28 March 2017

Did Prenuptial Agreements Really Take a Hit in Michigan?

The short answer?  Potentially, but in practical terms there may not be much of a change.

The Michigan Court of Appeals recently held, in Allard v Allard, that a court retains authority to award a party’s separate property to the opposing party in a divorce proceeding despite the parties’ valid prenuptial agreement protecting such assets.  Although this Court took a novel approach, its effect on Michigan prenuptial agreements is substantively no more restrictive than prior court holdings.

Prior to Allard, parties to prenuptial agreements have relied on Staple v Staple, a Michigan Court of Appeals case which held that parties can, by contract, knowingly and willingly waive their own statutory rights.  That Court held that a contract between parties contemplating marriages, relating to their property rights, would remain in full force and effect after the marriage.

So what happened?  The Allard Court agreed that parties have the right to contract away their property rights, but two Michigan statutes only provide rights to the courts, not the parties themselves.  In other words, the Court held that parties cannot waive any rights under these two statutes, but they also cannot petition to enforce any rights under this statute in a divorce proceeding.  Simply put, these statutes can only be used by a court.  The Court also mentioned the well-known law that parties cannot enter into a prenuptial agreement that attempts to force a court to make a property settlement that is inequitable.

The Allard Court relied on two statutes in reaching this conclusion.  The first statute allows a court to award separate property to the opposing party if the marital assets and/or the opposing party’s assets are insufficient for the support of the poorer spouse and/or children. The second statute allows a court to award separate property to the opposing party if that party contributed to the acquisition, improvement or accumulation of the separate property.

This decision sounds chilling.  However, when looking at the history of prenuptial agreements in Michigan, the substance of the Allard holding may not be much of a change.  Prior to Allard, the Courts have held:

  1. A court has the inherent authority to provide any relief necessary to achieve equity.
  2. In divorce actions, division of property must be equitable.
  3. To achieve an equitable property settlement, the Court can consider the length of the marriage, the source of property and any contribution, the ages and health of the parties, the parties’ life status, including needs, circumstances, earning abilities and the parties’ past conduct.
  4. Under certain circumstances, a court can invade separate property if the parties relied on that separate property for support during the marriage.
  5. Parties cannot enter into a contract regarding child support in a prenuptial agreement.
  6. Parties cannot contractually agree on the venue or court where a divorce will take place.
  7. Contracts that violate public policy are void.

In essence, the Courts have always been able to pierce a prenuptial agreement to avoid an inequitable result.  How can we possibly know, when entering into a prenuptial agreement, what will appear inequitable to a court (which we can’t choose) several years (and asset changes) down the road?  There has never been a guaranteed answer to this question, but careful attorneys and parties will take steps to make prenuptial agreements appear more equitable.  The facts in the Allard case were the perfect example of the saying that “bad facts make bad law.”  The husband had almost $1 million in assets, including several businesses, real estate holdings and inherited assets.  The wife quit her job early on to raise their children.  The prenuptial agreement was signed the day of the wedding rehearsal and the wife was not represented by an attorney.  The marriage lasted 16 years. The value of marital assets available for an award to the wife totaled $95,000. In that case, the prenuptial agreement was inequitable and lopsided.

Steps to limit an inequitable result include (1) signing the prenuptial agreement well before the wedding, (2) ensuring that both parties are independently represented by counsel, (3) if the parties’ wealth is substantially different, the agreement could include a progressive property settlement schedule based on the length of the marriage.

Further steps to ensure protection of separate property prior to a marriage include the use of irrevocable trusts, including Michigan’s new Domestic Asset Protection Trust, which can be used by either party to provide enhanced asset protection for separate assets.

Prenuptial agreements in Michigan have a checkered past.  They can, and normally do, protect the parties’ assets as agreed upon.  However, it is important to work with an attorney to ensure proper steps are taken to create a prenuptial agreement that appropriately meets the needs of the parties and to discuss the pros and cons of the use of irrevocable trusts for added asset protection.