Most people think of prenuptial agreements as something rich men use to keep their assets from falling prey to their new, less wealthy (and usually younger) wives — the gold-diggers.
Others see it as a sign of mistrust. If you need a
prenuptial agreement, you must not trust your future spouse.
I see it differently.
When I married my wife, neither of us had assets to protect, so our agreement was not about protecting assets. Rather, it was about what in our relationship we would value and how we would value it. We committed it to writing because memories fade over time and because we are both lawyers.
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Divorce attorneys do this all the time. They document a property settlement between divorcing spouses by agreeing to award the real property to one spouse, and specifying in the decree that the other spouse shall receive a portion of the proceeds when the real property sells. Here’s the problem – does this create a lien for an amount that is “to be determined later?” And is it fair to other judgment creditors to have to contend with this nebulous moving target?
The Washington Supreme answered yes in Bank of America v. Owens, 173 Wn.2d 40, __ P.3d __ (2011). In this case Bank of America won a prejudgment attachment lien against Owens (arising from a defaulted promissory note). This attachment lien was against all of Owens’s King County real property. But this occurred after Owens’s former spouse, Treiger, had recorded his and Owens’s divorce decree which awarded Treiger an interest in one-half the sale proceeds of one particular parcel. Relying on Swanson v. Graham, 27 Wn.2d 590, 597, 179 P.2d 288 (1947) (“In order to create a statutory lien, there must be a judgment for a specific amount.”), Bank of America argued that Treiger’s lien interest was invalid because it was not for a sum certain – i.e. it was not a “statutory lien.” The Washington Supreme Court agreed the decree was not a statutory lien, but still awarded Treiger priority over the Bank, by allowing Treiger an “equitable lien.” In other words, Treiger was first in time, thus fairness dictated that Treiger’s interest trumped the Bank’s.
Here’s the takeaway: The Owens case expressly provides that in order to have an equitable lien, the particular real property must be adequately described in the decree. Recite the legal description and tax parcel number in the decree, and refer to the real property’s vesting deed in the recording cover sheet.
The New York Times is reporting that Joe Paterno deeded his residence to his wife, as her sole and separate estate. (Check out the home on Zillow by clicking here.) Pundits are speculating this is a move to protect his assets in case he is sued. Paterno’s lawyers on the other hand are claiming it is a part of a “multiyear estate planning program,” and the transfer “was simply one element of that plan.” Who’s correct?
So which is it? Estate planning or asset protection? It is probably both. Under the Uniform Fraudulent Transfer Act, as enacted in Washington State, giving away one’s assets as a means of playing a pauper in the face of an expensive lawsuit does not work, even when the assets are given to a spouse (talk to Mike Mastro about that). But this is Pennsylvania.
Pennsylvania is a little different. In Pennsylvania, assets jointly held by spouses are generally protected from the creditors of one spouse. (In Washington, one spouse’s separate property is first liable, and then his share of community property if the judgment is not satisfied first by separate property. See DeElche v. Jacobsen, 95 Wn.2d 237, 622 P.2d 835 (1980)). So in this case, Joe’s house was probably already well protected. But, what if Joe Paterno’s wife were to pass away? Without some additional planning, this could result in Joe inheriting the home from his wife, ergo, it is back in Joe’s name, and now Joe’s creditors can pursue it (assuming there is an unsatisfied judgment against him). By deeding the home to his wife as her sole and separate property, if she passes away first, the home will pass to the beneficiaries named in her Will rather than to Joe. The odds are that Joe’s wife has a provision in her Will that allows Joe a life estate in the home, with its remainder to vest in the kids.
In any event, by deeding the house to his wife, the ultimate result is that creditors will have more difficulty recovering it from Joe, if it can be done at all, which gives him leverage in negotiating a settlement with whoever is about to sue him.