Prenuptial Contracts: Pratfalls, Pitfalls and Pitbulls


APPENDIX C
 
 

ATTORNEY OPINION LETTER


 
 


October 14, 1997
 
 

Client

Address

City, State Zip
 
 

Re: Property Status Agreement
 
 

Dear _______________:
 
 

I have reviewed the revised property status agreement which was also forwarded to you on __________.
 
 

I would like to take this opportunity to explain to you in detail the provisions of your proposed property status agreement and the impact those provisions have on your rights under Washington law in the absence of the agreement.
 
 

Washington Equitable Distribution Law
 
 

Without a property status agreement, your property rights, upon divorce, would be determined under Washington's equitable distribution laws, which are comprised of a statute and numerous court opinions. The following explains very generally what your property rights would be in the absence of any property status agreement.
 
 

Separate property of each party is comprised of: property owned prior to the marriage and any interest, rents or profits thereon; or acquired during the marriage from gift or inheritance.
 
 

Community property is any income earned during the marriage or any property acquired during the marriage that is not traceable to one party's separate property funds.
 
 

Upon termination of the marriage by dissolution, the court may look at all the property of both parties (including separate and community property) and make an "equitable" distribution of all the property (though not necessarily an "equal" distribution). Upon termination of the marriage by death, each party may dispose of their separate property and one-half of the community property.
 
 

 As I discuss each section of the agreement, I will specify where the agreement alters the rights you would otherwise have under Washington law, absent this agreement.
 
 

Property Status Agreements in Washington
 
 

As a general rule, a signed property status agreement is valid and enforceable in Washington, as long as it meets the following test:
 
 

1) the agreement is reasonable and fair to the party not seeking to enforce the agreement; OR 2) (a) there was complete disclosure as to the amount, character and value of both parties property; AND

(b) the agreement is freely and voluntarily entered, both parties had the opportunity to consult with independent counsel and have full knowledge of their rights.
 
 

 While courts generally enforce an agreement which meets only part 2 of the above test, the courts are leaning away from enforcing agreements which meet only part 1 of the test, those agreements being procedurally unfair.
 
 

I have review the property status agreement drafted by __________ and believe it is likely to be enforced in the unfortunate event that you should ever have to resort to it. However, a property status agreement is not a guarantee. There can never be total certainty that a judge will enforce the agreement, and there is always an element of risk that a judge may decide to disregard some or all of the provisions of the agreement.
 
 

Specific Provisions of the Property Status Agreement
 
 

The section entitled "Recitals" includes background information concerning you and ____. These provisions are fairly self-explanatory.
 
 

Paragraph I.A. lists the property which will be considered the separate property of each of you. Under Washington law, absent this agreement you could be entitled to the increased value of ____'s goodwill attributable to the period of time you are married. Paragraph I.B. provides that any income earned during the marriage is community property.
 
 

Paragraph I.C. provides that ____'s residence purchased prior to the marriage will be quit claimed to the two of you as joint tenants and the community will execute a promissory note to ____ in the amount of his down payment and closing costs. Under Washington law, absent this agreement, the house would remain ____'s separate property but you could be entitled to a lien against the residence for improvements, mortgage payments, etc. made with community property. However, while you would not have an ownership interest in the residence, you would also not be required to pay back ____'s downpayment and closing costs.
 
 

Paragraph I.D. was added at our request. This paragraph provides that any pensions owned prior to the marriage remain that party's separate property, but that any contributions made after the marriage from community property earnings should be made to new pension accounts in which you will both have an equal interest.
 
 

Paragraph I.E. provides that if separate property funds of one party are contributed to the other party's separate property, that contribution shall be considered a gift. Likewise, if community property is contributed to one party's separate property, that contribution is considered a gift, with the following exceptions: contributions of over $500 without written approval of both parties; and pension contributions. Paragraph 1E also provides that any labor contributed to the other party's or your own separate property is considered a gift; however, if ____ contributes over 100 hours per year to his separate property (excluding legal work billed by his firm), he will be required to reimburse the community at $100 per hour for each hour over 100 hours in that year. Under Washington law, absent this agreement, either of you could request that the community be reimbursed for any community labor contributed to separate property.
 
 

Paragraph I.F. states that you will both attempt to keep accurate records, open a joint account for payment of household expenses, and that you are both allowed to maintain separate property accounts to which the other party does not have access.
 
 

Paragraph I.G. provides that ____ will name you as the sole beneficiary of his $700,000 life insurance policy through his employment and that you will both agree on an alternate security should that policy terminate for any reason. This paragraph also lists the four policies ____ must maintain for his ex-wife and the one he must maintain for his children. ____ shall pay the premiums on these policies from his separate funds.
 
 

Paragraph I.H. states that you will both pay your own debts incurred prior to the marriage and that while ____'s child support and maintenance payments will be paid from community funds and while community funds will be spent on your children who will be living with you and ____, the community will have no right to reimbursement for these funds expended.
 
 

Paragraph I.I. provides that should you and ____ move from Washington to a state with different laws, community property shall continue to be owned 50:50, separate property shall remain as such, and, if you are living in a non-community property state, community earnings shall be deemed jointly owned marital property.
 
 

Paragraph I.J. states that any property owned by the two of you as joint tenants, such as your house, shall not be subject to the terms of this agreement unless specifically provided. For example, because you will own the house as joint tenants, should one of you die, the other party will receive 100% interest in the home, rather than only one-half under the community property provisions of this agreement.
 
 

Section II sets out property distribution upon a legal separation or dissolution. Paragraph II.A. states that each party shall retain their separate property and that all community property shall be divided 50:50. Under Washington law, absent this agreement, the court would have discretion to make an "equitable" distribution after considering all of the community property and both parties separate property. In other words, it is possible that after a few years of marriage, you would be entitled to more than 50% of the community property and/or a portion of ____'s separate property.
 
 

Paragraph II.B. states that the court has discretion to award a reasonable amount of spousal maintenance.
 
 

Section III sets forth the property distribution if the marriage is terminated by the death of either you or ____. This section provides that the surviving party shall receive their separate property and one-half of the community property; the decedent's successors in interest (named in Will) shall receive the decedent's separate property and one-half of the community property. However, paragraph D of this section provides that either party may name the other party in their Will or as a beneficiary and that the funds received under those designations are in addition to the survivor's interest under this agreement. For example, if you designated a portion of your estate to go to ____ in your Will, ____ would receive that amount in addition to his one-half community property and all of his separate property.
 
 

Paragraph C of this section states that you both waive any rights under law that you may have had as surviving spouse, including: share by intestacy, family allowance, quasi-community property, homestead, etc.
 
 

Section IV states that you will file joint income tax returns during your marriage and that any community or separate funds used to pay taxes shall be considered a gift.
 
 

Section V states that you have both been represented by an independent attorney who has explained your rights to you and how this agreement effects those rights, you understand the significance of this agreement and you are signing it freely and voluntarily. This section also includes a waiver of any disclosure beyond what is attached to this agreement. It also provides that if a specific asset was inadvertently not listed, it shall not effect ownership of that asset or the validity of this agreement.
 
 

The provisions in Section VI are standard provisions and fairly self-explanatory.
 
 

Other Issues to Keep in Mind
 
 

ADD PARAGRAPH RE SIGNING OF QPSA/QJSA WAIVERS AFTER MARRIAGE, IF PROVISION INCLUDED IN PRENUPTIAL.
 
 

The property status agreement, as stated above, is not ironclad protection. If you take actions which are contrary to the property status agreement, it is much less likely that your separate property will be protected. It is, therefore, important that you adhere to the letter of the agreement as closely as possible. The following are some especially important cautions:
 
 

1. Never commingle any of your separate property with any of ____'s separate property which could possibly change the character of your separate property to marital property.
 
 

2. If you purchase property with your separate property funds:
 
 

a. If purchasing or refinancing separate property, make sure that you are the sole applicant for credit. Ideally, at the time of each transaction, you should obtain a written statement from the lender stating that it intends to rely exclusively upon your separate property and upon income attributable to your separate property in making the loan.
 
 

b. Always take title to your separate property as "a married woman as her sole and separate property."
 
 

c. Always obtain a quit claim deed from ____ when purchasing real property. This is one more measure of assurance that he is not going to claim an interest in your separate property. The circumstances surrounding execution of the quit claim deed should be scrupulously fair: no pressure, full disclosure of all pertinent facts, adequate time to think about the transaction, and an opportunity to consult with independent counsel.
 
 

 These are only a few of the things which you should keep in mind. You should always review this agreement before entering into any significant transaction. If you have not already done so, you should change your Will to reflect your marriage and the changes, if any, you would like to make to the distribution of your estate. Be sure that your estate planning attorney reviews this agreement whenever you change your estate plan. If you have any questions about a transaction, it would be a good idea to get advice from counsel.

After you have read this letter please call me with any questions you may have or to set up an appointment for the signing of the agreement. I look forward to hearing from you.
 
 
 
 

Very Truly Yours,
 
 

LAW OFFICES OF

LOWELL K. HALVERSON
 
 
 
 
 
 

Lowell K. Halverson
 
 
 
 

 

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