The Three Pillars of High-Net-Worth Prenuptial Agreements in New York

There is often a bit of intrigue around prenuptial agreements. Though some people might envision a prenuptial agreement as being a contract with the length and complexity rivaling a merger between two Fortune 500 companies, the reality is much more mundane.

In New York, prenuptial agreements, especially those for high-net-worth couples, have three main pillars: property distribution, spousal maintenance, and estate rights.

Contrary to popular belief, New York prenuptial agreements generally do not address child support because the provisions are likely to be unenforceable. Courts maintain considerable discretion when dealing with any provision related to children and are not bound by any agreements. Under New York law, a provision in a prenuptial agreement eliminating a party’s child support obligation would be void as against public policy.

Couples, especially high-net-worth couples, who want their prenuptial agreement to truly be a meeting of the minds, should carefully consider each pillar both on its own and in relation to the others.

Pillar #1: Property Distribution

New York law classifies property as “marital property” or “separate property.” Marital property, without an agreement to the contrary, includes all property acquired during the marriage, the income and appreciation of any marital property, and the “active appreciation” on separate assets.

Separate property is the property that each individual brings into the marriage, was gifted to one spouse from someone other than the other spouse (including through an inheritance), was held in a trust for another, was received as compensation for personal injury, or is the appreciation on separate property, so long as the income was “passive.” Passive appreciation would include appreciation on funds in a brokerage account managed by a third party.

Upon divorce, marital property will be distributed “equitably,” but this does not mean equally. Courts will consider the length of the marriage, each party’s probable future financial circumstances, and each party’s “contributions” to the accumulation of assets during the marriage. The longer a marriage, the more likely that the assets will be divided equally, except assets deemed business interests, which are almost never divided equally.

New York prenuptial agreements often declare that the spouses will divide marital property equally to avoid litigation about how to equitably divide it. Therefore, the most significant variable in prenuptial agreements is how marital property and separate property will be defined.

Most couples have three options for how to handle property distribution under their prenuptial agreement.

The first option is the “Title Controls” option. This option allows couples to generally keep their property separate; only property titled in the names of both spouses will be marital property. This is the cleanest approach and avoids tangling assets that may need to be untangled under less harmonious circumstances during a divorce. The major drawback to this option is that some couples may find that keeping their assets separate runs contrary to their desire to treat their marriage as a partnership where the whole is greater than the sum of its parts.

The second option is the “Mirror the Law” option, which does exactly what it sounds like it does. It provides a “belt and suspenders” approach to classifying an asset as marital property or separate property under New York law. This approach allows the non-monied spouse to share in some of the wealth and can more accurately reflect the intermingling of finances that couples may want. But this option is messier, requiring couples to determine when assets were acquired, where they came from, and allows for separate property to be tainted by marital property, such as income that is obviously marital property being deposited into a spouse’s investment account established before the marriage and then appreciating during it.

The third option is a hybrid approach, which resembles the Title Controls option, but includes carve outs. For example, the couple would agree that the primary residence is marital property, no matter whose title the home was in, but other separately titled assets would remain separate property. In addition, a would-be spouse would designate particular business interests acquired during the marriage as marital property. This option allows couples to customize which assets they deem as marital property, which could be relatively easy to segregate from separate property.

One last note on property distribution as it relates to residences. Residences are often the most significant assets a couple owns, and can become a key point when negotiating prenuptial agreements. They can be deemed separate property if purchased with separate property and titled to one spouse, or they can be marital property if purchased in both spouses’ names or with a combination of marital property and separate property.

Often New York prenuptial agreements include a provision allocating a dollar-for-dollar credit to a spouse for separate property they contributed to the purchase or capital improvements of a residence. This allows for both the reimbursement of separate property and a sharing in the appreciation of a significant asset.

Pillar #2: Spousal Maintenance

If spousal maintenance (also known as spousal support or alimony), which is generally awarded to the less-monied spouse, is not addressed in a prenuptial agreement, a court would apply a formula to the payor’s income, up to a cap of $203,000. Courts have the discretion to deviate from the formula if its calculated award would be unjust or inappropriate.

When the monied spouse has income greater than $203,000, courts will apply statutory factors set forth in New York Domestic Relations Law § 236B(6)(d), including the parties’ age and health, present or future earning capacity, child support, the standard of living established during the marriage, and the length of the marriage. In high-net-worth divorces, the most relevant factor is usually the parties’ lifestyle and expenses.

For marriages lasting up to 15 years, the statutory maintenance period should be for a period equal to 15%–30% of the length of the marriage. Marriages of 15–20 years see an increase to 30%–40% of the length of the marriage. For marriages of 20 years or longer, the maintenance period increases to 35%–50% of the marriage’s length.

There are three common options for spousal maintenance in a prenuptial agreement.

In the first option, both would-be spouses waive spousal support, negating future spousal support obligations. Because the would-be monied spouse often wants this option, and the non-monied spouse stands to lose in the end if spousal supports ends before they can regain full employment or earn enough to fund the lifestyle they had while married, it is not unusual for the non-monied spouse to receive consideration for agreeing to waive support obligations. This consideration often comes as either a lump sum payment or an agreement that the non-monied spouse will have equity in one or more residences.

In the second option, there is no waiver, which leaves the issue to be addressed by a court if the parties cannot agree amongst themselves about support obligations. Of course, the goal of a prenuptial agreement is to avoid as much litigation as possible, so this option kicks a divisive can down the road.

The last option is to create a calculation the would-be spouses agree to, along with agreed-to caveats. For example, the couple could agree that support would last one-half the length of the marriage, and the statutory maintenance formula would apply to a capped income figure.

Pillar #3: Estate Rights

Should a spouse die during their marriage, the surviving spouse will have a right of election to either accept the provisions of the deceased spouse’s will that concern them or take their elective share. The elective share is one-third of the decedent’s estate. However, if a marriage ends before the death of either spouse, so does the right of election.

Under New York law, a surviving spouse may not be disinherited. Would-be spouses often include provisions regarding estate rights in their prenuptial agreement to protect family assets and to preserve their estate planning options. These estate rights typically take the form of waiving their automatic rights under New York law to their elective share.

When this occurs, the non-monied spouse often receives consideration. This could include the monied spouse taking out a life insurance policy that benefits the non-monied spouse, a minimum bequest, an agreement that the non-monied spouse will remain in the primary residence after the divorce, or some other consideration that provides the non-monied spouse a sense of financial security that would have otherwise been provided by the monied spouse’s will or estate.

Separately, the couple could also agree that 1/3 or more of a decedent’s estate will pass to the surviving spouse in a trust rather than outright. But in many first marriages, the would-be spouses simply retain their 1/3 statutory right in the estate of the other.

Simple structure, complex substance

When you boil down the vast majority of New York prenuptial agreements to their core, including those for high-net-worth couples, you’ll see they are built on the three pillars I’ve described above. Of course, the substance of prenuptial agreements is rarely as cut-and-dry as their structure.

The terms of prenuptial agreements for high-net-worth couples are often fiercely negotiated and will always be calibrated to the unique situation a high-net-worth couple is in given their personal assets and income, professional assets and income, and family wealth.

But no matter the income or assets a would-be high-net-worth spouse brings to a marriage, these three pillars should be the starting point for any prenuptial agreement between spouses who wish to proactively control how the end of their marriage could affect their personal and financial well-being.

Sherri Sharma is a founding partner of Mosberg Sharma Stambleck Gross LLP, a leading Manhattan matrimonial law firm specializing in representing high-net-worth individuals and other professionals in their divorces. She can be reached at sharma@mssglaw.com.

Reprinted with permission from the June 13, 2023, edition of the New York Law Journal © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.