You Do Not Have to Sign your Life Away: A Brief Primer on the Benefits of Marital Property Agreements
There are many reasons for small and family business owners to consider a marital property agreement. This post will briefly explain Wisconsin law as to ownership of property at death and divorce without a marital property agreement and why executing a marital property agreement can alter those laws to protect business interests and simplify transfer of ownership upon death.
In Wisconsin, spouses are entitled to certain rights during marriage and at death. As Wisconsin is a community property state, a spouse owns an undivided one-half interest in each item of property owned by either spouse acquired during the marriage. Each spouse has a one-half interest even if property is titled solely in one spouse’s name. Wisconsin divorce law provides a similar but technically distinct set of rights and responsibilities for spouses who are dissolving their marriages. Under Wisconsin divorce law, all property owned by the spouses (except gifted and inherited property) is presumed to be divided equally, even if acquired prior to the marriage. While these rights are protected, spouses have the ability to alter Wisconsin property and divorce law through a marital property agreement.
A marital property agreement (“MPA”) is a signed contract between two spouses, which can be prepared prior to marriage (pre-nuptial agreement or “pre-nup”) or during a marriage (post-nuptial agreement or “post-nup”). The general purpose of a MPA is to provide spouses with specific guidelines for 1) classifying property; 2) establishing management and control over the property; and 3) division of property at death or divorce.
The initial function of the MPA is to classify the spouses’ property. Generally, all property is considered either “individual property,” which is property that is solely owned by one spouse, and “marital property,” which is jointly owned property. Examples of property often classified as “individual” in MPAs are property owned prior to the marriage (real estate, retirement accounts, business assets, etc.) or property acquired by gift or inheritance. Marital property is most commonly a jointly titled residence or shared bank account.
Parties may also choose to further classify certain assets and generate terms relating to gifting or mixing assets. For example, income (even if from gifted and inherited property) is classified as marital property per Wisconsin law. That can cause issues with commingling different types of property, say, for example, if you have a pre-marital retirement account (individual property) that generates income (marital property). In this instance, all investment income, distributions from the trust, etc. may be classified as individual property to avoid commingling.
A well-written MPA can keep individual property, particularly those assets received from family or as a result of a spouse’s business interest, definitively separate from marital property and safe from a divorce. The key is to ensure that the way your property is managed throughout the marriage is consistent with your intentions per the terms of the MPA.
Control of Property Interest
An advantage of executing a MPA when you own business interests or investment properties is that the agreement can allow the owning spouse to manage and control his or her individual property during the marriage, without the consent of the other spouse. This means that either spouse could transfer, gift, or encumber individual property without consultation or agreement of the other. The MPA may also dictate the role or control a spouse has in a business, or a spouse’s access to stock or stock options. While many business agreements may include language regarding a spouse’s access to a business, including similar language in a MPA can help further insulate a family business from marriage, or the dissolution of marriage.
Terms regarding management and control of assets do not just apply to death or the dissolution of marriage. The parties can also include provisions regarding how property is managed or transferred during the marriage. MPAs can help to ensure a healthy financial marriage, especially where there are significant assets involved. One of the most effective ways to protect assets and business interests is to establish clear terms for how the property is to be controlled and managed, even during the marriage.
Division of Property at Dissolution
A MPA often alters the division of property under Wisconsin divorce law. Property acquired by gift or inheritance is not subject to division in divorce. However, without executing a MPA, all other property, including any property brought to the marriage, is divisible, regardless of how the property is titled. Wisconsin law presumes an equal division of all divisible property. The court may order an unequal property division after consideration of twelve specifically listed factors. One factor is the existence of a written agreement or a MPA. The provisions of the MPA are binding on the court unless the court finds the terms are substantially inequitable to either party. The court must presume that the MPA is equitable. A MPA is only inequitable if:
- Either spouse failed to provide a fair and reasonable financial disclosure to the other prior to execution;
- Either spouse failed to enter the MPA voluntarily and freely;
- The substantive provisions of the agreement dividing property upon divorce are fair to each spouse at the time of its execution, and, if circumstances changed significantly since execution, then also at the time of divorce.
Generally in a MPA, all individual property is awarded to the title-holding spouse and marital property is divided equally. However, to ensure the agreement is substantively fair, the propertied spouse should consider providing some individual property to the non-propertied spouse, especially in the event of a long-term marriage. Accordingly, it can be helpful to include language that awards the propertied spouse flexibility and control as to what property he or she must provide. Parties can also use the MPA to define how property is valued and to provide specific terms for payment for one spouse to another upon divorce. The goal of the MPA at divorce is to provide clear terms for the court to follow.
A MPA may also include provisions related to maintenance, or spousal support. However, unlike property division, the court is not bound by the MPA as it relates to maintenance. the court need only consider a maintenance provision when making its decision. The court may deviate from the MPA as it relates to maintenance, so parties should be cautious when agreeing to waive maintenance claims outright in a MPA.
Without a MPA, upon the death of one spouse, both spouses have a one-half interest in marital property. This means the deceased spouse may only leave one-half of marital property to someone other than the surviving spouse. The surviving spouse retains his or her one-half interest in marital property upon the death of a spouse. Property classified as the deceased spouse’s individual property may be passed to someone other than the surviving spouse according to the deceased’s spouse’s estate plan or beneficiary designation. A MPA can classify property that would otherwise be marital property as individual property instead so that additional property may be left to someone other than the surviving spouse.
The terms to which the parties agree upon death can be important when considering inherited assets and their interest in businesses, especially for parties who have been married before or who have children from a previous marriage. A MPA can be used to ensure business partners or children from a previous relationship are not fighting for ownership and control of a business with the surviving spouse upon the death of the owning spouse.
MPAs do not supersede estate planning documents. While the existence of a MPA may provide a spouse with a claim against the deceased spouse’s estate, it is important that estate planning documents do not conflict with the terms of the MPA. It is a good idea to jointly draft estate plans shortly after the marriage, and provide a copy of the MPA to your estate planning attorney, to further enforce and effectuate the terms of the MPA.
It is often a common misconception that a MPA is a simple document that can be prepared right before the wedding. In actuality, a MPA is a complex document that can affect the rights and responsibilities of spouses during the marriage, at divorce, and at death. The process to prepare and execute an effective MPA should not be taken lightly. It takes careful consideration and extensive knowledge of Wisconsin property and divorce law to ensure the enforceability of a MPA.
Unlike other states, Wisconsin courts consider fairness when the MPA is executed and again when the MPA is applied upon death and divorce. This means that MPAs are less enforceable in Wisconsin than in other states. That said, a MPA can be an incredibly useful tool for financial freedom and stability in a marriage. Too often, parties do not take full advantage of the MPA as part of a discussion as to how they will share finances during the marriage. Therefore, to ensure enforceability and be sure that you are taking full advantage of what the MPA has to offer, it is always best to have legal counsel assist you in drafting, or at least reviewing, the MPA.
Even if you are not considering a MPA at this point in your relationship, it can be a good idea to bring up the possibility with your potential spouse long before the wedding day. MPAs should be seen as smart financial planning and normal discussion about sharing finances with your spouse, not just as a plan for the end of a relationship. Therefore, to protect your assets and successfully plan for your financial future, you should consult with a family law attorney about your options for a MPA with sufficient time to discuss, negotiate and carefully draft a MPA prior to marriage.
Stafford Rosenbaum LLP is a full-service law firm with two convenient office locations in Madison and Milwaukee, Wisconsin. Over 140 years of dedication to businesses, governments, nonprofits, and individuals has proven that effective client communication continues to be the heart of our practice.