People seeking to protect their assets in a divorce have several options that include a pre-nuptial, post-nuptial agreement and/or a Trust.
By Marlene Eskind Moses and Jessica H. Uitto
The purpose of pre-nuptial and post-nuptial agreements is to determine each party’s rights in the other’s property, spousal support, and other related issues if divorce or death occurs.[1] Such agreements can be drafted to protect an increase in the value of, and the income from, separate property even if the nonowner spouse “substantially contributes to the preservation and appreciation” of that property.[2] “Substantial contribution” includes, but is not limited to, “the direct or indirect contribution of a spouse as homemaker, wage earner, parent or family financial manager, together with such other factors as the court having jurisdiction thereof may determine.”[3] If the agreement includes a waiver by the nonowner spouse of the appreciation in or income from the owner spouse’s separate property, and alimony award related to that appreciation and income should not be included in the agreement.[4]
A. Pre-nuptial Agreement
The pre-nuptial, also known as the ante-nuptial, agreement is becoming a commonly accepted instrument to protect property.[5] According to a survey conducted by the American Academy of Matrimonial Lawyers, 73 percent of divorce attorneys throughout the United States cited an increase in prenuptial agreements during the past five years.[6]
In Tennessee, a prenuptial agreement is valid if the spouses entered into it freely, knowledgeably, in good faith and without exertion of duress or undue influence upon either spouse.[7] The Supreme Court has interpreted the “knowledge” requirement to mean that the party seeking enforcement of the agreement has to “prove, by a preponderance of the evidence, that a full and fair disclosure of the nature, extent, and value of his/her holdings was furnished to the other party, or that such disclosure was unnecessary because the other party had independent knowledge of the same.”[8]
B. Post-nuptial Agreement
If spouses enter into a marriage without a pre-nuptial agreement, there is still an opportunity to protect assets through a post-nuptial agreement. The Tennessee Supreme Court has ruled that post-nuptial agreements are lawful and do not violate public policy.[9] In Tennessee, a post-nuptial agreement is valid if there is adequate consideration.[10] It is important to note, however, that unlike pre-nuptial agreements, the marriage itself, which is past consideration, is not adequate.[11] Therefore, there must be consideration in another manner. In addition, the spouses must enter into the post-nuptial agreement with full knowledge of the property and their rights.[12] The agreement also needs to be fair and equitable, and there cannot be fraud, coercion or undue influence.[13]
While pre-nuptial and post-nuptial agreements may protect assets from an ex-spouse, they do not block creditors from reaching the assets.[14] Thus, the Trust should be explored as a viable instrument in addition or as an alternative to pre-nuptial and post-nuptial agreements.
The Tennessee Investment Services Trust Act of 2007
Because of recent changes in Tennessee law over the past few years, the Trust is becoming an appropriate way to protect assets in the event of divorce.
The Tennessee Investment Services Act of 2007[15], which went into effect on July 1, 2007, permits a person (“transferor”) to transfer before marriage his or her separate property into an Investment Services Trust (IST) for his or her own benefit.[16]
The IST has certain advantages in the context of divorce planning. For example, while a pre-nuptial or post-nuptial agreement may require the negotiation of terms and the signature of both parties, an IST can be done unilaterally by a transferor to protect his or her assets from the other party.[17] Therefore, a transferor may want to create an IST in lieu of or in addition to executing a pre-nuptial or post-nuptial agreement.[18]
In addition, if certain requirements are met, the property in an IST is not subject to the reach of creditors.[19] The IST must comply with the following requirements: (1.) it must expressly incorporate Tennessee law to govern the validity, construction and administration of the trust; (2.) it must be irrevocable; (3.) it must provide that the trust assets may not be transferred, assigned, pledged or mortgaged, before the trustee distributes the assets to the beneficiary; (4.) the grantor must sign a sworn affidavit;[20] (5.) the trustee must: (a.) either be a Tennessee resident or someone who is authorized by Tennessee law to act as a trustee, (b.) maintain custody in Tennessee of the trust assets, and (c.) not be the transferor.[21]
There are a few exceptions, however, in which property in an IST is not protected from the reach of creditors.[22] These exceptions include, but are not limited to, the following: (1.) a creditor’s claim that arose before the transfer; or (2.) a creditor’s claim that arose concurrently with or subsequent to the transfer and the action is brought within four years after the transfer is made.[23] These exceptions, as well as some of the provisions in the sworn affidavit, have closed some of the potential loopholes for the defrauding of creditors.
The Tennessee Community Property Trust Act of 2010[24]
Tennessee is a separate property state in which marital property is equitably, but not necessarily equally divided in a divorce.[25] However, the Tennessee Community Property Trust Act of 2010, which went into effect on July 1, 2010, now permits married couples, whether resident or nonresident, to transfer their property into a Tennessee Community Property Trust.[26] If all of the requirements are met, the property is converted into community property.[27] This means that the parties will be deemed equal owners of the property, which may be a favorable arrangement to some couples.[28]
With regard to liabilities, it should be noted that the Tennessee Community Property Trust does not protect parties’ assets as strongly as tenancy by the entirety ownership when there is a debt owed by one spouse.[29] In a Tennessee Community Property Trust arrangement, if an obligation is incurred by one spouse before or during the marriage, that spouse’s one-half share of the community property trust may cover the debt.[30] Whereas, in tenancy by the entirety, the creditor cannot access the assets until the debtor spouse survives the other spouse.[31] Therefore, the Tennessee Community Property Trust should not be used for parties with possible creditor issues.[32] If both spouses incur an obligation during the marriage, the debt may be paid for by all of the trust’s assets.[33]
Upon divorce, the community property trust terminates and the trustee distributes one-half (50 percent) of the trust assets to each spouse with each spouse receiving one-half (50 percent) of each asset, unless the parties agree otherwise in writing.[34] When property is distributed from a Community Property Trust, it ceases to be community property.[35]
Conclusion
Because of the high percentage of divorces, people seeking to protect their assets in the event of divorce have several options that include, but are not limited to, a pre-nuptial, post-nuptial agreement and/or a Trust.
Notes
Marlene Eskind Moses is the principal and manager of Moses Townsend & Russ PLLC, a family and divorce law firm in Nashville. She is the immediate past president of the American Academy of Matrimonial Lawyers, and has held prior presidencies with the Tennessee Board of Law Examiners, the Lawyer’s Association for Women, and the Tennessee Supreme Court Historical Society. The Tennessee Commission on Continuing Legal & Specialization has designated Moses as a Family Law Specialist; she is Board Certified as a Family Law Trial Specialist.
Co-author Jessica H. Uitto is an associate at Moses Townsend & Russ PLLC. She also does pro bono work for the family division of the Legal Aid Society in Nashville, and is a member of the Nashville Coalition Against Domestic Violence. She is licensed to practice law in Tennessee, Pennsylvania and New Jersey.
This article originally appeared in the Tennessee Bar Journal.
Related Article
No-nups are useful in outlining upfront who will keep certain assets and what will happen to assets that were purchased during the relationship, should they choose to end it. The agreement binds both parties.