The "Second Look" Test

According to a survey published by the American Academy of Matrimonial Lawyers (AAML), “the millennial generation might become synonymous with selfies, social media, and prenups.” The emphasis on prenuptial agreements (prenups) is likely because millennials are getting married at later ages than couples in previous years. They have already accumulated some assets that they want to keep for themselves. They do not want to share their hard-earned private property with an ex-spouse in the event of a divorce.

A prenuptial agreement is a legal contract between people who plan on getting married but want to control ahead of time how their property will be divided in the event of a divorce. The document can define what property is private property; how assets accumulated during the course of the marriage will be divided; and whether either spouse will receive alimony and, if so, for how many years and how much will be paid. There are terms it cannot include, such as agreements about child support.

In addition to the surge of prenups for millennials, prenups are most common among spouses where at least one of them has children from a previous marriage or relationship and the parent wants to preserve assets for his or her own children. They are also common when one party has significantly more assets than the other and the wealthier party wants to be sure the poorer person is not just marrying the wealthy person for his or her money.

Although some may balk at signing a prenup, finding it “unromantic,” many family law attorneys liken it to an insurance policy covering catastrophic events like floods or earthquakes. It is something that you certainly hope you never have to use, but if you ever do need it you are very glad you have it.

Although the topics included in a prenup vary with state laws, almost all states agree on what it takes to have a valid prenuptial agreement:

  • It must be signed by both parties; oral prenups are not enforceable. It is a good idea for the signatures to be witnessed, but it is not required. Some attorneys now videotape the signing of the document to present in court later, if necessary, in order to verify there was compliance with laws governing prenups.
  • Each party must fully disclose his or her assets and liabilities.
  • The prenup must be voluntarily signed with no duress being placed on the less wealthy person to sign the agreement.
  • The further in advance of the marriage the prenup is signed, the more likely it will be considered valid and signed without duress.
  • Although not required to be valid, it helps to determine the validity of prenuptial agreements if the less wealthy party is made aware of how assets would be divided under state law so that person knows what rights he or she is giving up. If the less wealthy person signs an acknowledgment that he or she is aware of these rights and executes a “waiver of rights,” then that is strong evidence that the prenup was voluntarily signed.
  • If there are children, a party cannot give up the right to child support as required by state law.
  • Both parties need to have been advised by separate and independent counsel.
  • The agreement cannot be unconscionable. This generally means that it cannot leave one party destitute, or nearly so, while the other party will be able to flourish financially. An agreement will not be unconscionable just because it seems unfair.

It is important to know what it takes to prepare a prenup that will be deemed valid by a court. If the couple does divorce, there is a chance that the less wealthy person will challenge the prenup in an attempt to have it declared invalid. If all the criteria for a prenup are met, and the prenup is deemed valid, courts may still not enforce it if it does not meet the “second look” test.

What Does “Second Look” Mean?

A Massachusetts appellate court, in the case of Dematteo v. Dematteo, discussed in detail what it means to take a “second look” at a prenup to see if it is enforceable. The first step is to determine if the agreement is valid. If the agreement is invalid, there is no need for a second look. Only valid agreements are subject to the second look test. The court explained that the purpose of the second look is to “ensure that the agreement has the same vitality at the time of the divorce that the parties intended at the time of its execution.” The court noted that its decision is in line with that of other decisions from other courts on similar issues.

The main factor to consider in making this determination is whether or not circumstances have changed during the course of the marriage that now the spouse who is contesting the agreement would be left “without sufficient property, maintenance, or appropriate employment to support himself or herself.” Some situations that might fall into this category include, but are not limited to, the following:

  • The mental or physical condition of the challenging spouse has deteriorated.
  • The agreed upon support payment has been eroded by inflation to the degree that neither party could have anticipated at the time of the signing and has thereby essentially nullified “the obvious intention of the parties” at the time they entered into the agreement.

The court made it very clear that when courts take a second look at a valid prenup, the standard for evaluation is “conscionability.” Using these criteria, the court took a second look at a prenup it deemed was valid.

Second Look Upholds the Valid Prenup

In the Dematteo case, the court continued its evaluation and took a second look at the prenup after first determining the agreement was valid. In this case, at the time of the marriage and the signing of the agreement, the husband-to-be had substantial resources estimated to be between $83 million and $108 million. He gained substantial income from his ownership in the family construction business.

The wife-to-be had essentially no assets and earned $25,000 a year as a secretary. She consulted with her own attorney. After negotiations, a 15-page prenup was prepared. The terms were as follows:

  • The wife would receive the family home, free of any encumbrance.
  • She would be given yearly support of $35,000 until her death or remarriage, with the amount to be adjusted each year of the marriage for cost of living increases.
  • She would be given an automobile, unencumbered by any loan.
  • The husband would maintain health insurance for his wife until she remarried.
  • There would be an equal division of all marital property.

The signing of the agreement was on video. Although the parties had two children during the course of the marriage, and the wife had one child from a previous marriage, child support was not an issue. The wife also signed a waiver, acknowledging she was giving up certain rights that might be afforded her under state law.

After the husband petitioned for divorce, the wife claimed the agreement was unconscionable and should not be enforced. She alleged it was too lopsided, not consistent with the lifestyle she lived while married, and she was under duress when she signed it.

On its second look, the appellate court upheld the agreement and found it was not unconscionable. Circumstances during the marriage had not changed. The wife had no debilitating illness preventing her from working and the husband agreed to continue providing her health insurance.

Although there was a “vast disparity” in income, and the settlement was “less than modest” given the financial holdings of the husband, the court found the agreement was not unconscionable. The wife was “fully apprised of the husband’s holdings before she agreed to these ‘less than modest’ arrangements.” Additionally, on the video, the wife did not appear to be under any duress.

Second Look Finds Prenup Unconscionable

In another case—Kelcourse v. Kelcourse—that applied the test for conscionability to a valid prenup, a divorce court taking a second look found an agreement to be unconscionable. It was the second marriage for the husband who was in his forties. He owned and operated his own business.

It was the first marriage for the wife, who was in her twenties and pregnant with the couple’s second child at the time of the marriage. She had no assets.

A prenup was signed four days before their marriage. Both parties were represented by independent counsel. The terms of the prenup were as follows:

  • Any principal residence purchased during the marriage would be the wife’s separate property.
  • The issue of alimony was left open.
  • There was no waiver of rights under state law.

After 20 years of marriage, the couple divorced. Using the guidance of the Dematteo case, the court first determined the prenup was valid. But that was not enough to enforce it upon a second look.

At the time of the marriage, the couple was living in quite a nice house on the marina, near the husband’s business, Larry’s Marina, Inc. Shortly after, the couple moved to a rental residence they later bought. At the time of the divorce petition, the husband had moved back to the marina property, which was then valued at $1.7 million and was not encumbered by any mortgage.

On the other hand, the other residence, where the wife remained and which was the “principal” residence according to the prenup, was encumbered by a $256,000 mortgage. It was also in a state of extreme deterioration, such that estimated repairs were in excess of $300,000.

The court determined that enforcing the prenup would be unconscionable since it did not have "the same vitality at the time of the divorce that the parties intended at the time of the agreement’s execution." Also, the court determined that the deterioration of the principal residence was a “change in circumstance beyond what the parties contemplated when they executed the agreement, and that enforcement of the agreement would be unconscionable.” Critical to the court’s decision was that, if enforced, the wife—capable of earning only around $300 a week—“would be left without sufficient property and appropriate employment to support herself.”

Will the Change in Tax Laws Prompt a Second Look?

Those who sign a prenup concerning spousal support need to be aware of a new tax law effective December 31, 2018, which applies to any divorce settlement, whether pursuant to a prenup or not, entered into after that date. Prior to the effective date of the legislation, a divorce settlement agreement can be structured so that the party who pays spousal support can deduct the amount paid from their income tax. The party receiving spousal support must claim the amount received as income. This generally is fair, since the receiving spouse is most often in a lower tax bracket than the paying spouse. The payer of spousal support gets a tax break. As of the end of the year, that will no longer be the case. Whether a court will take a second look at spousal support agreements and the effect the new law may have on the amount agreed upon to be paid and received remains to be seen.

Prenups can be amended at any time throughout the course of the marriage. It might encourage couples to take second, third, and subsequent looks at their own prenup to see if it still reflects their intentions. They can also update the agreement to account for any change of circumstances that could influence a court not to uphold the agreement.

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