Incomplete Financial Disclosures Render Prenuptial Agreement Invalid in Jackson, Tennessee: In re Estate of Stokes

March 7, 2022 K.O. Herston 0 Comments

Facts: In December 2014, Husband and Wife became engaged. They set their wedding date for 2 ½ years later, in June 2017.

In April 2017, Husband met with Attorney to discuss a prenuptial agreement. Attorney gave Husband financial disclosure forms to be completed by him and Wife.

Two weeks before the wedding, Husband presented Wife with the financial disclosure forms and explained that the prenuptial agreement was to protect their respective homes if divorce occurs. Husband and Wife completed the forms and included their incomes and the addresses, value, and mortgage debt for their separate, premarital homes. However, they left the rest of the forms blank, including the sections related to bank accounts, securities, and retirement plans.

Husband returned the forms to Attorney to prepare the prenuptial agreement. Attorney expressed her concern that the incomplete disclosures could make the agreement unenforceable. Husband responded that the agreement was mainly to protect his home in the event of divorce.

Five days before the wedding, Husband and Wife visited Attorney’s office and signed the prenuptial agreement (“Agreement”). It included a provision whereby each party disclaimed any interest in the other’s estate, including

all rights and claims regarding descent and distribution, homestead, dower, year’s support, widow’s allowance, and right of election to take against the will of the other. We realize that by doing so we are giving up the right to take any separate property of the other upon their death and that we are familiar with the rights that we are relinquishing and that we have consulted with an attorney.

The financial disclosures were attached as exhibits to the Agreement.

When Wife signed the Agreement, she was not represented by counsel, and Attorney did not advise her about her spousal rights or the waiver of those rights under the Agreement. Wife was advised that she had the right to have the Agreement reviewed by her own attorney.

Two years after the parties married, Husband died with a will that left his estate to his adult children (“Children”). After Husband’s death, Wife discovered that he had a 401(k) retirement account, $300,000 in the bank, and several life insurance policies.

Husband’s will was admitted to probate. Wife petitioned for an elective share, exempt personal property up to $50,000, year’s support of at least $99,297, and homestead allowance of $5000.

Children argued the Agreement pretermitted Wife’s claim. Wife argued the Agreement was unenforceable because she lacked the necessary knowledge to enter into it.

The trial court denied Wife’s petition, finding that the parties intended to bind themselves to the Agreement and waived the rights Wife sought to assert.

Wife appealed.

On Appeal: The Court of Appeals reversed the trial court.

The Court began by criticizing trial court’s findings that Wife did not provide clear and convincing evidence that the Agreement was not entered into with her full knowledge and understanding.

Tennessee law places the burden of proof on the party seeking to invalidate a prenuptial agreement rather than the party seeking to enforce it. Instead of remanding the case back to the trial court to apply the proper evidentiary standard, the Court proceeded “because the record clearly establishes that [Wife] did not possess the requisite knowledge of [Husband’s] holdings prior to executing the Agreement.”

There are two ways to prove that a prenuptial agreement was entered into knowledgeably in Tennessee.

First, the party seeking to enforce the agreement can prove that the spouse seeking to avoid the agreement was provided with a full and fair disclosure of the nature, extent, and value of the other spouse’s holdings. What constitutes a “full and fair disclosure” will vary by case and depends on several factors, including the relative sophistication of the parties, the apparent fairness or unfairness of the substantive terms of the agreement, and any other circumstances unique to the litigants and their specific situation.

While disclosure need not reveal precisely every asset owned by an individual spouse, at a minimum, full and fair disclosure requires that each contracting party be given a clear idea of the nature, extent, and value of the other party’s property and resources. Although not required, many lawyers find it prudent to attach a net worth schedule of assets, liabilities, and income to the prenuptial agreement itself to demonstrate the requisite disclosure.

The Court found that lacking here:

Problematically, [Husband] listed only his principal residence, the mortgage amount, and his annual income in this disclosure. Notably, [Husband] failed to list any information concerning his bank accounts (including life insurance cash values), cash on hand, stocks, bonds, retirement/pension plans or accounts, vehicles, or other real property. Given the limited disclosure, there can be no question that [Wife] was not provided with a full and fair disclosure of the nature, extent, and value of all of [Husband’s] holdings; rather, the disclosure provided [Wife] with information concerning only one of [Husband’s] assets, i.e., his residence.

[Children] argue that [Wife] received a “full and fair disclosure” of [Husband’s] holdings because [Husband’s] paystub was attached as an exhibit to the Agreement and showed that [Husband] was contributing to a 401(k) account. This hardly demonstrates that [Wife] was (1) aware of the value of [Husband’s] 401(k) account or, more importantly, (2) provided a full and fair disclosure of the nature, extent, and value of [Husband’s] other holdings. [Children’s] claims are disputed by [Wife’s] testimony that she discovered the existence of [Husband’s] 401(k) account, the amount of money held in his bank accounts, and his several life insurance policies only after his death. [Children] presented no countervailing evidence.

The Court concluded that Children did not carry their burden to show that Wife received the necessary disclosure of Husband’s holdings.

The second way one can show that a prenuptial agreement was entered into knowledgeably is if the proponent of the agreement can show that the spouse seeking to avoid the agreement had independent knowledge of the full nature, extent, and value of the proponent spouse’s holdings, thereby making the financial disclosures unnecessary. Some factors relevant to the independent knowledge assessment include, but are not limited to, the parties’ respective sophistication and experience in business affairs, the duration of the relationship before the execution of the agreement, the time of the signing of the agreement in relation to the time of the wedding, and the parties’ representation by, or opportunity to consult with, independent counsel.

Children argued that Husband and Wife had been together “for well over five years” at the time of Husband’s death. Thus, they claim this was sufficient time for Wife to gain knowledge about Husband’s financial affairs.

The Court made quick work of this argument:

[Children] mistake the relevant time period at issue. It was [Children’s] burden to show that [Wife] possessed independent knowledge of the full nature, extent, and value of [Husband’s] holdings when [Wife] entered into the Agreement, not at the time of [Husband’s] death…. [Children] presented no evidence of such independent knowledge at trial and now merely allege that this period of time was “sufficient” for [Wife] to gain “knowledge about the financial affairs of [Husband].” … [T]he undisputed testimony shows that [Wife] did not possess independent knowledge of the full nature, extent, and value of [Husband’s] holdings when she entered into the Agreement.

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Despite a lengthy engagement, [Husband] did not approach [Wife] concerning the execution of an antenuptial agreement until two weeks before the wedding date. Furthermore, [Wife] was not presented with the complete Agreement until the day she executed it—this was a mere five days before the wedding, which approximately 350 people were scheduled to attend. Regardless of any business experience [Wife] may have had, this swift timeline prevented her from conducting a comprehensive review of the Agreement and/or having the opportunity to consult with independent counsel before executing the Agreement.

Finding that Children did not show, by a preponderance of the evidence, that Wife entered into the Agreement “knowledgeably,” the Court reversed the trial court’s conclusion that the Agreement is enforceable.

In re Estate of Stokes (Tennessee Court of Appeals, Western Section, February 17, 2022).

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Incomplete Financial Disclosures Render Prenuptial Agreement Invalid in Jackson, Tennessee: In re Estate of Stokes was last modified: March 6th, 2022 by K.O. Herston

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