Summertime has passed, and like every summer, the weather was beautiful and a whole lot of people got married. That’s a good thing, for as a friend of mine once told me, “Marriage is a sacred institution. It’s something a man only does ... two or three times in his life!” Unfortunately, however, this summer, like every other summer, a whole lot of other people got divorced.
This year, like every year, there is intense media focus on high-profile, high net worth celebrity divorces. The one getting the most attention this year is, of course, the multi-hundred-million-dollar break up of Coldplay front man Chris Martin and actress Gwyneth Paltrow. While the media’s divorce gossip reporting surrounding star splits may reveal a kind of sick national obsession with celebrity wealth, and the woes of the privileged class, one good thing about the coverage, perhaps, is that it also seems to regularly provoke a discussion about asset protection in the event of a divorce or dissolution of a civil union. Consequently, this month’s article is about an important type of legal contract that I believe every entrepreneur should know at least a little bit about: the prenuptial agreement.
Depending on the state’s law governing the agreement, a prenup can be an effective and binding agreement between the parties covering a broad range of matters.
Why Are Prenuptial Agreements Important To Entrepreneurs?
Here’s some good advice on the subject from Donald Trump, a billionaire somewhat familiar with the sometimes very combustible mix of big money and matrimony:
“When it comes to marriage, one thing I’ve preached over and over again is that you should have a prenup. I know it doesn’t sound very romantic, and it’s a difficult subject to broach when you’re in love, but if you have any financial assets at all it’s critical. You never know what will happen in love and money, so you should always be sure to cover your assets.”
In the U.S., the distribution of property and debts at the time of a divorce or dissolution of a civil union is governed by state law. Therefore, in the absence of an enforceable agreement between spouses, a court will apply state law to determine the division of property and debts. How this is done depends on whether the state has adopted regime that recognizes the creation of community property.
In “community property states” such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, property acquired during marriage is presumed to be the product of the joint efforts of both spouses. Consequently, in states recognizing the creation of community property, income earned by either spouse from salaries, wages, or virtually any other compensation, is considered to be earned one-half by each spouse. All property purchased or otherwise accumulated as a result of income earned by either spouse is also deemed to be community property. Thus, in a community property state, in the event of divorce or dissolution of a civil union, the couple’s total property is divided in half even if most of the assets were earned by one member of the couple, unless there is a negotiated settlement or the property is subject to a valid prenuptial agreement.
Also, in community property states, debts incurred during the marriage by either spouse are presumed to be obligations of both spouses regardless of whether the debts were created disproportionately by the spouses. In some circumstances, however, a spouse may successfully contest whether a debt created by the other spouse is a jointly owed obligation where, for example, the debt incurred individually by one spouse could not reasonably benefit the marital household. In such circumstances one spouse might be held solely responsible for the debt.
States that do not recognize the creation of community property, utilize a regime for the division of property and debt known as “equitable distribution.”
In equitable distribution states, the courts have a little more discretion to divide assets and liabilities according to what is “fair” in the court’s view. Otherwise, the scheme is very similar to community property states. The court will still determine which debts were accumulated during the marriage (thus belonging to both spouses) and which debts or assets belong to only one spouse. The difference is that once a court determines what the marital property and liabilities are, the court is empowered to make whatever division among the spouses the court determines is fair. There is, therefore, not a requirement of equal division of property or liabilities. The court is free to consider factors like the incomes of the parties, non-monetary contributions to the household (e.g., contributions by a stay-at-home-parent), or economic misconduct by one spouse. The factors that courts are required to consider in making such determinations vary from state to state.
While the community property and equitable distribution regimes have many fundamental differences, divorcing spouses subject to either system will be forced to confront the fact that in the absence of a pre-existing enforceable agreement, the division of their property and apportionment of liabilities will be simply out of their hands.
Both the community property and equitable distribution methods of property and debt distribution are far from perfect. Innumerable disastrous and often financially crippling decisions by judges have resulted either from the discretion available to them in equitable distribution jurisdictions or the lack thereof in states recognizing community property. Many divorced spouses have thus, unfortunately, learned the hard way that when their fate is left to the courts, divorce laws governing property and debt allocation often produce very unjust and very unfair results.
Now in the context of that legal reality, consider the fact that half, or more or all marriages in the United States end in divorce. What this means is that half or more of all the people that get married are going to be subjected to a potential judicial division of their assets and debts over which they will have no control, unless they take action to agree ahead of time about what that division will be. I know few persons in business that would enter into a venture that would put half or more of all their assets at risk and potentially subject them to the possibility of judicially forced imposition of financial obligations, and do so without a contract! Yet that is exactly what the vast majority of businesspersons do, thereby subjecting themselves to financial risks that are likely to be greater in magnitude than those encountered in any single business venture in which they have participated.
You certainly don’t have to be as rich as Donald Trump to need a prenup. (Trump, by the way, has used three of them so far.) In fact, the arguments for a prenuptial agreement may be strongest for persons who have only a small or modest nest egg as an unfair division of their property could be a much more damaging blow to their financial health than to a multimillionaire. Experts in the area agree that if you own a business, have children from a previous marriage, have elderly parents who will need caring or if one of the partners is far richer than the other, a prenuptial agreement is certainly advised.
What Is A Prenuptial Agreement?
A prenuptial agreement, often referred to as “prenup”, a “premarital agreement” or an “antenuptial agreement” is a type of contract that would-be spouses enter into prior to the commencement of their marriage or civil union. The primary purpose of a premarital agreement is to provide for the division of property and address spousal support issues should the parties divorce or dissolve their civil union. But, depending on the state’s law governing the agreement, a prenup can be an effective and binding agreement between the parties covering a broad range of matters. In most states, almost any contractual matter can be addressed in a premarital agreement as long the subject matter does not promote the dissolution of the marriage or violate public policy, such as obtaining a waiver of responsibility for child support. For example, prenups can be used to protect spouses from each other’s debts. They can also be used to spell out what will happen to property when a spouse dies. For example, a prenup can require that certain property, which would otherwise be claimed by the surviving spouse, shall instead be made available to pass on to children or other specified persons.
According to Katherine E. Stoner and Shae Irving, authors of Prenuptial Agreements: How to Write a Fair and Lasting Contract, “People have been making prenuptial agreements for thousands of years. Scholars tell us that the practice dates back to the ancient Egyptians, and that prenups have existed for many centuries in Anglo-American tradition. In previous times, the parents of the bride and groom negotiated the agreement on the new couple’s behalf.”
Prenuptial agreements are now recognized by all the states in the U.S. and by many, but by no means all, countries.
What Are The Requirements For A Valid Prenuptial Agreement?
As you might expect, the laws governing the validity of premarital agreements vary from state to state and from country to country. The following, however, are some of the most common requirements:
• The agreements must be in writing, oral prenups are not valid.
• The agreement must signed by both parties. In some states the agreement must be notarized and otherwise executed in the manner required for a deed to be recorded.
• In most states, the parties must disclose their income and assets to the other party at the time they enter into the agreement.
• The agreement must be voluntary and not the result of duress or fraud. A prenup can be invalidated if, for example, the wealthier party deliberately misstates his or her financial condition.
• The terms of the agreement cannot be unconscionable.
If you think that a prenup may be appropriate for your situation, I strongly urge you to seek legal advice from a competent and experienced attorney familiar with contracts in general and premarital agreements in particular. A prenup is definitely not a “do-it-yourself” document. This is a lesson that director Steven Spielberg learned the hard way back in 1989, when his former wife Amy Irving contested their self-drafted prenup. Not surprisingly, their agreement had been signed on a napkin in traditional Hollywood mogel style. During the Spielberg’s divorce Irving successfully contested the validity of the agreement and walked away with $100 million, half of her ex-husband’s earnings at the time, and far more than what was apparently intended on that now famous face-wipe.
But discussing a prenup is so unromantic.
It is sad but true that a large number of people that would like to enter into a prenup with their fiancé, and an even larger number of people that reasonably should at least seriously discuss the pros and cons of a prenup, nevertheless will not do so primarily because they believe that to do so would be “unromantic” or will somehow “start their marriage on the wrong foot”. My response to these excuses is simple: “Get over it.”
I believe that persons finding themselves in such a position might want to consider the experience of one of my personal heroes, Paul McCartney, who was dragged through the mill, or should I say the Heather Mills in a messy divorce without a prenup that resulted in a court order requiring him to pay Mills $48 million. The lack of a premarital agreement was reportedly because Paul felt that a prenup was unromantic. Not surprising, I guess, given the fact that he has composed many of the most romantic songs of our era. That notwithstanding, however, I’ll bet that mistake won’t be repeated by Macca. And it’s a mistake I hope none of our readers make, or worse, repeat.
If you are contemplating marriage and would like to keep control over the division of marital property and obligations in the event of a divorce, but you are embarrassed or uncomfortable about discussing the matter with your fiancé, here are a few things to consider that might help you broach the subject:
• It is important for couples to have healthy discussions and agreements about finances before they get married as well as after they get married. Discussing the pros and cons and the parties’ feelings about a premarital agreement can be a positive and healthy precedent for being candid and honest regarding financial issues.
• Common sense and fair play dictate that couples should fully disclose and frankly discuss the details of their financial situations before they get married, especially where children from prior marriages or family owned assets are involved. According to Donald Trump: “Besides being practical, a prenup is a matter of consideration and responsibility. It’s a matter of consideration because a prenup can spare a couple some of the messier, more unpleasant aspects of divorce. It’s also a responsibility because marriage, among other things, is a legal commitment. Why ignore this basic component of an important step in your adult life? If you aren’t adult enough to be responsible, maybe you shouldn’t be getting married in the first place.”
• There is no doubt that for some people, no amount of logic or reason will diminish the fact that discussing a prenup will have the potential to provoke intense emotions, insecurities, and confusion. But facing this kind of difficult issue together can help a couple clear up misunderstandings and provide a foundation for open communication in their marriage.
• A prenuptial agreement can be a positive communication tool to clarify goals and aspirations in the context of how assets and liabilities will be treated in the future.
• It is not abnormal to at least question a person’s sincerity regarding claims that their relationship with you is truly based on love and mutual respect if they strongly protest or resist discussing the possibility of a prenup. Similarly, if you are the wealthier partner going into the marriage and your fiancé doesn’t want to sign a fair and equitable premarital agreement, while it may be an unpleasant task, it is appropriate, fair, and prudent to determine whether an inappropriate desire for financial gain is motivating your fiancé’s decision to wed.
Finally, I believe that an effective prenuptial agreement optimizes the probability that the exspouses will remain friends. By doing so, I also believe it provides the best opportunity for marriages with children to provide a better post-divorce environment for their kids and set for them a good example of prudence, forethought and responsibility.
I believe that our society pays a big price for the high rate of divorces that are filled with needless acrimony and costs that could be avoided via the use of prenuptial agreements.
It is unfortunate indeed that there is still such as parochial stigma attached to their use. Perhaps if a prenup had to be filed with the marriage licensing authority as a condition to obtain a marriage license, the reticence or embarrassment regarding the discussion of prenups would diminish or disappear.