Divorce Planning in Tennessee: Pre-nuptial, Post-nuptial Agreements and Trusts

The purpose of pre-nuptial and post-nuptial agreements is to determine each party's rights in the other's property, spousal support, and other related issues if divorce or death occurs.[1] Such agreements can be drafted to protect an increase in the value of, and the income from, separate property even if the nonowner spouse "substantially contributes to the preservation and appreciation" of that property.[2] "Substantial contribution" includes, but is not limited to, "the direct or indirect contribution of a spouse as homemaker, wage earner, parent or family financial manager, together with such other factors as the court having jurisdiction thereof may determine."[3] If the agreement includes a waiver by the nonowner spouse of the appreciation in or income from the owner spouse's separate property, an alimony award related to that appreciation and income should not be included in the agreement.[4]

A. Pre-nuptial Agreement
The pre-nuptial, also known as the ante-nuptial, agreement is becoming a commonly accepted instrument to protect property.[5] According to a survey conducted by the American Academy of Matrimonial Lawyers, 73 percent of divorce attorneys throughout the United States cited an increase in prenuptial agreements during the past five years.[6]

In Tennessee, a prenuptial agreement is valid if the spouses entered into it freely, knowledgeably, in good faith and without exertion of duress or undue influence upon either spouse.[7] The Supreme Court has interpreted the "knowledge" requirement to mean that the party seeking enforcement of the agreement has to "prove, by a preponderance of the evidence, that a full and fair disclosure of the nature, extent, and value of his/her holdings was furnished to the other party, or that such disclosure was unnecessary because the other party had independent knowledge of the same."[8]

B. Post-nuptial Agreement
If spouses enter into a marriage without a pre-nuptial agreement, there is still an opportunity to protect assets through a post-nuptial agreement. The Tennessee Supreme Court has ruled that post-nuptial agreements are lawful and do not violate public policy.[9] In Tennessee, a post-nuptial agreement is valid if there is adequate consideration.[10] It is important to note, however, that unlike pre-nuptial agreements, the marriage itself, which is past consideration, is not adequate.[11] Therefore, there must be consideration in another manner. In addition, the spouses must enter into the post-nuptial agreement with full knowledge of the property and their rights.[12] The agreement also needs to be fair and equitable, and there cannot be fraud, coercion or undue influence.[13]

While pre-nuptial and post-nuptial agreements may protect assets from an ex-spouse, they do not block creditors from reaching the assets.[14] Thus, the Trust should be explored as a viable instrument in addition or as an alternative to pre-nuptial and post-nuptial agreements.

The Tennessee Investment Services Trust Act of 2007

Because of recent changes in Tennessee law over the past few years, the Trust is becoming an appropriate way to protect assets in the event of divorce.

The Tennessee Investment Services Act of 2007[15], which went into effect on July 1, 2007, permits a person ("transferor") to transfer before marriage his or her separate property into an Investment Services Trust (IST) for his or her own benefit.[16]

The IST has certain advantages in the context of divorce planning. For example, while a pre-nuptial or post-nuptial agreement may require the negotiation of terms and the signature of both parties, an IST can be done unilaterally by a transferor to protect his or her assets from the other party.[17] Therefore, a transferor may want to create an IST in lieu of or in addition to executing a pre-nuptial or post-nuptial agreement.[18]

In addition, if certain requirements are met, the property in an IST is not subject to the reach of creditors.[19] The IST must comply with the following requirements: (1.) it must expressly incorporate Tennessee law to govern the validity, construction and administration of the trust; (2.) it must be irrevocable; (3.) it must provide that the trust assets may not be transferred, assigned, pledged or mortgaged, before the trustee distributes the assets to the beneficiary; (4.) the grantor must sign a sworn affidavit;[20] (5.) the trustee must: (a.) either be a Tennessee resident or someone who is authorized by Tennessee law to act as a trustee, (b.) maintain custody in Tennessee of the trust assets, and (c.) not be the transferor.[21]

There are a few exceptions, however, in which property in an IST is not protected from the reach of creditors.[22] These exceptions include, but are not limited to, the following: (1.) a creditor's claim that arose before the transfer; or (2.) a creditor's claim that arose concurrently with or subsequent to the transfer and the action is brought within four years after the transfer is made.[23] These exceptions, as well as some of the provisions in the sworn affidavit, have closed some of the potential loopholes for the defrauding of creditors.

The Tennessee Community Property Trust Act of 2010[24]

Tennessee is a separate property state in which marital property is equitably, but not necessarily equally divided in a divorce.[25] However, the Tennessee Community Property Trust Act of 2010, which went into effect on July 1, 2010, now permits married couples, whether resident or nonresident, to transfer their property into a Tennessee Community Property Trust.[26] If all of the requirements are met, the property is converted into community property.[27] This means that the parties will be deemed equal owners of the property, which may be a favorable arrangement to some couples.[28]

With regard to liabilities, it should be noted that the Tennessee Community Property Trust does not protect parties' assets as strongly as tenancy by the entirety ownership when there is a debt owed by one spouse.[29] In a Tennessee Community Property Trust arrangement, if an obligation is incurred by one spouse before or during the marriage, that spouse's one-half share of the community property trust may cover the debt.[30] Whereas, in tenancy by the entirety, the creditor cannot access the assets until the debtor spouse survives the other spouse.[31] Therefore, the Tennessee Community Property Trust should not be used for parties with possible creditor issues.[32] If both spouses incur an obligation during the marriage, the debt may be paid for by all of the trust's assets.[33]

Upon divorce, the community property trust terminates and the trustee distributes one-half (50 percent) of the trust assets to each spouse with each spouse receiving one-half (50 percent) of each asset, unless the parties agree otherwise in writing.[34] When property is distributed from a Community Property Trust, it ceases to be community property.[35]

Conclusion

Because of the high percentage of divorces, people seeking to protect their assets in the event of divorce have several options that include, but are not limited to, a pre-nuptial, post-nuptial agreement and/or a Trust.

Notes

  1. Bratton v. Bratton, 136 S.W.3d 595, 599 (Tenn. 2004).
  2. Tenn. Code Ann.  § 36-4-121(b)(1)(B); Perkinson v. Perkinson, 802 S.W.2d 600 (Tenn. 1990).
  3. Tenn. Code Ann.  § 36-4-121(b)(1)(D).
  4. Perkinson v. Perkinson, 802 S.W.2d 600 (Tenn. 1990).
  5. American Academy of Matrimonial Lawyers, "Big Rise in Prenuptial Agreements Says Survey of Nation's Top Divorce Lawyers," American Academy of Matrimonial Lawyers Press Release, Sept. 22, 2010, http://www.aaml.org/about-the-academy/press/ press-releases/pre-post-nuptial-agreements/big-rise-prenuptial-agreements-sa.
  6. Id.
  7. Tenn. Code Ann.  § 36-3-501.
  8. Edgemon v. Edgemon, 2007 WL 1227467 (Tenn. Ct. App.)
  9. Bratton v. Bratton, 136 S.W.3d 595, 600 (Tenn. 2004).
  10. Id.
  11. Id.
  12. Id. at 601.
  13. Id. at 601.
  14. Tenn. Code Ann.  § 36-3-502.
  15. Tenn. Code Ann.  § § 35-16-101"36-16-112.
  16. Id.; David E. Heller, "Death and Divorce: The Relationship Between Family Law and Estate Planning," 134-135 (Oct. 7, 2010) (Continuing Legal Education, Family Law Institute: "Current Developments and Hot Topics").
  17. Id.
  18. Id.
  19. Tenn. Code Ann.  § 35-16-104(a).
  20. Pursuant to Tenn. Code Ann.  § 35-16-103, a qualified affidavit must state: (1) The transferor has full right, title, and authority to transfer the assets to the trust; (2) The transfer of the assets to the trust will not render the transferor insolvent; (3) The transferor does not intend to defraud a creditor by transferring the assets to the trust; (4) The transferor does not have any pending or threatened court actions against the transferor, except for those court actions identified by the transferor on an attachment to the affidavit; (5) The transferor is not involved in any administrative proceedings, except for those administrative proceedings identified on an attachment to the affidavit; (6) The transferor does not contemplate filing for relief under the provisions of the federal bankruptcy code; and (7) The assets being transferred to the trust were not derived from unlawful activities.
  21. Tenn. Code Ann.  § 35-16-102.
  22. Tenn. Code Ann.  § 35-16-104.
  23. Id. at (b)(1)-(2).
  24. Tenn. Code Ann.  § § 35-17-101"35-17-108.
  25. Tenn. Code Ann.  § 36-4-121.
  26. Tenn. Code Ann.  § § 35-17-101"35-17-108.
  27. Pursuant to Tenn. Code Ann..  § 35-17-103 (1)-(4), the following are the requirements to establish a Community Property Trust: 1. the trust must expressly declare that it is a Tennessee community property trust; 2. the trust must have at least one (1) trustee who is a "qualified trustee," meaning a resident of Tennessee or a company authorized to act as a fiduciary in Tennessee; 3. the trust must be signed by both spouses; and 4. it must contain the following language: "THE CONSEQUENCES OF THIS TRUST MAY BE VERY EXTENSIVE, INCLUDING, BUT NOT LIMITED TO, YOUR RIGHTS WITH YOUR SPOUSE BOTH DURING THE COURSE OF YOUR MARRIAGE AND AT THE TIME OF A DIVORCE. ACCORDINGLY, THIS AGREEMENT SHOULD ONLY BE SIGNED AFTER CAREFUL CONSIDERATION. IF YOU HAVE ANY QUESTIONS ABOUT THIS AGREEMENT, YOU SHOULD SEEK COMPETENT ADVICE."
  28. Bryan Howard, "Tennessee Becomes Second State to Allow Community Property Trusts," Howard & Mobley PLLC Blog (March 16, 2010), http://www.tennesseeestateplanninglaw.com/2010/03/articles/estate-planni....
  29. Id.
  30. Tenn. Code Ann..  § 35-17-106(a).
  31. Telephone conference with Bryan Howard, founding member, Howard & Mobley PLLC (Nov. 18, 2010).
  32. Bryan Howard, "Tennessee Becomes Second State to Allow Community Property Trusts," Howard & Mobley PLLC Blog (March 16, 2010), http://www.tennesseeestateplanninglaw.com/2010/03/articles/estate-planni....
  33. Tenn. Code Ann.  § 35-17-106(b).
  34. Tenn. Code Ann.  § 35-17-108.
  35. Tenn. Code Ann.  § 35-17-105(e).

Marlene Eskind Moses MARLENE ESKIND MOSES is the principal and manager of Moses & Townsend PLLC, a family and divorce law firm in Nashville. She is the current president of the American Academy of Matrimonial Lawyers and the Tennessee Supreme Court Historical Society. She has held prior presidencies with the Tennessee Board of Law Examiners and the Lawyers Association for Women. She has also served as vice president for the United States Chapter of the International Academy of Matrimonial Lawyers and is the current vice president for the National Board of Legal Specialty Certification. The Tennessee Commission on Continuing Legal Education & Specialization has designated Moses as a Family Law Specialist; she is Board Certified as a Family Law Trial Specialist. Moses is a new columnistt for the Tennessee Bar Journal. Jessica J. Uitto contributed to this article.

Co-author JESSICA J. UITTO is an associate at Moses & Townsend PLLC, a family and divorce law firm in Nashville. She also does pro bono work for the family division of the Legal Aid Society in Nashville, and is a member of the Nashville Coalition Against Domestic Violence. Uitto graduated from the University of Pennsylvania with a B.A. in Women’s Studies and a minor in Psychology. In 2008, she graduated from Pepperdine University School of Law with a law degree and a Certificate of Dispute Resolution from the Straus Institute. She is licensed to practice law in Tennessee, Pennsylvania and New Jersey.