Thursday, June 11, 2009

Prenuptial Agreements: The Five Requirements + Forseeability

In a recent case, Reed v Reed, the Michigan Appellate Court made a decision that strengthened the enforceability of prenuptial agreements especially in long-term marriages.

Before Reed, there were five basic factors to determine whether a prenuptial agreement is enforceable:

1. Was the agreement obtained through fraud, duress or mistake?
2. Was the agreement unconscionable/unfair when signed?
3. Have the facts and circumstances changed since then so as to make it unfair and unreasonable?
4. Did both parties enter into the agreement voluntarily?
5. Did both parties disclose all assets and facts before signing the agreement?

In enforcing prenuptial agreements in long-term marriages, the Courts have typically found that the facts and circumstances had changed since the date of the agreement and refused to enforce them.

This has been generally true until the case of Reed v Reed. Mr. and Mrs. Reed married in 1975. When they married, Mr. Reed was in law school and Mrs. Reed was studying for her degree in business. They had approximately $20,000 worth of assets.

Mr. and Mrs. Reed were married for thirty years. During the marriage, they accumulated several million dollars worth of assets. They shared some of their assets and bank accounts jointly and titled other assets and bank accounts in their own names.

The trial court decided not to enforce the agreement. The trial court believed that it would be unfair to enforce the agreement at the time of the divorce based upon the length of the marriage and the accumulation of assets.

The Appellate Court disagreed with the trial court and ordered the trial court to enforce the agreement despite the length of the marriage and the accumulation of assets.

The Appellate Court included an element of "foreseeability." It indicated that at the time of the agreement, it was foreseeable that the parties may accumulate significant wealth and that a long-term marriage was as foreseeable (and actually what most people hope for) as a short-term marriage.

The court indicated that because of the "foreseeability" of the long-term marriage and accumulation of assets, enforceability was fair. It indicated that Mr. and Mrs. Reed could have foreseen the long marriage and accumulation of assets when they entered into the agreement.

The Court stated a very strong preference for upholding prenuptial agreements. It stated that the parties to the prenuptial agreement had "agreed to be captains of their own financial ship and to decide their own destiny." Therefore, if a future event is foreseeable, it is not a change that would make enforcement unfair.

This decision has strengthened the enforceability of prenuptial agreements, especially in long-term marriages. If parties that are marrying would like to maintain their own separate assets and income into the future, it appears that prenuptial agreements are a very strong way to do so.

In writing a prenuptial or making changes to one, both people should be represented by an attorney due to the serious effects it will have on their rights. Prenuptials are particularly important for small/family business owners or partners.

I am Cameron C. Goulding, a North Oakland County Divorce Lawyer, serving primarily Rochester, Rochester Hills, Bloomfield, Troy, Lake Orion and Oxford for over fourteen years. For more information or to contact me please visit my website at http://www.camerongoulding.com/ or call my office at (248) 340-0900.

Monday, June 8, 2009

Divorce and the marital residence in this rotten real estate market; four solutions

The marital home or residence was once the greatest asset of the marital estate. In many cases, it has now become an albatross. Clients and potential clients are very concerned today, among other financial/economic issues, about the value of their homes in relation to the market and their mortgages.  This is particularly true in areas such as Rochester and Rochester Hills where Chrysler purchased a large number of homes for executives and other employees whom are no longer living in the area and these very nice homes are sitting vacant on the market.

Many people considering divorce are concerned that, after they are divorced, they may not be able to sell the residence or, perhaps worse, may have to reside together after the divorce if they cannot sell the home. This is of a particular concern when the house is "underwater", where the appraised value of the home is less than the balance of the mortgage (or mortgage and equity loan or second mortgage.) This is known as a deficiency; the difference between the value of the home and the balance of the mortgage and often the costs associated with attempting to collect the balance.

There are at least four basic solutions to this problem.

First, the parties can attempt to work together to solve these issues. Often one party is willing to stay in the home and "ride the market out." This may require some concessions from the party that does not retain the marital home, however, if the parties can agree, this can save them from facing a certain instant deficiency where they will have to come up with money at closing from other sources of savings.  In addition, characterization of payments between the parties as spousal or family support may allow the parties to take advantage of income tax differentials and overall save the parties some money in the form of taxes.

Second, the parties can sell the home at the best possible price and take money out of retirement funds to cover any deficiency. While this is not an optimal solution, it is often effective. The money can be drawn without penalty at the time of the divorce and brought to the table. This allows the parties to move on without one party bearing more risk and maintaining the mortgage payment alone.

Third, the parties may attempt to broker a short-sale of the property.  In a short-sale the parties, the realtor and the bank representative work together to sell the property at the best possible price and obtain a release from the mortgage.  This appears to be a good solution, however, I have heard that the length of time that it takes to complete these transactions can be significant and they appear to have a problem with falling through at the final moment. 

Fourth, some clients allow the home to go into foreclosure.  Unfortunately, some couples faced with divorce have homes where they cannot afford the monthly mortgage payment alone and the deficiency is so large that it does not make sense for either party to keep the home.  In this situation, some clients have allowed the home to go into foreclosure.  During the foreclosure period, the client usually is allowed to stay in the home even though she is not paying the mortgage.  In this case, the client can save the money that would be used to pay the mortgage to apply to a new residence.  Unfortunately, this leaves the couple both open to liability for the deficiency and the bank may sue either party in an attempt to recover the deficiency.

These are only four potential solutions. There are many possible ways of dealing with this issue and the divorce process can be very flexible if the parties are able to "get along" in order to move on with their lives. A solution can be fitted to every situation.

I am Cameron C. Goulding, a Divorce Lawyer practicing in Oakland County Michigan for over fourteen years.  If you would like more information or to contact me please visit my website www.camerongoulding.com or call me at (248) 340-0900.