When a couple divorces in Colorado, each party keeps his or her separate property (so long as it was maintained separately during the marriage and not co-mingled with marital funds). If the parties have not reached an agreement, the court is directed to divide the marital property in the proportion that it deems "just" after considering all relevant factors. So, for example, if you entered the marriage with a house worth $150,000 and an investment portfolio worth $100,000, and kept title to those assets separate during the marriage, you would retain as your separate property $150,000 of the value of the house and $100,000 of the value of the portfolio. The increase in value in those assets during the marriage would be marital property, subject to division upon divorce. In addition, if you used the income earned from those assets to purchase additional assets, those assets purchased with income from separate property would themselves be marital property. If you had inherited $50,000 from a relative during the marriage and kept that money in an account titled in your name only, that $50,000 would remain your separate property. But, again, the income from and appreciation on that asset would be marital property. Keep in mind as well, that income contributed during the marriage to a retirement plan (such as a 401(k)) would be considered marital property. Further, the increase in value of your retirement account during the marriage is marital property. Consequently, upon divorce, the court could grant your spouse certain rights to your retirement plan account.
In addition to dividing marital property, a divorce court can award maintenance (a/k/a "alimony") if it finds that the party seeking maintenance lacks sufficient property (including separate property and the marital property allocated to that party) to provide for "reasonable needs." Again, the amount and length of the award are to be as the court deems "just" after considering "all relevant factors." Colorado courts have been unpredictable in awarding maintenance. Consequently, it is somewhat of a wild card, and could have a significant financial impact on the party ordered to pay it.
While most people are aware that a spouse has certain property rights in a divorce situation, fewer people are aware that a surviving spouse also has certain rights to the estate of the deceased spouse. Absent a prenuptial agreement, if the deceased spouse left no will or trust, all property would pass to the surviving spouse (assuming there are no descendants or parents of the decedent). If the deceased spouse left one or more descendants, the surviving spouse would take up to one-half of the deceased spouse's estate, depending on the length of the marriage. (Basically, each spouse vests in five percent of the other spouse's estate after each year of marriage, culminating with a right to 50 percent of the decedent's estate after ten years of marriage.) Even if the deceased spouse has left a will, the surviving spouse can reject the terms of the will and take up to one-half of the estate outright (again, depending on the length of the marriage). The surviving spouse also has other rights to the estate, including an exempt property allowance of $15,000 and a family allowance.
Prenuptial Agreement Allows Couples to Define Their Own Terms.
A prenuptial agreement enables the engaged couple to negotiate around Colorado law in order to define separate property and marital property as they wish. By means of a prenuptial agreement you can define separate property to include all income from and appreciation on your separate property. You can also protect your earned income by defining that as separate property, so that assets purchased or investments made with your earned income will remain your separate property upon divorce. Thus, by altering the definitions of "separate property" and "marital property" from those provided by statute, you can protect not only the core of your separate property which you amassed prior to your marriage, but also the earnings from and appreciation on that property. If you wish to restrict your spouse's rights upon divorce to your earned income, including retirement benefits, you can do that as well.
Spouses can waive their rights to maintenance payments in a prenuptial agreement. They can agree in a prenuptial agreement to a certain amount of maintenance to be paid to the less wealthy spouse in the event of a divorce. However, if at the time of a divorce, the court determines that the spousal maintenance terms in the prenuptial agreement are "unconscionable" in the treatment of the less wealthy spouse, the court would have jurisdiction to render that portion of the prenuptial null and void, and to award reasonable maintenance.
Finally, a prenuptial agreement can allow couples to determine what rights a surviving spouse will have upon the first spouse's death. For example, in many prenuptial agreements, each spouse waives his or her right to reject the terms of the other's will and elect to take up to half of the estate outright (depending on the length of the marriage) Such a waiver ensures that the estate plan of the first spouse to die will be honored by the surviving spouse.
Why Couples Choose to Alter Spousal Rights Provided by Law.
Couples choose to alter their statutory rights for a number of reasons. Some people simply wish to have certainty as to property rights and maintenance payments upon a potential divorce. By entering into a prenuptial agreement, they eliminate much of the financial uncertainty associated with a divorce. A fairly negotiated prenuptial agreement can provide some assurance to the wealthier spouse as to the extent of the financial impact of a divorce, while at the same time, providing the less wealthy spouse with some guarantee of his or her entitlement to a property distribution and/or maintenance upon a divorce.
People who have children from a previous marriage may wish to protect their assets for the ultimate benefit of their children. They may view a prenuptial agreement as a means of protecting their assets in a divorce for the benefit of their children. A prenuptial agreement which addresses the rights of a surviving spouse upon the death of the other spouse can protect the deceased spouse's estate for the benefit of descendants.
Sometimes parents encourage their adult children to enter into a prenuptial agreement in order to protect assets owned by the child which were accumulated by previous generations. Usually, a wealthy family wants to ensure that assets which have been gifted to adult children do not become vulnerable to the spouse in a divorce situation.
Enforceability of a Prenuptial Agreement.
Colorado adopted the Colorado Marital Agreement Act in 1986. This statute sanctions the waiver of statutory property and maintenance rights of spouses either before or during a marriage. Thus, the general statutory rule is that prenuptial agreements are valid and binding contracts. However, one party can have the agreement voided if he or she did not sign it voluntarily or if the other party did not provide a fair and reasonable disclosure of his or her property and financial obligations.
When one spouse challenges the validity of a prenuptial agreement (generally at the time of a divorce or at the death of the other spouse), the court will look at several factors to determine whether the agreement should be enforced. The court will look to the adequacy of the financial disclosure. Such disclosure is required prior to the signing of the prenuptial agreement because a party cannot knowingly waive rights unless he or she has sufficient information about the potential value of those rights. The court will also look at whether the challenging spouse was under duress when he or she signed the agreement. An issue related to duress is the timing of the execution of the agreement. An agreement signed too close to the wedding date may support a challenge of duress due to the time constraint, because the challenging party can claim he/she did not have sufficient time to consider the ramifications of the agreement. A court will also look to whether there was any fraud involved in the process of negotiating and signing the agreement. Finally, the court will consider whether each party had separate counsel to advise them. While this is not required by the Marital Agreement Act, Colorado courts have considered the issue of separate and independent counsel many times. Separate representation has never been found to be a de facto reason for voiding an agreement, but it is certainly considered as an important element to the enforceability of an agreement.
Prenuptial Agreement Cannot Address Issues Related to Children.
It is important to note that a prenuptial agreement cannot address any issues related to children of the marriage. Thus, if a divorce were to occur, contested child-related issues such as custody, visitation, and child support would be decided by a court.
Recommendations If You are Considering a Prenuptial Agreement.
(1) Engage in candid discussions with your partner prior to hiring an attorney. Don't simply spring the idea on your loved one. The process of negotiating and drafting a prenuptial agreement proceeds more smoothly if the couple has had forthright discussions about the financial implications of their marriage and the general concept of a prenuptial agreement. Try to avoid, however, negotiating specific terms with your fiancee prior to seeking legal counsel, so that you are not locked into a promise which, upon guidance of counsel, may not be advisable.
(2) Enter into the process well in advance of your wedding date. This avoids the "ink on the wedding dress" problem in terms of one party later claiming duress due to the pressure created by the time constraint.
(3) Hire separate counsel. Each party should have his or her own attorney who can explain spousal property rights upon divorce and death and any waivers of those rights which are made in the agreement. Both spouses should have a full understanding of their rights upon divorce as well as upon the death of the other spouse, so that any waiver of those rights is made by informed decision. Seek out an attorney who has experience in the area of prenuptial agreements.
(4) Prepare detailed financial disclosure statements. This should include a statement of all assets and liabilities. I also recommend having each spouse disclose their annual gross income, interests in family trusts, and potential inheritances. This helps defend against a challenge by either party that he/she did not understand the value or extent of the financial rights which were waived.
(5) Keep in mind that the process of negotiating and signing a prenuptial agreement can often lead to tension, even for mature level-headed couples. The most difficult aspect of a prenuptial agreement is that it is essentially a business transaction negotiated between two parties who are in love. In addition, in order to protect their respective clients, the lawyers involved must negotiate and draft the agreement as if a divorce will occur. Inevitably, the process of drafting a prenuptial agreement brings up emotional issues for one or both parties. If you decide that you want to have a prenuptial agreement, you, your fiancee, and your attorney should all be attuned to the potential emotional issues which may surface.
Bridget K. Sullivan is an attorney in the Denver office of Sherman & Howard L.L.C. She works in the Tax & Probate Department, specializing in estate planning, estate administration, and marital agreements. Ms. Sullivan also represents clients in IRS audits, appeals, and tax litigation. Ms. Sullivan received her Bachelor of Arts degree from Regis College in 1987, and graduated in 1990 from Yale Law School. Ms. Sullivan can be reached at (303) 299-8130 or by e-mail at bsulliva@sah.com.