In a prenuptial agreement, what is financial disclosure? 🤔
…What constitutes “proper” financial disclosure?
…Why is it necessary to get into the nitty gritty of your finances, when you and your fiance agree that everything should be considered separate property, anyway?
Let’s break it down.
Simply put, both fiances must reveal all of their income, assets and debts when entering into a prenuptial agreement. All of it.
This is done by attaching a “financial schedule” to the end of your agreement, which is a snapshot of all of your income, assets, debt, and prospective inheritance. Everything you plan to protect, or not protect.
We talk about the importance of financial disclosure a lot. Why? Because financial disclosure is important for a transparent conversation with your fiance about finances, life goals, and future planning, but also because it is important for enforcement purposes.
Do you have a million dollars in a brokerage account and don’t think you need to account for it in your financial schedule? Don’t want to tell your fiance about the $25,000 credit card debt that’s rapidly adding interest every month? Well, not including these in your financial disclosure could spell disaster for your prenup if it ever needs to get enforced in the future.
The significance of financial disclosure can be summed up simply:
How can you bargain away rights in a prenuptial agreement if you don’t know what you’re giving up?
Is full financial disclosure (or “full and fair” financial disclosure, as some states define it) required by law in all states?
Nope. Prenuptial agreement law varies state to state. Most states mandate some amount of disclosure, while others require complete disclosure and others allow parties to forgo disclosure with a waiver. States that have the waiver option seem to be leaning more in the direction of full disclosure.
One thing is certain: while enforcing a prenup, a judge will consider whether the parties were informed of all assets. This is a universal truth.
In jurisdictions where financial disclosure can be waived, the judge may consider the totality of the circumstances, such as whether the fiance had awareness of the assets he was waiving? Did they have any reason to know how much the business was worth? Would she have signed this agreement if she had known about these hidden or undisclosed assets?
If you fail to disclose an asset in Massachusetts, for example, your prenuptial agreement may not be enforced in whole or in part. Why? Because Massachusetts mandates full and fair disclosure. This is the end of the story. You cannot opt to leave assets out of your financial disclosure, just because you felt like it. You cannot omit assets just because you and your fiance talked about it. Doing so would put you in a very vulnerable position in the future. Furthermore, if the judge finds that your entire prenup should be thrown out, the assets that were supposed to be safeguarded by it may suddenly be in question. You and your future spouse may need to participate in costly and time-consuming litigation to resolve issues that would have been addressed under your prenuptial agreement. This is a whole universe of chaos you want to stay away from.
If you want to be honest, fair, and have a strong likelihood of a valid and enforceable prenup, you should include *all* of your financial information in your financial schedule. To help you organize this information, HelloPrenup provides categories.
What’s the bottom line? It is critical to reveal ALL of your assets and finances if you want the best possibility of enforcement.
Let’s take a look at case law from a few different states for a few examples:
Case: In re Marriage of Howell (2011) 195 Cal.App.4th 1062, 1064, 126 Cal.Rptr.3d 539, 541
Summary: Wife argued that prenuptial agreement was invalid because it was “unconscionable”. In order to invalidate a prenuptial agreement, lack of full and fair financial disclosure is not enough, the agreement must also be unconscionable. See Fam. Code, § 1615. The court determined that the agreement was not unconscionable. In doing so, it noted that the parties made disclosures of property within the premarital agreement and further, the level of disclosure of assets and liabilities “was fair, reasonable and full”. These disclosures included the husband’s non-marital properties, retirement account, and separate liabilities. In addition, the court considered that there was no great financial disparity between the parties and the fact that former wife was a bookkeeper and was therefore capable of understanding former husband’s financial disclosures. “Fair, reasonable, and full disclosure” may also be attained through “adequate knowledge of the property or financial obligations of the other party” or express and voluntary waiver of financial disclosure.
Summary: Husband included a financial disclosure in couple’s prenuptial agreement in which he disclosed that he had $1.3 million in real estate holdings but failed to include a $400,000 mortgage obligation on one of the properties. Wife challenged the validity of the agreement based on insufficient disclosure. To determine whether a party’s obligation of fair disclosure was satisfied, the focus of a court’s inquiry is whether “the disclosure [was] such that a decision by the opposing party may reasonably be made as to whether the agreement should go forward.” Id. at 110, quoting DeMatteo v. DeMatteo, 436 Mass. 18 (2002).
The court ultimately concluded that the financial disclosure was sufficient and the agreement was therefore valid. In doing so, the court considered the fact that at the time the parties entered into the agreement, wife was aware that husband’s property in Florida was encumbered by a mortgage. Additionally, both spouses were represented by attorneys and neither wife nor her attorney requested any information from husband regarding his liabilities during negotiations. The court also noted that wife was not prejudiced by the failure to include the mortgage in the disclosure as the reduction in net worth would not have materially affected wife’s decision to enter into the agreement. So, this case tells us that in Massachusetts, financial disclosures do not have to be exact. Rather, general approximations of the ones’ net worth may be sufficient. Additionally, even whether there are significant gaps in the financial disclosures, the court will analyze whether those gaps “prejudice” the complaining party (i.e. whether the information would have potentially altered the decision to enter into the agreement).
Summary: Wife was reluctant to remarry after incurring financial loss due to the decline in health and eventual death of her late husband. However, second husband agreed to provide for her financially if she were to marry him. In the prenuptial agreement, second husband agreed to transfer half of his assets to wife 30 days after their wedding. However, second husband never carried out this promise and wife sought enforcement of the agreement. Second husband challenged the validity of the agreement arguing that wife did not provide a disclosure of her financial obligations prior to entering in to the agreement. The court ultimately concluded that the agreement was valid. In examining the validity, the court started with an analysis as to whether or not the agreement was unconscionable because, “lack of disclosure is material only if the premarital agreement is unconscionable.” In concluding that that agreement was not unconscionable, the court did not even need to analyze the disclosure issue. So, this tells us that in Texas, financial disclosures are only considered by the court when an agreement is “unconscionable”.
Summary: Former husband and wife entered into a prenuptial agreement in which both parties waived their right to alimony. The former husband attached a list of his assets to the agreement with included approximate valuations. Additionally, many of the valuations were listed as unknown. Upon separation 18 years later, former wife challenged the validity of the prenuptial agreement based on husband’s financial disclosure.
The court ultimately decided that the former husband’s financial disclosure was sufficient. Even though some items in the list of assets attached to the agreement were listed as having unknown values, the court determined that the former husband was not attempting to conceal his assets from former wife and that the asset list gave former wife “such general and approximate knowledge of his property as to enable [the spouse] to reach an intelligent decision to enter into the agreement.” Id., quoting Del Vecchio v. Del Vecchio, 143 So. 2d 17, 21 (Fla. 1962). So, this shows us that while financial disclosures in Florida need to be full, fair, and open, they do not need to be minutely detailed or exact. What the courts are really looking for in determining whether the disclosure is insufficient, is whether there has been an attempt to conceal assets from the other party.
Julia Rodgers is HelloPrenup’s CEO and Co-Founder. She is a Massachusetts family law attorney and true believer in the value of prenuptial agreements. HelloPrenup was created with the goal of automating the prenup process, making it more collaborative, time efficient and cost effective. Julia believes that a healthy marriage is one in which couples can openly communicate about finances and life goals. You can read more about us here Questions? Reach out to Julia directly at [email protected].