Estate Planning Newsletter – July 2016 Edition

PRENUPTIAL AGREEMENT HELD INVALID BECAUSE OF LACK OF ADEQUATE DISCLOSURE

Frequently, I am asked about Prenuptial Agreements, I have clients that want to do them, or I am asked to review Prenuptial Agreements.   One of the critical requirements for a valid Prenuptial Agreement is that the parties make a full and fair disclosure of each of their assets to the other before the Prenuptial Agreement is executed.  In the case of Ellis v. Ellis, the Court found that there was not a valid Prenuptial Agreement because of inadequate disclosure of assets.

In the Ellis case, the Court discussed Prenuptial Agreements by explaining that the general rule is that Tennessee Courts will enforce a Prenuptial Agreement if the party seeking enforcement demonstrates that the Prenuptial Agreement was entered into fairly, knowledgeably, and in good faith without the exertion of duress or undue influence.  The Court went on to explain that whether the spouse who is the proponent of the Prenuptial Agreement has satisfied the disclosure requirement is heavily dependent upon the facts and circumstances in each case.  The extent of what constitutes full and fair disclosure varies from case to case depending upon a number of factors, including the relative sophistication of the parties, the apparent fairness or unfairness of the substantive terms of the Prenuptial Agreement, and any other circumstances unique to the parties in their specific situation.

In the Ellis case, the husband made an incomplete listing of his assets.  At trial, he argued that the wife had independent knowledge of his holdings.  The Court pointed out the factors that are considered to constitute independent knowledge, and the Court found that independent knowledge did not exist.  The court also ruled that a full and fair disclosure of assets had not been made by the Husband.

MY OBSERVATION:  Very few cases have upheld a Prenuptial Agreement based on independent knowledge of one of the parties where there was not otherwise full and fair disclosure of the assets.  The Court in the Ellis case pointed out that a fairly simple and effective method of proving full and fair disclosure is to attach an accurate net worth schedule of assets, liabilities, and income.

Be very intentional and diligent about the full and fair disclosure of assets, liabilities, income, and sources of income.  Do not attempt to rely on the independent knowledge of the other party.  If you are going to go to the effort of making a Prenuptial Agreement, do not take short cuts.