Premarital agreements are used for at least three different reasons, only one of which is actually related to divorce. First, a well-drafted premarital agreement can be used prior to marriage to define the character of property or assets (separate or community property states) and the allocation distribution of assets and income in the event of divorce.
Second, they establish the individual or joint responsibility for debts, liabilities, including claims, losses and lawsuits. This type of premarital agreement is intended to provide greater asset protection for one spouse from claims from the other spouse from his or her business, financial or other activities.
Third, a premarital agreement may be used for estate tax planning purposes. Certain tools to minimize estate tax can be utilized only with separate properties from each spouse. An example of that is a spousal lifetime access trust, or SLAT.
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Kevin Costner’s premarital agreement probably had aspects of all three objectives incorporated into the agreement. With his ongoing divorce, the premarital agreement will impact the property and income that each former spouse will receive.
When one spouse is substantially better off economically than the other, certain assets or benefits are often provided in the premarital agreement to be paid or transferred to the less-wealthy spouse. This is often provided in a ladder or staggered approach, such as when more benefits or assets are provided the longer that the marriage lasts.
A legal filing in Costner’s divorce indicates that his wife, Christine Baumgartner, may be challenging that agreement. Doing so may jeopardize the $1.5 million that she would receive pursuant to that agreement because there is an “in terrorem,” or no contest, clause.
A premarital agreement often will contain a provision similar to a no-contest clause in a will or estate plan. In the event that the agreement is contested, then the benefits that would otherwise be provided in the agreement are lost.
If the agreement is upheld after a challenge, any funds or other assets that would be paid to the other spouse pursuant to the agreement are lost. This could happen to Baumgartner if she challenges the agreement and loses. She could also be required to pay Costner’s legal fees and court costs.
An example of this no-contest clause, or in terrorem provision, would read as follows:
If a Party to this Agreement files suit against the other Party, or files an action in court, or requests arbitration, in order to determine the validity of this Agreement, the Party that initiates such an action shall have his or her recovery reduced by the amount paid in legal fees and costs incurred by the defending Party to the extent that this Agreement provides any benefit that might exceed what may be provided by a court, judge, or arbitrator. Additionally, by the nature of the contemplated legal action in questioning the validity of this Agreement the initiating Party would forfeit any contractual benefit bestowed by this Agreement to the extent that this Agreement may exceed what may be provided by a court, judge, or arbitrator notwithstanding this Agreement.
For a wealthy spouse providing contractual benefits that are not otherwise available for the other spouse, the in terrorem provision is a very important tool to prevent a spouse from contesting the agreement, causing both parties to incur substantial legal and court costs, while at the same time seeking to receive the benefits provided in the premarital agreement that is challenged.
What to pair with a premarital agreement
A premarital agreement should also be paired with an asset protection trust to provide greater protection from attack. At present, 19 states permit you to establish a trust to protect your assets from your creditors (a self-settled spendthrift trust). Of these states, only Nevada, Utah and West Virginia provide protection from a divorcing spouse and child support. This does not mean that you need to be a resident of those states, just that the trust is based on the law of that state, and there is sufficient connection between the trust and that state.
The premarital agreement should be paired with a confidentiality agreement. This is needed even if you are not rich and famous to help ensure the privacy of the divorce process, your finances and the related negotiations.
Premarital agreements are not just for the rich and famous. People are getting married later in life, often with more assets as well as children from a prior relationship. A well-drafted premarital agreement helps you divide assets and property during the often highly emotional divorce. The premarital agreement can also protect you from your spouse’s debts, allocate assets for children from a prior relationship, protect the family business and ensure that the family home stays with the family. The in terrorem, or no contest, provision can help ensure that this agreement is actually respected.
Begin discussion with your fiancé as soon as possible. In California, the final version of the agreement must be presented to the other party at least seven calendar days before the wedding. Failure to do so creates a presumption that the agreement was not voluntary and may prevent enforceability of the agreement. Each state will have its own rules.
Each party to the premarital agreement must have independent legal counsel (separate attorneys). Failure to do so may also invalidate the agreement.
You should always consider a severability provision. This may protect the overall agreement if one provision is stricken.
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