs. If there is ever an issue where prenuptial agreements are most frequently challenged, successfully, it is where there has been a lack of adequate disclosure of the assets and the debts of the parties at the time that they entered into their Agreement. Many court decisions have turned upon whether the judge found that there was a substantial undervaluation (or overvaluation) of assets and debts.
What is most important from your perspective is to identify what you generally want to protect through such an Agreement. If what you wish to protect a privately held company and your opportunity to control it, that will fairly well be assured to you as long as the other spouse is not given any stock in the corporation nor elevated to a position of officer or director of the entity. Unfortunately, that would not protect, for example, any appreciation in the entity’s stock from the date of marriage to the date of divorce. Although clients can argue that the privately held company stock is still “separate property” for divorce trial purposes, as a practical matter our experience is that argument tends to fall on deaf ears when the Judge is asked to divide wealth in the context of a divorce. That gets back to the “fairness” argument.
Other considerations that you will want to keep in mind as you prepare for establishing a prenuptial agreement and think about adding details and provisions before it is submitted to a future spouse, include the following:
A. It is not uncommon to add a “formula” which rewards the spouse for the number of years of marriage. Rather than giving a spouse a flat cash amount at the time of your divorce or your death, a formula is employed by which the spouse is “rewarded” for each year of your marriage. For example, for each year of your marriage, the spouse could be awarded $100,000.00, perhaps to a maximum of $500,000.00.
B. Sometimes judges like to see “sunset clauses” in these Agreements. For example, after ten (10) years of marriage, the prenuptial agreement would cease to have any legal force or effect for divorce purposes.
C. Another approach would be to identify specified assets and indicate what you will do to make sure that your spouse receives them at the time of your death. An example would be to designate your spouse as the contingent beneficiary of any life insurance on your life so that your spouse can regularly verify your adherence to that financial commitment for their benefit.
D. Another approach, often taken, is to simply add your spouse’s name to certain assets with the acknowledgment that you are the primary source of funds used to acquire the jointly owned asset. The most common asset is the marital home. Be aware, however, that typically jointly held assets will automatically be owned outright by the surviving spouse. Moreover, once a spouse’s name is on the title of the asset you cannot take any steps to remove their name without their knowledge or consent.
E. You could indicate that after a number of years of marriage, or alternatively after your spouse attains a certain age, if you are still married, all of your earnings at that point will be construed as “marital” and not “separate,” such that any assets acquired with your earnings after that date will be considered “marital” in nature, outside the scope of the prenuptial agreement, and available to your spouse on death or divorce.
Finally, the prenuptial agreement should outline what obligations, if any, a spouse will have for any children arising out of an earlier marriage or relationship.