Personal Business: PRENUPTIAL PACTS
A BINDING AGREEMENT BEFORE YOU TIE THE KNOT?
Forget the hearts and flowers. These days, more and more couples are deciding how they will divide up their assets even before they utter "I do." With half of the annual 2.3 million new marriages in the U.S. destined to end in divorce, a growing number of couples realize they must protect their assets in case their marriage dissolves. And many people--especially investors who have reaped higher-than-expected returns from the continuing bull market--aren't willing to let the court decide how to divvy up their war chest. One way to prevent your ex-spouse from taking you to the cleaners is to draw up a binding prenuptial agreement before you tie the knot.
LACK OF TRUST. Most prenuptial agreements simply spell out ahead of time how assets will be divided in case of divorce or death. That could save you the expense and emotional upheaval of a full-fledged divorce proceeding by allowing you to get a simple no-fault divorce. Unless your spouse challenges the "fairness" of the agreement, of course. Prenups can also set ground rules for a marriage. Rex and Teresa Legalley of Albuquerque drew up a 16-page prenup in 1995, which included such explicit directives as "nothing will be left on the floor overnight--unless packing for a trip" and "we'll engage in healthy sex three to five times per week." None of this is enforceable in a court of law, says Raoul Felder, a high-profile Manhattan divorce lawyer, but it may provide some guidance and may aid communication throughout the marriage.
Not surprisingly, many young couples shun such agreements because they can imply a lack of commitment and trust. Marriage is supposed to be a joint effort, not a division of property. "Some may argue that [prenups] even preordain the marriage to fail," says Edward Winer, a matrimonial lawyer and partner at Moss & Barnett in Minneapolis.
But for folks with $500,000 or more--especially those who are remarrying and want to preserve that wealth for their kids from a prior marriage--prenups are more accepted. "The first time, you say divorce won't happen to me," says Timothy Tippins, chairman of family law for the New York State Bar Association. "The second time around? Well, it already did."
For those people who own their own businesses and for executives in partnerships, prenuptial agreements are crucial and, in some cases, mandatory. If you should die, a spouse who has no ownership share in the business could be awarded some stake if no prenup exists. It's highly unlikely that the court would force you to transfer complete ownership of the business to a spouse, however, in the event of a divorce. "You may have to share some value of the company with your spouse on an ongoing, long-term basis," says Winer. But you generally won't lose all your share in the firm or be forced to liquidate, especially if you're the family breadwinner.
BEACH HOUSE. At the very least, your business will be disrupted and your privacy will be invaded during a divorce proceeding. To put a dollar figure on your company's worth, an accountant must sift through your financial records--most of which are not normally available to the general public. "That's like stripping down naked in front of a bunch of strangers," says Donald Schiller of Chicago's Schiller, Du Canto & Fleck, the nation's largest matrimonial law firm.
If you don't have a prenup--and if you can't agree during the divorce proceedings on which partner gets to keep the beach house and how much alimony your spouse should pay--your assets will be divided according to the laws of the state where you live. This means that in community-property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), which generally view both spouses as equal owners of all marital (or "community") property, you may each get 50% of the pot. In equitable-distribution states (the rest of the U.S.), property will be split "fairly" by the court, depending upon how long you were married, which assets were purchased jointly, and so forth.
In most cases, your spouse is entitled to some share of the wealth accumulated during your marriage--even if she or he wasn't directly involved in earning income--unless you have a prenup that says otherwise.
In short, a prenup lets you take charge of your own financial affairs--rather than having a judge or the law of the state determine your fate. In some agreements, a spouse's rights increase according to the number of years the marriage endures. For example, Bill will provide Jane with 20% of his annual income if the marriage lasts more than three years but less than five; 30% if more than five years but less than 10, etc. Sometimes, a "sunset date" is offered. After 30 years of marriage, for instance, the prenup automatically expires.
INFLATED VALUES. You can't dictate all of the terms, however. While you can outline preferable child-custody terms, Winer says that a judge will ultimately decide what's in the best interest of the child. Similarly, a high-earning wife can waive her right to alimony in the prenup, but if she's no longer a big-time wage earner when the divorce is finalized, she can't be left destitute.
Be extra careful when divulging your assets. Full financial disclosure is absolutely essential, says Felder, so that the party giving up rights knows exactly what is being forfeited. Any omission could invalidate the entire agreement. Assets like real estate and jewelry should be appraised by a professional. To prevent your spouse from arguing later on that you understated your assets, Felder suggests inflating them by 10% to 20%.
By all means, don't wait till the last minute to broach the subject. It takes at least three weeks to iron out the details, and if you sign the document too close to the impending wedding day, your spouse could contend in a divorce proceeding that he signed "under duress." To guard against such future claims, have the signing videotaped and do the agreement before you shell out any money for the wedding.
Most prenups do stand up in court. To ensure that yours will, too, consult a local family-law or matrimonial lawyer (laws vary widely from state to state). Ask friends for recommendations or consult Best Lawyers in America, a reference book available in most libraries. To prevent any claims of partiality later on, both you and your intended should seek separate legal counsel. "You might pay for a fiance's attorney if you're the more affluent partner," says Violet Woodhouse, a lawyer in Newport Beach, Calif.
UPDATING. If you never bothered to get a prenup before you were married, you may still be able to get one now. Loosely referred to as pre-divorce papers, postnuptial agreements are really belated prenups. Valid in many states, such as Illinois and New York, these agreements cover the same ground as most separation agreements--except the couple doesn't separate. They arise, says Tippins, generally as a reconciliation effort when a marriage breaks down. In one recent case, a woman was caught having an affair by her husband. She wanted to reconcile. He refused--until she signed a postnup.
Even if you signed what you thought was a fair prenup, it's a good idea to update it every five years or so to reflect changes in your income and asset holdings. Donald Trump and Marla Maples signed a prenup before they tied the knot in 1993. Since then, they've updated it at least once.
Romantic, they're not. But prenuptial agreements can save you heartache and expense down the road. Marriage is, among other things, a financial partnership, says Woodhouse. Addressing and dealing with such practical issues early in the relationship may actually help preserve your marriage. If not, at least you can be confident that your interests and assets will be protected over the long run.By Barbara Hetzer EDITED BY TODDI GUTNERReturn to top