New York Divorce Report - New York's Divorce and Family Law Blog

New York divorce courts will uphold unambiguous terms of a pre-nuptial agreement even if enforcing the agreement seems harsh. 

How would you decide this case if you were the judge? (I will try and hide the genders of the parties so you can impartially rule.) 

In a recent case, decided by a New York Appellate Court, a couple executed a pre-nuptial agreement that defined marital property as:

(a) any property that is jointly owned by the parties, and (b) all household furniture and furnishings owned by either party, whether heretofore or hereafter acquired and regardless of the form in which title is held.

Everything else was defined as separate property, including:

real property purchased by either party during the marriage using their own separate property, as well as the appreciation of such property during the marriage "whether caused by the efforts of a party or a third party, or by inflation, or by any other cause or stimulus.

After the parties wed, B purchased what became the marital residence for $295,000, making $150,000 down payment using from the proceeds of separate property.   C took out a mortgage for the balance. Title to the home was in B’s name.  (I do not how the mortgage was in C’s name, if C did not have title.)   

B was not employed after the parties were married so C paid the mortgage and all the carrying costs for the house.

The parties divorced.  What should the court do with the house?

The prenuptial agreement defined marital property as any property that is jointly owned.  Here, title to the property was solely held by B, who purchased it using separate property.    C’s payment of the mortgage and carrying costs did not “convert” the property from separate to marital. 

The home is separate property and not subject to equitable distribution.

So, your fiancée insisted that you sign a pre-nuptial agreement before you wed.  Even though you did not particularly agree with everything in the agreement, you signed it, thinking you will just contest it if you get divorced.  Now, with a divorce pending, you want to invalidate the pre-nuptial agreement.   Guess what - you may be out of luck!

New York has a very strong public policy of holding parties to their contractual arrangements.   There is a heavy presumption that a deliberately prepared and executed written agreement manifests the true intention of the parties.    An agreement between spouses or prospective spouses may be invalidated only if the party challenging the agreement sustains the burden of proof, demonstrating that the agreement was the product of fraud, duress, or it was improperly executed.

To prove coercion or duress, you would have to establish that you were somehow pressured into signing the agreement.  The threat that “I will not marry you unless you sign this agreement” is not duress.  If both of the parties were independently represented by counsel and the agreement was the product of arm’s length negotiations, it may be difficult to prove that the pre- nuptial agreement was procured by duress.

At the time agreement is negotiated and signed, the parties should disclose their assets, liabilities, and income. Unless, you can prove, for instance, that your spouse deliberately misrepresented the extent of his assets to induce your agreement, it is unlikely you will be able to establish fraud. 

Most agreements provide that the parties are only relying on the representations contained in the agreement, more importantly, that they are not relying on promises or representations not contained in the pre-nuptial agreement.   That is precisely why the decision reported in the New York Post, is an anomaly.  

In this unique New York divorce case, the wife successfully challenged the pre-nup because:

He told me he would rip [the pre-nup] up as soon as we had kids,” Elizabeth, who has since had twin sons and a daughter, told The Post at her Old Brookville mansion.

“But he never did.

Shine details how the wife was coerced her into signing the pre-nup.

She claims he dropped the premarital bomb four days before their wedding day in 1998, leaving her with little time for a contractual dispute. She also told the court the agreement included promises her ex never intended to keep. Among those promises, she said, was that he would add her name to the deed of their Old Brookville home,

The New York Appellate Division found that the issue of the husband’s fraudulent misrepresentations was a question of credibility and declared that the wife’s testimony was "credible," "convincing," "unequivocal and consistent with "additional corroborative evidence," and that any "inconsistencies" in her testimony related to "insignificant" matters. By contrast, the defendant's "credibility was suspect," due in part, to his "patent evasiveness." 

Even, the wife’s attorney concedes that “The decision “is unprecedented, vacating a pre-nup on the basis of a verbal promise,” even though a clause in the contract says there were no verbal promises.” 

The bottom line, cases where the prenuptial agreement are invalidated are rare.   You cannot and should not count on a court to rescue you from the terms of a bad agreement. If you do not understand the agreement or do not agree with the contractual terms, do not sign it.   If you are being promised something that is not in the agreement, insist that it be included in the agreement.   If your future spouse tells you it is not necessary to put the “promise” in writing, well, maybe you should go into the marriage with your eyes wide open.

Don’t you just love it when you are right? 

Three years ago, I wrote about the lawyer who was trying to re-open his divorce settlement to recover his Madoff losses.  In consideration of the wife retaining the marital residence and other assets, the lawyer had retained his “investment” in Madoff funds. Of course, after the divorce, the Madoff investment became worthless.  The Husband wanted to  reopen the divorce settlement.

At the time, I wrote:

Had the account value gone up, it is doubtful that husband would have shared the profits with his ex-wife. Alternatively, had the wife poorly invested the cash she received from the husband, she would have no claim against the ex-husband for her loss. And what about all the people who bargained for the marital home, which is now worth substantially less than it was one year ago-should they look to have their former spouses share in the loss?

There is a practical reason why the husband cannot win this case-if the mere fact that some former marital asset lost value could subject a settlement agreement to attack, there would be no finality to divorce. Every agreement would be at risk for a post divorce attack. In order for there to be finality, in absence of fraud, duress or coercion etc., agreements must be enforced.

The case wound its way up to the New York Court of Appeals which ruled that the agreement could not be reopened.   In Simkin v Blank, New York’s highest court stated in language eerily similar to my prediction:

This situation, however sympathetic, is more akin to a marital asset that unexpectedly loses value after dissolution of a marriage; the asset had value at the time of the settlement but the purported value did not remain consistent. Viewed from a different perspective, had the Madoff account or other asset retained by husband substantially increased in worth after the divorce, should wife be able to claim entitlement to a portion of the enhanced value? The answer is obviously no.

The Husband had argued that the agreement should be set aside because the parties made a mutual mistake about the existence of the Madoff account.  The Court rejected that theory because there was an actual Madoff account which the Husband could have cashed out of any time prior to the collapse of the Ponzi scheme.

Had this settlement been reopened, every agreement, not just divorce agreements, could be subject to attack with the benefit of hindsight.  At least now, a settlement agreement has some finality.  

When a couple weds, few contemplate that their marriage will end in divorce.   The hope is that their marriage will be forever; the reality is, however, that some will end, often bitterly, in divorce.   Much of the acrimony of divorce could have prevented if the parties simply had a pre-nuptial agreement. 

So why do couples, who are aware of the risks, fail to even consider entering into a pre-nuptial agreement?   Diana Mercer in This is Not Your Parents' Prenup: Debunking Prenup Myths offers several explanations, with my comments added:

•  Prenuptial agreements are only for wealthy people; my fiancé and I are just starting out or have nothing. 

Things change.  As you become older and more accomplished in your career your income will increase.  Your assets, particularly your  home, your savings and your retirement accounts will become more valuable.  You may inherit money or property from your family.  The pre-nuptial agreement can protect the accumulated wealth and provide for how it will be dealt with if a marriage ends in divorce or death.

•  Prenuptial agreements only protect the wealthier spouse and leave the other spouse with little or nothing.

Pre nuptial agreements must be fair.  If the agreement is found to be unconscionable, it will be set aside.  Particularly where there is disparate wealth, the pre-nup can  provide for maintenance for the non-moneyed spouse in the event of divorce.    

• Premarital Agreements must cover everything, soup to nuts.

The agreement can be tailored to your specific desires.   I have written agreements that were limited to how one asset how- a prospective inheritance -would be handled in the event of divorce.   On the flip side, I have prepared agreements that micro-manage how funds will be budgeted and expenses paid throughout the marriage. 

•  Premarital Agreements Aren't ROMANTIC

 The words “pre nuptial agreement” may be the most unromantic words I know.  However, those words are generally uttered between two people who love each other and plan to invest their lives together so that there is incentive to work together and be reasonable in planning for a possible future without each other.   Contrast the pain of saying the word “pre-nup” with the bitterness of a divorce, where greed and irrationality dominate- there is no question which is more painful.   

The sale of a home is always a tension inducing experience. If the transaction is incident to a divorce, the tension increases exponentially. 

Disagreements can arise over a multitude of issues, including the selection of a broker, setting and negotiating the sale price, apportioning responsibility and the costs of preparing the property for sale and, of course, distributing the sale proceeds.     Any one of these issues can erupt aborting the sale.        

Well crafted settlement agreements address these issues, in detail, in an attempt to pre-empt disputes. But, in reality, if a dispute arises, by the time a court rules on one party’s breach of contract, the buyer will have walked away from the deal.    

Sara Lerner of NPR  reports that there is a new breed of real estate agent, specializing in sale of homes owned by divorcing couples.   "Really it's a simple, singular goal, and that's to, as efficiently as possible, get to the end of the road, which is the sale of their home."

One broker reports his strategy is:

I never try to force them to communicate together, which means a lot of separate and duplicate communication, so that neither ever has the impression that I'm trying to force the agenda of one on the other..

My role at that point, when someone needs to get something off their chest, is simply to let that happen. Because if people aren't able to express themselves, then it causes frustration," he says. "And the last thing that I need is for a husband or a wife to be frustrated with me because they are perceiving that I'm not ... that I don't get it.

Even though both parties’ interests should be aligned in selling the marital home so that they could “cash out” and move on, selfish desires or just the need to assert control over the other, often prevent the parties from acting in concert.    Any real estate broker who is willing to enter fray and bring the adversarial parties together to facilitate a sale deserves his commission.  

More couples are entering into pre-nuptial agreements reports Reuters.   It is not just the rich and famous looking to protect their assets, more and more middle class couples are entering into pre-nuptial agreements. 

 As reported by the American Academy of Matrimonial  Lawyers, increasing numbers of women are asking for  pre-nuptial agreements.  

More women are working now than in precious decades and they are earning higher salaries. Women comprised 46.8 percent of U.S. workers in 2009, according to the U.S. Department of Labor and that number is expected to rise to 46.9 percent in 2018.

"In our historically male-dominated culture women didn't control money and now they need to plan as much as the men. More women have more assets these days and have more control over funds," said Moses, a family lawyer with 30 years of experience.

While marriage is supposed to be forever, the sad reality is that one half of all marriages will end in divorce. A pre-nuptial agreement can limit the acrimony at the time of a bitter break-up as assets and liabilities can be distributed in a pre-determined manner.  In most cases, New York courts will enforce a properly executed pre-nuptial agreement so long as it was not procured as a result of fraud, coercion or duress.    

The Wall Street Journal in an article written by Mary Pilon detailed some of the reasons couples enter into prenuptial agreements.

In the article, I was quoted for having noticed a trend in my practice. In conversations with many of my younger clients, I observed that often they did not want a pre-nuptial agreement to protect assets they had already acquired-often they had yet to acquire anything of value, but instead, to protect their prospective inheritance. In many cases they were being dictated to by their parents and told that they had to obtain a pre-nuptial agreement.

In its most basic form, a pre-nuptial agreements identifies what is marital property, which would be subject to equitable distribution if the parties later divorce, and what is separate property, which would be immune from their spouse’s claims.

Property inherited or acquired by gift is separate property. However, money is fungible and memories of the source of the funds are conveniently fleeting.

As pointed out in the Divorce Analysis Blog:

A prenuptial agreement is useful in establishing the parties individual pre-marital wealth levels. While this may seem mundane ( I mean, who doesn’t know their net worth when they say “I do”?), you would be how surprised how time colors the memory of wealth. Like the old “fishing story” beliefs about net worth can change dramatically with time.

One of the most useful aspects of the prenuptial agreement is that it clearly defines what is separate property, where appropriate, values the separate property and delineates the circumstances where separate property can be converted to marital property.

Parents leaving sizeable estates to their children may require the children to obtain pre-nups to ensure that however their children use their estates, the funds will for all purposes remain a separate asset and otherwise immune from a spouse’s claim in the event the marriage ends in divorce.
 

To the list of things Bernard L. Madoff has been blamed for ruining — retirements, lives, reputations — add another: a clean breakup.”

The New York Times is reporting that a husband (a lawyer), who, entered into a settlement agreement distributing marital assets, which included an investment in Madoff’s hedge fund, is seeking contribution from his ex wife for the post-divorce losses sustained in the Ponzi scheme.

Rather than splitting an investment in the Madoff hedge fund, the husband gave the wife $2.7 million in cash and held onto the account. Of course, the account is now worthless. The husband wants his ex wife to share in his loss.

Good luck!

Had the wife participated with Madoff in the fraud or had knowledge of the wrong-doing, the husband might have a case. But, the husband simply made an unfortunate choice and, through no fault of the wife, lost his investment.

Had the account value gone up, it is doubtful that husband would have shared the profits with his ex-wife. Alternatively, had the wife poorly invested the cash she received from the husband, she would have no claim against the ex-husband for her loss. And what about all the people who bargained for the marital home, which is now worth substantially less than it was one year ago-should they look to have their former spouses share in the loss?

There is a practical reason why the husband cannot win this case-if the mere fact that some former marital asset lost value could subject a settlement agreement to attack, there would be no finality to divorce. Every agreement would be at risk for a post divorce attack. In order for there to be finality, in absence of fraud, duress or coercion etc, agreements must be enforced, without the benefit of hindsight
 

The New York Times ran a front page story detailing how the availability of medical insurance has become a major consideration in the decision to divorce or to wed.

In a poll conducted this spring by the Kaiser Family Foundation, a health policy research group, 7 percent of adults said someone in their household had married in the past year to gain access to insurance. The foundation cautions that the number should not be taken literally, but rather as an intriguing indicator that some Americans “are making major life decisions on the basis of health care concerns.”

The issue of medical coverage has long been a consideration in divorce. In fact, many couples, after negotiating their settlement agreements, delay seeking an immediate divorce and, instead, opt to divorce on the basis of their living separate and apart for a year pursuant to a written separation agreement. The one year separation allows a party who would otherwise be without access to medical insurance to remain eligible for medical coverage on the basis of the marriage. Some couples put off the divorce for even more than a year for this very reason.

Amplifying this consideration, New York requires parties to acknowledge that they are aware that they will no longer be allowed to receive health coverage under their former spouse's health insurance plan once the divorce is granted.

Following the divorce the parties may be eligible to continue medical coverage under COBRA (which can be prohibitively expensive) or purchase insurance on their own
 

[D]espite her asserted lack of understanding, she acted in accordance with the terms of the agreement throughout the marriage, maintaining separate bank accounts in her own name in which she deposited income from properties she inherited from her family, which properties were themselves also retained by plaintiff solely in her name.

[T]his State favors " individuals ordering and deciding their own interests through contractual arrangements'" (Van Kipnis v Van Kipnis, __ AD3d __, 2007 NY Slip Op 06074, *5 [July 12, 2007], quoting Bloomfield v Bloomfield, 97 NY2d 188, 193 [2001]), and thus, duly executed prenuptial agreements, including agreements executed in a foreign country, are accorded the same presumption of legality as any other contract.

”I]f defendant "did not read or understand the agreement, or have any explanation of the same, his conduct evidenced a degree of carelessness or negligence not to be expected of a sophisticated and mentally brilliant person" (id.). One need not be an attorney or a Fulbright scholar to know the folly of signing a legal document without an understanding of its import.

Surrogate Lopez-Torres noted that a "duly executed prenuptial agreement is given the same presumption of legality as any other contract, commercial or otherwise. It is presumed to be valid in the absence of fraud." The court further referred to section 5-1.1-A(e)(2) of the Estates Powers and Trusts Law which sets forth the requirements for an effective waiver of a spouse's right of election against the estate of a deceased spouse. Such a waiver or release must be in writing, signed, acknowledged and in "recordable" form which means that such a waiver must follow the same form as would be used to provide for the recording of a deed to real property.

because there is no mechanism by which to determine how much of defendant's 37½; acres must be from the "westerly side" of the parcel. Stated otherwise, the stipulation provides no basis from which to discern a dividing line.

• There is a "strong public policy favoring individuals ordering and deciding their own interests through contractual arrangements" (Bloomfield v Bloomfield, 97 NY2d 188, 193 [2001] Thus, "[d]uly executed prenuptial agreements are accorded the same presumption of legality as any other contract.”
• "Agreements are to be construed in accord with the parties' intent."
  
• The best evidence of what parties to a written agreement intend is what they say in their writing."
• A written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.
• Extrinsic evidence of what the parties really intended is generally inadmissible, and will be considered only if the agreement is found to be ambiguous, W.W.W. Assoc., v Giancontieri 77 NY2d 162 [1990]).
• Extrinsic evidence may not be utilized to create an ambiguity that would otherwise not exist

Some common blunders: Dividing a stock portfolio down the middle without checking for losses or gains -- which can trigger either a tax break or a big capital-gains tax hit.

There are steps you can take to avoid house-related tax hits. If you keep the house and retitle it in your name, but end up selling it after the split, you may be able to shield only as much as $250,000 of the gains from capital-gains taxes. Consider selling the house while you're still married, or include specific provisions for the sale of the house in the divorce decree, to shield as much as $500,000 from capital-gains taxes.

The QDRO -- short for Qualified Domestic Relations Order -- is a court order that spells out who gets what in an employer-sponsored retirement plan such as a pension or a 401(k). QDROs must be approved by both the employer's retirement-plan administrator and the divorce-court judge.

The document lets you make transfers to an Individual Retirement Account, or make early fund withdrawals from the plan without paying the usual 10% IRS penalty if you're under age 59½. (You'll still have to pay income taxes on withdrawals.)

Try to complete the QDRO before the divorce is finalized. Otherwise, if your ex should die, remarry or leave the company, it may be tough to receive any retirement money.

Adding to the confusion, IRAs don't require QDROs. If you write it in your divorce agreement, you can split an IRA by transferring the funds directly into other IRAs without being subject to penalties or taxes.

If you're paying alimony, you can claim the payments as a deduction. But if you receive alimony payments, they count as taxable income. Child-support payments are neither deductible nor taxable.

Other tips: Take out a term life-insurance policy on the alimony-paying spouse. And update wills, trusts and beneficiary designations on retirement plans and insurance policies, so that your ex doesn't end up inheriting an unintended windfall.

It seems to be just common that when negotiating any type of marital agreement, it is important to make sure that your every intention is clearly spelled out, even if the intent seems obvious to you..  Such is the lesson of recently decided case of Genovese v Axel.

In Genovese:

[T]he parties executed a prenuptial agreement dated April 17, 2000, whereby they agreed to waive their respective rights of election pursuant to EPTL 5-1.1-A. Following the waiver provision, the parties agreed, in clause 1(ii), that "[n]otwithstanding anything to the contrary" they would each "execute their respective Last Will & Testament[s] leaving a minimum of 33 1/3% of their gross estate to each other."

It seems obvious that it was the the couple’s original intent  to make reciprocal obligation to name the other as a beneficiary of his/her estate conditioned upon the continuation of the marriage.  Nothing in the opinion indicates that the parties wished to bind  their post divorce estates.  Unfortunately, , the parties had to spend thousands in legal fees and go as far as the Appellate Division to reach this result.

Where an agreement is clear and unambiguous on its face, as here, the intent of the parties is gleaned from the four corners of the writing as a whole with a practical interpretation of the language employed so that the parties' reasonable expectations are met (see W.W.W. Assoc. v Giancontieri, 77 NY2d 157, 162; Rainbow v Swisher, 72 NY2d 106, 109; Sunrise Mall Assoc. v Import Alley of Sunrise Mall, 211 AD2d 711). In examining the agreement, the court should consider the relation of the parties and circumstances under which it was executed. "Particular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties as manifested thereby" (Kass v Kass, 91 NY2d 554, 566 quoting Atwater & Co. v Panama R.R. Co., 246 NY 519, 524).

The one-third provision appears under the heading "release of rights," in which the parties employed language such as "surviving spouse" and "deceased spouse," which evidences their intent that the parties remain married in order to receive a one-third disposition under each other's will. The plaintiff contends that the use of the phrase "notwithstanding anything to the contrary" demonstrates that the parties intended the one-third provision to remain in effect regardless of their marital status. We disagree. That language modifies the previous provision, in which the parties waived the spousal right of election. The plaintiff's interpretation would require this court, under the guise of interpretation, to imply a provision that the parties chose to omit (see Karmin v Karmin, 19 AD3d 458, 459), namely that the obligation contained in clause 1(ii) would extend to one who was no longer a spouse.

Pre-nuptial agreements, are no longer an exclusive financial risk management tool for Hollywood couples.  Having seen what can happen when a high-profile relationship fails, increasing numbers of less famous couples are known to be opting for written agreements to protect the financial assets each partner brings to the relationship.

Some of the advantages of such an agreement are: to protect your separate property; support your estate plan; it defines what property is considered marital property or community property; it reduces conflicts and saves money if you divorce; it clarifies special agreements between you, and it establish procedures and ground rules for deciding future matters.

But, of course a prenup is not romantic.

As the artice points out, "Being engaged conjures up images of candlelit dinners and walks in the moonlight. Although marriage is a financial partnership as well as a romantic one, if you feel that discussing something as mundane as property and finances, as well as the possibility of divorce, will mar an otherwise beautiful time of your lives, you may not be candidates for a prenup

Pros

· A premarital agreement can protect the inheritance rights of children and grandchildren from a previous marriage.

· If you have your own business or professional practice, a premarital agreement can protect that interest so that the business or practice is not divided and subject to the control or involvement of your former spouse upon divorce.

· If one spouse has significantly more debt than the other, a premarital agreement can protect the debt-free spouse from having to assume the obligations of the other.

· If you plan to give up a lucrative career after the marriage, a premarital agreement can ensure that you will be compensated for that sacrifice if the marriage does not last.

· A premarital agreement can address more than the financial aspects of marriage, and can cover any of the details of decision-making and responsibility sharing to which the parties agree in advance.

· A premarital agreement can limit the amount of spousal support that one spouse will have to pay the other upon divorce.

· A premarital agreement can protect the financial interests of older persons, persons who are entering into second or subsequent marriages, and persons with substantial wealth.

Cons

· The agreement may require you to give up your right to inherit from your spouse's estate when he or she dies. Under the law, you are entitled to a portion of the estate even if your spouse does not include such a provision in his or her will.

· If you contribute to the continuing success and growth of your spouse's business or professional practice by entertaining clients and taking care of the home, etc., thus allowing him or her to focus on professional endeavors, you may not be entitled to claim a share of the increase in value if you agree otherwise in a premarital agreement. Under the laws of many states, this increase in value would be considered divisible marital property.

· It can be difficult to project into the future about how potential issues should be handled, and what may seem like an inconsequential compromise in the romantic premarital period may seem more monumental and burdensome in reality.

· A low- or non-wage-earning spouse may not be able to sustain the lifestyle to which he or she has become accustomed during the marriage if the agreement substantially limits the amount of spousal support to which that spouse is entitled.

· In the "honeymoon" stage of a relationship, one spouse may agree to terms that are not in his or her best interests because he or she is "too in love" to be concerned about the financial aspects and can't imagine the union coming to an untimely end.

· Starting a relationship with a contract that sets forth the particulars of what will happen upon death or divorce can engender a sense of lack of trust.

· As mentioned above, a contract can take the wind out of your emotional sails.