Texas Business Dispute Blog

Monday, September 11, 2017

Family Law Post (Part II) - What's Love Got To Do With It: The Business, Financial and Other Benefits Of A Marital Pre-Nup

By Frances Ellenbogen and Ladd Hirsch

Couples often spend months planning their wedding day details, from the color of the flowers to the icing on the cake.  What they often overlook, however, are the legal rules that will govern their property once they are married.  While the topic lacks romance, couples should seriously consider the benefits of entering into a pre-nuptial agreement, which will impact them, and potentially their children, far beyond their wedding day.

This is the second in a two-part series focusing on pre-marital agreements, or pre-nups. Part 1 considered how a pre-nup can help a couple address a number of crucial financial and personal issues.  (See Part 1 to learn more regarding the role of family law counsel in drafting a pre-nup, and the various benefits of a pre-nup).  In this Post, we focus on the legal elements required for a pre-nup to be valid in Texas and also review the legal requirements to invalidate a pre-nup under Texas law before it goes into effect.

One Size Does Not Fit All

Under the Texas Family Code, a pre-nup is an agreement between prospective spouses that is entered into in contemplation of marriage and that becomes effective upon marriage.  Generally, a pre-nup can cover any matter as long as it does not defraud creditors or violate public policy.  A pre-nup also cannot adversely affect a child’s right to support, although a pre-nup may validly provide for education, vehicles, or other expenses for children. 

The Texas Family Code flexibly allows spouses to agree on various issues that may be personally important to them, including business ownership, the characterization of assets as community or separate property, management and control over certain property, division of property upon death or divorce, protection from creditors, spousal support, and choice of state law.  Further, the definition of “property” set forth in the Texas Family Code is broadly defined to include a wide range of assets, including retirement benefits (such as pensions and 401k plans), debt, and stock options.

What Is Required for a Pre-Nup To Be Valid and Enforceable?

Texas Family Courts usually uphold written pre-nups between spouses, because they are presumed to be enforceable.  A pre-nup is considered valid and enforceable as long as it meets the requirements set forth in the Texas Family Code, which are:

  • The pre-nup is in writing;
  • The pre-nup is signed by both spouses;
  • Both spouses disclosed assets and liabilities before signing the pre-nup; and
  • Both spouses waived the right to further disclosure

Unlike other types of legal agreements, neither spouse is required to provide any consideration (i.e. an exchange of something of value in return for the promises included in the agreement) for the pre-nup to be valid.  After marriage, a pre-nup may be amended or revoked only by a written agreement that is signed by both spouses.

In order to avoid the potentially disruptive effect of requiring a spouse to bring litigation against the other spouse related to their pre-nup, any statute of limitations that would be applicable to a claim relating to a pre-nup is tolled during the marriage.

Challenging the Validity of a Texas Pre-Nup

The Texas Family Code only permits a spouse to challenge the enforceability of the pre-nup as a whole (as opposed to challenging particular terms) and for only two reasons: involuntariness and unconscionability.  In making its assessment of a challenged pre-nup, the Family Court may consider factors such as the maturity and ages of the spouses at the time they signed the pre-nup, their business backgrounds, education, previous marriages, and personal motivations (such as to protect children of prior marriages).

Note: The statutory defenses of involuntariness and unconscionability that are set forth in the Texas Family Code are the exclusive means for a spouse to challenge a pre-nup that was signed after September 1, 1993. 

The challenging spouse has the burden of proof in a legal proceeding that is filed to determine the validity of a pre-nup.  If the pre-nup addresses specific divisions of property, the Family Court will not consider evidence of a party’s fault. 

  • Either Spouse Did Not Sign the Agreement Voluntarily

A pre-nup will be deemed invalid if the challenging spouse is able to prove that he or she did not sign the pre-nup voluntarily.  Under Texas law, however, proving that a pre-nup was signed involuntarily requires the movant to meet an extremely high standard requiring a determination of fact based on the circumstances surrounding the signing.  The Family Court will not invalidate a pre-nup simply because one spouse threatened not to go through with the marriage without a pre-nup in place.

The Family Court may invalidate a pre-nup as involuntary if a spouse was forced to sign the agreement under duress, or if the signature was obtained by fraud, undue influence, or lack of capacity.  When faced with an involuntariness challenge to a pre-nup, the Family Court is likely to also consider: (i) whether the challenging spouse had the advice of counsel; (ii) any misrepresentations made in obtaining the challenging spouse’s signature; (iii) the amount of information provided; and finally, (iv) whether any information was withheld.  

Note: Although Texas law applies fiduciary duties to married spouses, in certain circumstances, the Family Court may also consider fiduciary duties in determining whether an engaged couple’s pre-nup was involuntary.

  • The Agreement was Unconscionable at the Time it was Signed

A spouse may also challenge a pre-nup as unconscionable.  In determining whether a pre-nup is unconscionable, the Family Court must consider all of the circumstances surrounding the pre-nup, including the alternatives available to either spouse at the time, the relative bargaining power of each spouse, and whether the pre-nup is oppressive or unreasonable.  The Family Court will not invalidate a pre-nup as unconscionable simply because one spouse agreed what turned out to be a bad deal. 

In addition to showing that the pre-nup was unconscionable when it was signed, a spouse challenging a pre-nup as being unconscionable must also show that he or she:

  1. Was not provided with a reasonable disclosure of the assets and liabilities owned or held by the other spouse;
  2. Did not voluntarily waive any right to disclosure of the assets and liabilities beyond what the other spouse already disclosed; and
  3. Did not have, or reasonably could not have had, adequate knowledge of the assets and liabilities of the other spouse

In order to meet this test, the challenging spouse must also show that that there was no other way to discover assets or liabilities that were not disclosed by the other spouse. Under these circumstances, the challenging spouse could not have made an informed decision as to whether the pre-nup terms were fair and the Family Court may invalidate the pre-nup as a result.

Conclusion

Texas law gives spouses broad authority to enter into written agreements before marriage on a wide variety of property and personal issues.  A well-crafted, thoughtful pre-nup can provide a newly married couple with peace of mind, given that there is a plan in place for structuring the division of their assets in the event of divorce or death.  Business owners, high net wage spouses, and heavily indebted couples can rest more easily, knowing that their interests are protected and that the Family Court is likely to enforce a properly drafted pre-nuptial agreement.

To bolster the validity of a pre-nup, an engaged couple considering a pre-nup should always obtain separate counsel for each of them.  Independent counsel can also help to ensure that both spouses make a complete and honest financial disclosure, and that the pre-nup includes all crucial assets.  A Family Court is more likely to enforce a pre-nup when both spouses had the benefit of independent legal advice in negotiating, drafting, and reviewing the pre-nup.  Although it won’t make the wedding day more romantic, a couple that plans for future events makes a smart investment that may benefit both spouses down the road.


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