A premarital agreement is a contract, signed by two persons who are about to be married. It sets forth rules that will apply when the marriage ends, either in death or divorce. It can also set forth rules to govern how the parties will deal with their property during the marriage.
Married persons do not have to sign a premarital agreement. The law already provides rules for dividing property and awarding support upon divorce, and rules for dividing property upon death. If the two people do not have a premarital agreement, these normal rules apply. The purpose of a premarital agreement is to contract out of the normal rules, and to apply different rules in their place.
To understand whether you need a premarital agreement, you need to first understand the rules that will apply if you do not have an agreement. If those rules are acceptable to both parties, there is no need to sign a premarital agreement. If those rules are not acceptable, and the spouses can agree upon a different set of rules that they both like better, there is reason to sign a premarital agreement.
The rules that apply without an agreement vary from state to state. This blog post will discuss the rules that apply to division of property upon divorce, and why spouses might want to sign an agreement that applies different rules.
In North Carolina, when a marriage ends in divorce, the court divides the parties’ property into two categories. “Separate property” which is usually property acquired before the marriage, or property acquired by gift or inheritance during the marriage. Separate property is not divided upon divorce. “Marital property” is everything that is not separate property, and it is divided equitably between the spouses. The presumption is that an equal division is equitable, but the presumption can be rebutted by proof that another decision is fairer. See generally N.C. Gen. Stat. (“G.S.”) § 50-20.
The most common type of marital property is salary or bonuses earned during the marriage by the parties. If you want to prevent division of marital earnings upon divorce, then you need a premarital agreement.
What if you own a business or other property before the marriage? The value on the date of marriage will be separate property. But marital property also includes “active appreciation” in separate property—growth in value caused by marital funds or marital efforts. For example, growth in a separate property business, caused by the owner’s efforts, is active marital appreciation.
By contrast, “passive appreciation” in separate property, that is appreciation caused by market forces or the efforts of third parties, remains separate. For example, if one owns separate property real estate, and that real estate increases in value because market prices for real estate go up, and no marital funds or efforts are used to improve the property, the increase is passive appreciation, and it remains separate property.
Some owners of businesses prefer to receive the entire value of the business, including active appreciation. If the spouse of such an owner is willing to give up the right to share in active appreciation, an antenuptial agreement can be used to change the rules, so that active appreciation need not be shared. Id. § 52B-4(a).
Note that you do not necessarily need a premarital agreement to protect property that is owned before the marriage, or that is acquired by gift or inheritance. If there is no agreement, the initial value of this property, plus any future passive growth in value, is not marital property. If you anticipate that this sort of property might increase in value due to marital funds or marital efforts, however, that increase in value is normally marital property and divisible upon divorce—unless a premarital agreement provides otherwise.
The next premarital blog post will consider additional reasons why you might want a premarital agreement—spousal support and division upon death.