Seven Steps to Building a Better Prenup
Broach the topic of a prenuptial agreement and most people cringe.
Prenuptial agreements – prenups as they’re typically called – carry a certain stigma and many misconceptions. For example, they’re for the very rich or uncaring. They’re an admission of failure before you even marry. They rob weddings of their romance. Prenups are an “I get everything – you get nothing” arrangement.
A case could be made for these beliefs in the cases of some prenups – bad ones. But the facts are, good prenups are necessary for high-net-worth individuals and those who have been divorced before and have had to previously divide their assets.
Protecting one’s assets before marriage – especially in the cases referenced above – is the smart thing to do. I look at prenups as risk tolerance tools should a divorce eventually occur. It’s much like taking out a home or auto insurance policy. You don’t expect something will happen but you’re guarding against that potential eventuality. Prenups also go a long way in preventing an estate battle in the event of a spouse’s death during an intact marriage.
Prenuptial agreements aren’t solely to protect assets in case of a divorce. Couples who address fiscal goals proactively with a prenup can avoid estate battles when a marriage ultimately ends … whether in divorce or death. For example, when one spouse dies, a prenup can help preserve the inheritances of grown children, especially if the other spouse remarries.
Benefits of a Prenup
Prenups can’t eliminate the need to pay temporary support or temporary attorney’s fees pending final resolution of a divorce, nor can they address parenting issues such as timesharing or child support. Timesharing and child support must be decided at the time of divorce, taking into consideration the child’s (or children’s) wellbeing and the parties’ financial circumstances. However, prenups can protect against the transmutation of pre-marital property into marital property, the accumulation of marital property, claims for all forms of alimony or spousal support that continue beyond entry of the final judgment and requests for attorney’s fees and professional costs after entry of the final judgment.
Additionally, prenups can waive or fix certain rights that accrue on the death of a party during an intact marriage. By way of example, most states have laws which provide relief to someone who was disinherited by their spouse. Prenups can opt out of those laws and provide absolute freedom to the contracting parties. The agreement can waive all entitlements, provide for certain minimum guarantees, or merely defer to the estate plan in effect at the time of a spouse’s death.
While it’s true that the parties can challenge prenups, if there’s been a fair and reasonable disclosure of income and net worth, if the agreement is executed freely and voluntarily and if there’s been sufficient time to confer with counsel and reflect on the finances and agreement terms, a court will most likely uphold the agreement. In fact, a number of court rulings and legislation in recent years have strengthened the validity of prenups.
Seven Critical Steps
Because we deal with HNW clients who have complex financial arrangements, they would be economically foolish not to prepare prenups prior to marriage. The following are seven critical steps to take when preparing a strong prenup:
1. Start early. When a party requests a prenup for a marriage that will take place in fewer than 60 days, I typically decline. Should the marriage end in divorce, the aggrieved party will likely claim they felt under duress and didn’t enter the agreement freely – one of the standards that could invalidate the prenup.
2. Use a forensic accountant. When it comes time to negotiate terms of a complex divorce, most attorneys use forensic accountants to ensure that all assets have been identified, categorized and properly valued to achieve an equitable distribution, as well as to ensure that all income and needs have been determined for purposes of spousal and child support claims. To preserve their legal standing, prenups demand fair and reasonable financial disclosure. By having a forensic accountant review my client’s finances and prepare the proper disclosures, I’m assured that a full revelation of net worth and income is provided during the process.
3. Let both parties choose their own attorneys. I insist both parties have legal representation to ensure that their standing is addressed. Even when my client pays for the other attorney, I want the other party to select that attorney. The opposing party will feel better about the ultimate outcome, plus there can be no viable charge of overreaching should the prenup be challenged.
4. Agree on what’s marital and what’s not. To avoid confusion or challenges during divorce proceedings, I specify in prenups that all assets and property brought into the marriage aren’t to be considered part of the marital property on divorce, even if they’ve increased in value during the marriage. This is particularly important when one party enters a marriage with family assets or individual wealth that was earned or secured prior to the union, for which the other party played no part. Additionally, I specify what constitutes marital property and may limit that definition to anything that the parties decide to place into joint names during the marriage.
5. Lump sum payout. I typically recommend waivers of equitable distribution and all forms of alimony in favor of a lump sum payout on divorce. The lump sum option enables both parties to better plan for the consequences of a divorce and ensures that a future divorce proceeding is kept simple and efficient.
6. Address death during an intact marriage. If a spouse dies during a marriage and doesn’t provide for the surviving spouse in his will, many state laws allow the surviving spouse to make a claim against the decedent’s estate. That claim or right is known as the elective share. I typically recommend that the prenup contain a full waiver of elective share rights and instead provide for certain minimum guarantees on death that can be voluntarily supplemented and enhanced through estate planning.
7. Schedule a signing ceremony before a court reporter. Have all parties and their attorneys present at the signing of the prenup. I hire a court reporter and put both parties under oath and ask them a series of questions on the record. The purpose is to show and reaffirm that both parties know what they’re signing; that neither is under the influence of any medications or substances that might impair their ability to understand what they’re signing; that they’ve had sufficient time to review the paperwork; that they’re satisfied with their chosen professionals; that they’re signing the agreement freely and voluntarily; that they’ve received financial disclosure and have had ample time to review it; that they waive any financial disclosure beyond that which has been produced; that they understand all terms and provisions of the agreement; that those terms and provisions have been explained to them by their attorneys; that they intend for the agreement to be fully binding and enforceable on divorce (and death); and that neither has any intention to ever challenge the validity of the agreement in the future. Then we go off the record and proceed to sign the agreement in the presence of two witnesses and a notary public.
Managing Financial Impact
The fact is, there’s never a “winner” in divorce; the marriage failed. Prenups are successful tools for managing the financial impact of a divorce proceeding.
Are there bad prenups? Absolutely. Will the courts uphold a bad prenup? If there’s been fraud, duress, coercion or overreaching, or if the agreement is unconscionable and there hasn’t been a fair and reasonable disclosure of income and net worth, then it’s highly likely that a court will set aside the agreement. However, if proper disclosures have been made and the agreement is signed freely and voluntarily, then a court will most likely uphold it even if it’s unfair. It’s not the role of the court to save a party from making a bad or improvident bargain. Rather, that’s the job of the parties and their attorneys.
These guidelines go a long way toward ensuring a more positive outcome for the HNW client looking to get married.