“Do I Need a Prenuptial Agreement?”: Preventing Marital Claims Against Separate Property
Premarital agreements allow spouses to modify or “opt out” of the application of Arizona community property law. They can be used to define both spouses’ rights and responsibilities in the event of a death or divorce
Done correctly, prenuptial agreements ˗ also known as
antenuptial agreements or, in Arizona, premarital agreements ˗ are
enforceable contracts between prospective spouses that become effective upon
marriage. Such agreements are governed by the Arizona Uniform Premarital
Premarital agreements allow spouses to modify or “opt out”
of the application of Arizona community property law. They can be used to define
both spouses’ rights and responsibilities in the event of a death or divorce
that occurs after the date of the marriage. The use of premarital agreements in
conjunction with estate planning is discussed in another article. This article
will focus on the necessity and use of premarital agreements in the context of a
First, what cannot be controlled by a premarital agreement?
Such agreements cannot include terms governing legal decision-making (child
custody), parenting time (visitation), or child support. Any provisions
purporting to define these issues in the event of a divorce are unenforceable.
That leaves property (assets), debts (obligations), and
spousal maintenance (alimony) as appropriate subject matter for a premarital
agreement. The full permissible scope of a premarital agreement is defined in
A.R.S. § 25-203.
To determine whether a premarital agreement might be
appropriate, it is first necessary to understand Arizona community property law
that would apply, if the spouses decide to divorce, in the absence of such an
All property owned by either spouse prior to marriage
is that spouse’s sole and separate property. However, separate property that
is commingled with community property and becomes untraceable could be
determined to be community property.
All property acquired by either party after their
date of marriage, except as a result of gift or inheritance, would be
presumed to be community property.
The spouses’ respective salaries and other
compensation for their labor during their marriage would be community
Each spouse would own a one-half (1/2) community
interest in all property acquired by either party as a result of efforts
expended during the marriage.
The increase in value of one spouse’s sole and
separate property during the marriage could be either community property or
separate property, depending upon whether the increase in value is the
result of the individual efforts of a spouse, contributions of sums earned
during the marriage, or the inherent qualities of the separate property
itself. Upon divorce, such increase in value may be apportioned between the
spouses by the Court.
Upon divorce, A.R.S. § 25-318 requires that
community, joint and common property must be divided “equitably,” which
almost always means “equally.”
Either party would be entitled to claim that he or
she should be awarded spousal maintenance pursuant to A.R.S. § 25-319.
A premarital agreement allows the parties to avoid
application of the foregoing community property principles and to define by
agreement how their property and debts will be apportioned and allocated upon
divorce. This is particularly important when one spouse owned significant
separate property prior to the marriage. For example, in the absence of a
premarital agreement, resolution of the following issues in a divorce case can
result in significant expense, both in legal fees and expert fees:
Apportioning the equity in a residence that one spouse
owned prior to marriage but both parties lived in during the marriage.
Apportioning the value of a business owned by one spouse
prior to marriage and operated by one or both spouses during the marriage.
Resolving one spouse’s entitlement to, and the amount
and duration of, spousal maintenance.
Of course, there are many other issues that arise during a
divorce case that could be addressed and prevented with a valid premarital
agreement, but the foregoing issues are often the most difficult to resolve and
can be complicated and expensive, as demonstrated by the following examples.
Dividing Equity in a Sole and Separate Residence
Any property owned by one spouse prior to the marriage is
the sole and separate property of that spouse. Upon divorce, all sole and
separate property must be awarded to the owner-spouse. However, that does not
prevent the other spouse from claiming a financial interest (as opposed to an
ownership interest) in the property. Consider the following example:
Wife, while single, purchased a home in 1990 for $500,000
with a down payment of $50,000 and a mortgage of $450,000. Wife and Husband
married in 2000, by which time the mortgage had been reduced to $365,000 and the
home had increased in value to $550,000. The parties divorced in 2010, and by
that time the mortgage had been further reduced to $225,000 and the home had
increased in value to $600,000, thus creating total equity of $375,000. Because
Wife purchased the home before marriage, she is entitled to all of the equity,
right? Not so fast.
The income used to pay down the mortgage from 2000 (date of
marriage) to 2010 (date of divorce) was derived from the work efforts of at
least one of the spouses. (It doesn’t matter if the income was from the
employment efforts of Wife, Husband or both – all such income earned during the
marriage is community property.) Therefore, the marital community contributed
$140,000 toward reduction of the mortgage principal balance ($365,000 minus
$225,000). Thus, Husband is entitled to his one-half community property share,
or $70,000 of the equity.
But wait. Not only is the marital community entitled to a
return of its contributions to the mortgage principal reduction; Arizona law
also allows the marital community to share proportionately in the
increase in value of Wife’s sole and separate property that occurred during
the marriage – in this case $50,000 from 2000 (date of marriage) to 2010 (date
of divorce). The formula is: C+[C/B x A], where:
A = Appreciation During Marriage ($50,000)
B = Value as of Date of Marriage ($550,000)
C = Marital Community’s Contributions to Principal
This results in the following calculation: $140,000 +
[$140,000/$550,000 x $50,000] = $152,727. This is the value of the marital
community’s lien on the equity in Wife’s sole and separate residence. In other
words, the marital community is entitled to a return of the $140,000 mortgage
principal reduction during the marriage, plus $12,727 of the $50,000 increase in
value that occurred during the marriage. In this example, Husband’s share of the
equity is $76,364, not just $70,000.
The foregoing example is complicated enough, and it requires
an expenditure of attorney’s fees to obtain and review the relevant documents to
ascertain the appropriate values for the formula and prepare the calculations.
Imagine if there have been several refinances throughout the marriage, including
additional down payments and/or withdrawals of equity. The calculation (and work
required) becomes exponentially more complicated and expensive, and, if all of
the pertinent documents cannot be located, it could result in the inability to
even prepare a proper calculation.
A properly drafted premarital agreement can eliminate the
need for such work, with language clearly stating the intention of the parties,
“From time to time throughout their marriage the parties
may reside together in one of the party’s sole and separate property residence.
Such cohabitation shall not signify or create any right, title, lien or any
interest whatsoever for the non-owning party in the other party’s sole and
separate property. Any contributions by one party to the mortgage or other
encumbrances, utilities, homeowner’s association dues, homeowner’s insurance,
maintenance, upkeep, repairs, improvements and any other costs or expenses
associated with the other party’s residence shall be deemed a gift, and the
non-owning party shall have no right to claim reimbursement for such
expenditures, nor shall any community or separate lien against the separate
property, including any increase in value, be created.”
Apportioning Value of a Sole and Separate Business
Assume that Husband owns a business that manufactures, sells
and distributes widgets. He took over the business from his father, who started
the business in 1970. Husband has been operating the business since 1990.
Husband married Wife in 2000, after working hard to grow and build the business
for the preceding ten years. Husband continued to operate the business during
the parties’ marriage, and he continued to operate the business after the
parties decided to divorce in 2010.
The business remains Husband’s sole and separate property
because he owned it prior to marriage, and therefore he will be awarded
ownership of the business upon divorce. However, Wife asserts that the marital
community has a financial interest (as opposed to an ownership interest) in the
business because it has grown, and presumably increased in value, during the
marriage. Wife may be right.
To determine whether Wife has a valid claim, first the
business must be valued as of the date of divorce. This will require the
involvement of a business valuation expert. Depending on the nature of the
business, the cost of the valuation may be a few thousand dollars to tens of
thousands of dollars, plus attorney’s fees related to coordinating the
valuation. If the parties agree on a valuation expert, and if both parties agree
on the value determined by the expert, this can still be very expensive. If
either or both parties disagree with the valuation of a jointly retained expert,
each party may then hire his/her own expert, thus doubling or tripling the cost
of the valuation. This type of valuation is required to divide any community
property business, i.e., a business that was started during the parties’
For a separate-property business started by one party before
the marriage, the expert will also have to value the business as of the date of
marriage, adding time and expense to the process. Assume that, after all of
this, the expert determines that the business was valued at $600,000 at the time
of marriage, and $1 million at the time of divorce. How does the Court apportion
the $400,000 increase in value during the marriage while Husband continued to
operate the business?
Arizona has rejected the “all or none” rule whereby the
increase in value was allocated either 100% to the separate property of the
owner spouse or 100% to the marital community. Instead, the increase in value
must be apportioned between community property (the increase attributable to the
efforts of the spouse) and separate property (the increase attributable to the
inherent nature of the business). Depending on the case, apportionment
approaches may include:
determining the reasonable value of the community's
services, allocate that amount to the community, and treat the balance as
separate property attributable to the inherent nature of the separate
allocating to the separate property a reasonable rate of
return on the original capital investment, with any increase above that
amount being community property.
This type of apportionment can be highly subjective, and it
can promote, rather than eliminate, disputes between the parties. This can
result in substantially higher expert fees and attorney’s fees as the parties
review expert reports, take depositions of each party’s expert witness, and
prepare for and conduct a trial to the Court.
A properly drafted premarital agreement can eliminate the
need for such work by providing language that clearly states the intention of
the parties, such as:
“All earnings from, or increases in the value of, the
property identified as one party’s sole and separate property, regardless of
whether such earnings or increases in value are the result of either party’s
individual efforts, toil or labor, or the inherent qualities or characteristics
of the property, shall remain that party’s sole and separate property. The
intent is that each party is waiving any claim of community property, community
lien, profits, distributions or increase in value of the other party’s sole and
separate property that he/she might otherwise have pursuant to the theories,
rationales and holdings in Arizona law recognizing such claims.”
Litigating the Spousal Maintenance Claim
claim for spousal maintenance, or alimony, is often the most difficult issue in
a divorce case. Unlike child support, there is no formula used to calculate
spousal maintenance. If the same facts were presented to ten different judges,
there would be ten different rulings, which would likely vary widely in both the
amount and duration of the spousal maintenance award.
The uncertainty surrounding spousal maintenance awards
impedes settlement of this issue and can substantially increase litigation
expenses. For self-employed spouses, even determining his or her true income can
become difficult and laborious, sometimes requiring the services of a financial
expert. In many cases, there is a dispute over one spouse’s “earning capacity,”
which can require the services of a vocational evaluation expert.
Premarital agreements can resolve spousal maintenance claims
in advance, thereby significantly reducing attorney’s fees, and possibly expert
witness fees, incurred in reaching a settlement of the divorce case. A valid
premarital agreement can eliminate spousal maintenance for either party,
provided that the elimination of spousal maintenance does not render the person
“eligible for support under a program of public assistance at the time of
separation or marital dissolution.” Alternatively, rather than eliminate spousal
maintenance entirely, many premarital agreements define each spouse’s rights and
obligations to receive and pay spousal maintenance, thereby eliminating the
costs attendant to resolving such disputes as part of the divorce case. Some
Establishing a baseline monthly amount that vests after
one year of marriage and increases for each year of marriage.
Eliminating spousal maintenance per se but requiring a
lump sum, non-taxable property settlement payment that increases for each year
A properly drafted premarital agreement can eliminate
expensive and often contentious negotiation and litigation to resolve spousal
maintenance claims; it can also ensure that both spouses can survive financially
after a divorce.
The goal of a premarital agreement is not to
plan for a failed marriage; rather, it is to eliminate significant stress and
expense that can arise in resolving complicated issues in the event the parties
do decide to divorce.
The examples cited in this article are some of the more
complex and expensive issues that can be addressed in a valid premarital
agreement, but such agreements can cover a much broader range of issues
involving division of property and debts as part of a divorce case.
When it comes to premarital agreements, the adage holds true:
An ounce of
prevention is worth a pound of cure.