Taxes and Prenuptial Agreements

On behalf of The Marks Law Firm, L.L.C. posted in Divorce on Thursday, February 7, 2013

This week the Eastern District of the Missouri Court of Appeals decided a legal malpractice case involving an antenuptial agreement, and the holding of the case points out some of the difficulties surrounding the negotiation of an antenuptial agreement.

When a couple considers getting married and one or both partners have significant wealth, the need for an antenuptial (or prenuptial) agreement will arise. In this case, husband sought to protect many of his property holdings in the event of divorce while also having a set sum that would go to wife in the event of divorce. The parties signed an initial agreement in 1981 and substituted a new agreement eight years later. In the second agreement, the parties negotiated over a term of four years, arriving at essentially a 25% share for wife of the value of a set list of assets. Apparently, the parties did not explicitly state who would bear the capital gains liability with regard to these defined assets. Wife filed for divorce in 2006, and the family court rejected husband’s argument that the value of the assets be reduced by the capital gains liability, i.e. husband would owe wife 25% of the fair market value of the assets without a deduction for capital gains taxes, which meant that husband would have to bear those costs alone. The family court enforced the second agreement, finding it silent on the issue of capital gains liability.

Subsequently, husband filed a legal malpractice action against his attorney, alleging that his attorney should not have negotiated an agreement without the capital gains issue resolved in his favor. The trial court granted summary judgment in favor of the attorney and the Eastern District affirmed, noting that husband could not prove that wife would have signed the second agreement under the terms he suggested regarding capital gains.

This case holds some important lessons for persons involved in high asset prenuptial agreements. First, understand what you sign before you sign it. If you have questions about the meaning of any provision in the agreement, discuss it thoroughly with your attorney. Second, always think about the tax consequences of any proposed agreement and place a dollar value on those consequences before deciding how to allocate the tax burden. Third, make explicit provisions in your prenuptial agreement about tax burden allocations to avoid future conflicts.

Drafting prenuptial agreements for high asset clients requires patience, sophistication, creativity and an eye for detail. We at the Marks Law Firm, LLC have had years of experience drafting these types of agreements. If you have questions about a prenuptial agreement, contact us – we can help.