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Do You Need A Prenuptial Agreement?
Bridget K. Sullivan, Esq., Sherman & Howard L.L.C.

Your Position In the Absence of A Prenuptial Agreement.

If you are married and living in Colorado, your spouse has certain rights granted by statute if the marriage terminates by divorce. Colorado statutes delineate two types of property which exist during the marriage, in the absence of a prenuptial agreement. First, there is separate property, which is all property you owned prior to the marriage, and all property received by gift or inheritance during the marriage. Second, there is marital property, which includes: (1) all property earned by either spouse during the marriage, including deferred compensation; (2) all income from separate property; (3) all appreciation on separate property, whether realized or not. Marital property exists regardless of how title is held.

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 t