Postnuptial Agreement

What Is a Postnuptial Agreement?

A postnuptial agreement is a contract created by spouses after entering into a marriage that outlines the ownership of financial assets in the event of a divorce. The contract can also set out the responsibilities surrounding any children or other obligations for the duration of the marriage.

A postnuptial agreement is also known as a "post-marital agreement" or "postnup." It may be contrasted with a prenuptial agreement, which is signed prior to marriage.

Understanding Postnuptial Agreements

Similar to a prenuptial agreement, postnuptial agreements allow a couple to alleviate tension caused by financial concerns. Entering into this style of contract will allow spouses to establish an equitable distribution of assets if the marriage dissolves.

Marital agreements, including postnuptial ones, are often considered taboo or not in the spirit of love or companionship. Critics argue such contracts indicate the couple expects the marriage to fail. However, if a contract can remedy financial discomfort, the couple could choose to enter into an agreement in hopes of keeping marital harmony.

Although laws can differ by state, there are five basic elements to a postnuptial agreement:

1. It must be in writing. Oral contracts are not enforceable
2. It must be entered into voluntarily by both parties
3. It requires full and fair disclosure of relevant information at the time of execution
4. Terms must not be unconscionable or unjust or one-sided in nature
5. Both parties must sign the agreement

Items Typically Covered by Postnuptial Agreements

Beyond the basics, there are several other matters that most postnuptial agreements address. First, the agreement will lay out what happens to marital property in the event of death to one spouse. This is important because a surviving spouse may waive certain property rights they would otherwise inherit.

Secondly, a postnuptial agreement establishes certain terms that have been agreed to by both parties in advance of a separation. By agreeing to these terms in advance, both parties can avoid the time and cost of divorce proceedings. The disposition of property, other marital assets, custody, alimony, support, and the like are agreed to by the marital partners upon separation. This part of the agreement is typically incorporated into the final divorce decree.

A postnuptial agreement will also seek to establish spouses' rights in a future divorce. These agreements address not only marital property; they will also often limit or waive alimony (spousal support).

Items Not Covered by Postnuptial Agreements

Items that are not enforceable through a postnuptial agreement include issues related to child custody or child support. Neither can a postnuptial agreement attempt to include terms that attempt to regulate routine aspects of a marital relationship.

Enforcement of a postnup will vary by state law. Most courts tend to uphold the agreements as long as they’re written, signed without coercion, and involve a full disclosure of financial information on both sides. However, some jurisdictions put up additional barriers. In New Jersey, for example, the postnup must be considered “fair and just” in order to be enforceable, a standard that invites a degree of subjectivity. And in California, where spouses have a fiduciary obligation to each other, the contract must reflect the “highest good faith and fair dealings.”

It can be helpful to use an attorney to draw up one of these agreements since tax law can complicate the financial picture.

Reasons for Postnuptial Agreements

Couples may seek postnuptial agreements for any number of reasons. It may be that they simply didn’t get around to drafting a prenup before their marriage. With a postnuptial agreement, they can iron out the same financial considerations they wanted to address all along — albeit after they’ve exchanged vows.

The following are among the scenarios in which couples may seek a postnup.

Protecting an Inheritance

When one of the spouses expects a large inheritance, the two may want to work out who’s entitled to the money should they split. That’s especially important in community property states, in which assets acquired during the marriage generally are otherwise split equally between the spouses.

Inheritances received by one spouse during the marriage are usually not considered community property. However, if an inheritance has been handled in a way that caused it to become "co-mingled" with community property, an inheritance may be considered community property. When there’s a postnup in place, the agreement would override that equal claim on property and ensure that the heir continued to own their inheritance. Even in some non-community property states like Pennsylvania, any increase in the value of the inheritance is considered marital property.

Providing for Stay-at-Home Parents

A stay-at-home parent who’s seen his or her earning power dwindle — or a spouse who wants to provide for children from a previous relationship — may also see the value of a legal document dictating the partition of assets.

Dividing Interest in a Business

Assets like bank accounts and retirement funds are relatively easy to value in a divorce proceeding. But putting a dollar figure on a business in which one or both spouses are principals is considerably harder. Because valuing a company can be extremely expensive and time-consuming, some couples use postnups as a way to categorize the business as separate property that will stay with the titled spouse. The couple may agree to give the other spouse a bigger share of non-business assets to make up for it.

Repaying Gifts

In cases where one spouse’s parents gave the couple a substantial amount of money — perhaps for the down payment on a house — a divorce settlement can be a particularly awkward process. A postnuptial agreement provides the in-laws (and their child) with the peace of mind that they’ll be reimbursed if the relationship doesn’t last. The contract may stipulate, for example, that the spouse whose family was the source of the money gets the first $100,000 in assets to recoup the funds.

Rebuilding a Relationship

In some cases negotiating these topics is seen as a way to keep a struggling marriage solvent. Suppose, for example, that one of the individuals has been unfaithful. Agreeing on post-divorce terms that are favorable to the other spouse can be a sign of an intention to keep the relationship intact.