Common Mistakes to Avoid in a Separation Agreement

A separation agreement is a private contract between spouses who have separated or are about to separate. It typically addresses property division, spousal support (alimony), child custody, and child support. If the spouses can agree on these issues in a separation agreement, they can avoid litigation along with its financial and emotional costs. While it is a private contract and not a court order, a separation agreement can be enforced by the court if properly prepared and executed. However, once executed, it can be very difficult to rescind, so it is crucial to avoid certain mistakes when preparing a separation agreement.

WHAT YOU MUST AVOID IN A SEPARATION AGREEMENT

Below are some of the most common mistakes and how to avoid them:

• FAILING TO FULLY DISCLOSE ASSETS AND LIABILITIES

A fundamental premise of a valid separation agreement is that each party has made an informed and voluntary decision to be bound by the terms of the agreement. This may mean a spouse determines the terms of the agreement are at least as favorable to him or her as what the law provides, or, despite knowing that the terms of the agreement are less favorable to him or her than what the law provides, a spouse nonetheless chooses to be bound by the terms. In either case, an informed decision can only be made by first understanding the actual scope of the marital assets, liabilities, and incomes of both spouses. If a spouse fails to fully disclose his or her assets, liabilities, and income, then the other spouse may enter into the agreement based on an inadequate or inaccurate understanding of the scope of the marital estate and the other party’s income. If this failure is later discovered, it may be a basis for the separation agreement to be set aside.   

To avoid future challenges to the validity of the separation agreement, the spouses should exchange documentation of all assets (real estate, bank accounts, brokerage accounts, retirement accounts, business interests, etc.) and debts (mortgages, credit cards, etc.) as well as income documentation (tax returns, paystubs, etc.). So long as there is a complete exchange of these documents prior to the execution of the agreement, it is difficult for either spouse to later set aside the separation agreement on the basis of insufficient disclosures. If either spouse is aware that he or she has not received a full disclosure from the other spouse but nonetheless chooses to enter into the agreement, an explicit waiver of full disclosures should be included in the separation agreement. 

• OVERLOOKING FUTURE FINANCIAL NEEDS

A properly prepared and executed separation agreement is legally binding, enforceable by the court, and difficult to rescind. Once the spouses enter into a separation agreement, they typically waive their right to request that the court determine property division and/or spousal support (alimony). Even if your financial situation changes drastically in the future, that does not provide a basis to set aside or alter the agreement. You are stuck with the agreement whether you like it or not, unless the other party agrees to change it. Before entering into a separation agreement, it is important to evaluate not only your current financial needs but also your potential future needs and future ability to earn income.

• FAILING TO ADDRESS TAX IMPLICATIONS

For separation agreements entered into after December 31, 2018, spousal support payments are not deductible by the payor or taxable to the recipient for income tax purposes. However, other provisions may still carry tax consequences. For instance, dividing a brokerage account or transferring business interests may have certain tax implications, as well as the decision of filing joint or separate tax returns before the divorce. If filing separately, there may also be entitlement to certain child-related tax benefits.  These issues can and should be addressed in the separation agreement to prevent later disputes. However, the lawyers who draft and negotiate your separation agreement typically cannot provide tax advice, so it is important to also consult with a CPA or an expert in tax issues to fully understand any tax consequences arising from your separation agreement. 

• USING VAGUE OR AMBIGUOUS TERMS

Separation agreements are interpreted just like any other contract. In a dispute over the terms of a contract, the court first looks to the explicit language of the contract. Vague or ambiguous language can cause problems. Look out for phrases like “reasonable visitation” and “shared costs.” Without more explanation, such terms have little meaning and may be unenforceable. It is also important to specify details such as dates, dollar amounts, and deadlines so that the terms are not subject to interpretation if later challenged in court. For instance, if a spouse is required to sign a deed but the agreement does not state by when, you may run into difficulties enforcing that provision. 

• NEGLECTING TO ADDRESS CUSTODY AND VISITATION IN DETAIL

Although custody can be handled separately through a court order, it can also be included in a separation agreement. However, unlike property division and spousal support, even if custody is addressed in a separation agreement, neither party waives the right to request that the court determine custody in the future. If the spouses are on amicable co-parenting terms at the time they enter into the agreement, they may not feel the need to include specific custody provisions in the agreement. However, if the co-parenting relationship later takes a turn for the worse and the custody provisions are vague or insufficient, they may end up in a custody dispute. To avoid this, it is generally safer to specifically address the physical custody schedule and legal custody (i.e., decision-making) as well as details such as transportation logistics, communication methods, and provisions for holidays and vacations. 

• IGNORING PROVISIONS FOR DISPUTE RESOLUTION

Absent a provision to the contrary, disputes regarding the separation agreement will likely be resolved through litigation. Litigation is almost always time-consuming and expensive. Therefore, you should include specific provisions requiring alternative avenues to resolve disputes, such as mediation and/or arbitration, before resorting to litigation. 

• AGREEING TO UNFAIR TERMS OUT OF GUILT OR PRESSURE

While the process of negotiating a separation agreement is generally less contentious than litigation, it is common nonetheless for spouses to lodge hostile allegations and threats against one another during the process. Both spouses are often emotionally wrought and may feel considerable pressure to settle and accept unfair terms, particularly the spouse with fewer financial resources. North Carolina courts may refuse to enforce a separation agreement if a spouse can prove he or she was under duress or undue influence when entering into the agreement, or that the agreement is unconscionable. To avoid this, it is important to ensure that both spouses are fully informed (see paragraph above regarding full disclosure) and, ideally, represented by independent counsel to show that the agreement was entered into freely and voluntarily without coercion or duress.

• FAILING TO INCLUDE AN ENFORCEMENT CLAUSE

Unless your separation agreement is incorporated into your divorce judgment, it remains a private contract, and its enforcement is limited to a civil action for breach of contract. It is essential to include language in the separation agreement regarding the remedies available in the event one party breaches the agreement, including the option to file a lawsuit for damages, as well as to compel specific performance. You should also include a provision granting attorney’s fees to any party who prevails in such a lawsuit. This incentivizes both parties to comply with the agreement. 

• RELYING SOLELY ON A DIY APPROACH

Be wary of “DIY” separation agreement templates on the Internet, as they often fail to meet sufficient legal standards to withstand challenges to their validity under North Carolina law. DIY separation agreements frequently contain ambiguous and/or inconsistent terms that lead to future disputes, and any costs you may have saved from initially doing it yourself will likely be outweighed when you inevitably need to seek legal help later to fix the problem retroactively, if the problem can even be fixed. It is vital to have the separation agreement drafted or, at the very least, reviewed by an experienced North Carolina family law attorney before you sign it.

• FAILING TO UPDATE ESTATE PLANNING DOCUMENTS

In North Carolina, execution of a separation agreement, or separation itself, does not automatically revoke previous wills, powers of attorney, or beneficiary designations. Although separation agreements typically include a waiver of estate rights and language regarding changing beneficiary designations, that alone may be insufficient to effectuate the intent stated in the separation agreement.  Contemporaneously with or immediately after entering into a separation agreement, you should update your will, power of attorney, and beneficiary designations to reflect terms consistent with your separation agreement. If the attorney drafting your separation agreement is not versed in estate law, it may be a good idea to seek the advice of an estate lawyer.

TIPS FOR NAVIGATING THE SEPARATION PROCESS

It is difficult to treat divorce as purely a business deal because of the emotions that inevitably drive the decision-making. The most important step you can take to maximize your chance of achieving a fair deal is to consult with professionals, in particular a family law attorney, who can help you understand what you are entitled to under the law, and then negotiate on your behalf to achieve an outcome that is as close to that as possible. Second, if you can avoid litigation and amicably come to an agreement with your spouse (such as through a separation agreement), this is almost always a cost-saver, both financially and emotionally. Finally, as explained above, once you sign the agreement, you are bound regardless of your future circumstances. Therefore, it is crucial to carefully consider the long-term consequences and not rush into any decisions. 

HOW SMITH DEBNAM LAW CAN HELP WITH SEPARATION AGREEMENTS

At Smith Debnam, our experienced family law attorneys can provide you with legal guidance to ensure that your separation agreement achieves your goals, complies with North Carolina law, and creates a fair and equitable outcome. We are here to help you through every stage of the process, providing you with the confidence to move forward post-separation.