Is a Pre-Nuptial Agreement the Right Move? Only If You Get Married
“If I get divorced, the least of my problems will be what happens to my car.”
“My husband and I are made for each other; there is no way we would ever get divorced.”
“We are about to start off on a new relationship and I think it sets a bad tone to start by asking the person you are about to marry to sign a pre-nup.”
“Why? I don’t own anything!”
These are just a sample of the reasons I hear when I ask people whether or not they are going to get a prenuptial agreement (more commonly referred to as a “pre-nup”) before they get married. A pre-nup is a contract entered into between people planning to get married. The purpose of the agreement is to define for the couple what the disposition of their financial assets will be in the event of divorce or death. Most people do not wish to think about such things; some people underestimate the seismic impact divorce can have on their life; still others think that something like that “won’t happen to me.” And then you have people who say that they do not own anything so a pre-nup is no good for them.
Well, let’s take the case of a struggling actor. He’s been in a few mediocre roles when at 23 years old he takes a job in this low-budget sci-fi film. Soon after filming he meets this dental nurse and they fall in love. They have very little money when they marry and rent this small house. They have virtually no assets and their future earning income is small. Does that actor need a pre-nup?
Well, that low budget sci-fi film was Mad Max and it was a run-away international box-office hit and the actor was Mel Gibson. By 2011, Gibson’s estimated fortune was $900 Million. That year he and his wife of 26 years divorced. The couple had no pre-nup. Gibson ended up forking over $400 Million in a settlement.
Gibson is not alone. Basketball superstar Michael Jordan had no pre-nup in place when he married his wife Juanita in 1989, at a time when Jordan should have known the value of his talents and his name. In 2006 the couple was divorced and the 6-time NBA Champion and 5-time MVP paid to his ex-wife approximately $168 Million. Music superstar Madonna was a multimillionaire when she married her second husband, Guy Ritchie in 2000. The couple divorced in 2008, and they never had a pre-nup despite Madonna’s vast fortune. Ritchie ended up taking roughly $80 Million dollars. After divorcing her first husband, Rosanne Barr married struggling actor/comedian Tom Arnold. They were married for only 4 years. Not only did Barr not have a pre-nup, but she fired her long-time attorney when he stated she should get one. When the divorce was final, Arnold walked away with $50 Million.
Obviously these are extreme examples. However, when half of your livelihood and your assets could be taken away in a divorce, does it matter if you are worth $50 Million or $50,000? Half is still half.
So what can a Prenuptial Agreement do for you?
Pre-nups lay down for the couple the “ground rules” of what will happen to marital property should the marriage fail or should one party die during the marriage. It can state clearly how property the couple gets during the marriage and brings into the marriage will be divided. It can identify who will be responsible for paying which debts the couple incurs during the marriage and any pre-marital debts each had. Many pre-nups also have clauses stating that the agreement has a “termination” period and becomes invalid after a certain number of years. Some pre-nups have clauses that make the agreement invalid if one spouse is unfaithful during the marriage.
Prenuptial Agreements are not just for the rich. Pre-nups can cover real-estate one party brings into the relationship prior to the marriage; they can protect 401(k)s, stock and retirement accounts.
Pre-nuptial agreements can also protect anticipated inheritance, such as if one party is from a prosperous family and that party can expect a good deal of money upon the death of his or her parents.
Finally, while not a substitute for a will or trust, a pre-nuptial agreement is a potent, though limited, estate planning tool. A pre-nup can set-up what will happen to certain property should one of the parties die during the marriage. Think of it this way: a man and a woman marry and it’s the second marriage for the wife. Wife has three grown children and an impressive portfolio of assets, including real estate, stocks and money-market accounts. Wife wants to ensure that should she per-decease her new husband, that her assets go to her children, or at least a large portion of them. A pre-nup can assist in that process and it can have Husband disclaim any statutory interest he may have in any of that property.
While a prenuptial Agreement is a powerful tool to protect property, it’s not a catch-all that can cover everything. A pre-nup cannot decide or anticipate custody of any children of the marriage, even of the children were born before the marriage. Moreover, a pre-nup cannot decide child-support; that is done by statute and enforced by the courts irrespective of prior negotiations between the married couple.
With all this in mind, if you want a prenuptial agreement that will work and that will be upheld in court, you should keep the following tips in mind:
Hire an attorney
An attorney should write the agreement and be able to explain to you all of its terms. our future spouse should hire their own attorney separate from your attorney. It’s unethical for the same attorney to represent two parties in an action, and each party should have their own attorney who can advise them on the impact of the pre-nup. In 1989, director Steven Spielberg wrote the terms of his pre-nup on a cocktail napkin without his wife’s, Amy Irving’s, attorney present. A judge tossed the pre-nup out and Irving received half of Spielberg’s wealth at the time, $100 Million.
Full Disclosure
A pre-nuptial agreement is a waiver of the divorce process. With this in mind, in order for that waiver to be proper, it must be well informed. If a man never tells his future wife that he has real estate in various locations and she signs the pre-nup never knowing about that property, then that woman’s waiver is incomplete and the pre-nup in serious jeopardy. After all, how can she disclaim something she does not know about? Both parties should and must fully disclose all of their assets to the other prior to entering into the pre-nup otherwise there is a very good chance the court will set it aside.
Time
Parties to a pre-nup should never wait until the last moment to sign the agreement. Both parties should have enough time review, edit and contemplate the terms of the agreement well in advance of the marriage. Courts routinely throw out pre-nups that are signed under duress. Think about it: is it fair to have planned out a wedding, get a church, plan the honeymoon, etc and then at the very last minute, have one party say to the other, “Before I walk down the aisle I insist that you sign a pre-nup.”? That’s not fair and the courts know it. In 1994, Giants outfielder Barry Bonds presented his soon-to-be wife with a pre-nup in the back of a limousine, literally, on the way to the airport to their Las Vegas wedding. This lead to the complete overhaul of the pre-nup law in the state of California and, ultimately, the entire country.
What's a good period of time before the wedding? Well, it varies on circumstances, but the more time you can do it ahead of time the better. Usually, months are much better than weeks.
Follow Your Rules
If a couple has a pre-than they should follow the rules stated in the pre-nup. If the couple fails to follow their own rules then they could be unwillingly dissolving the pre-nup. Take for example a married couple: Dave and Donna. Dave and Donna are about to get married and they sign a pre-nup. In the pre-nup it states that Dave has a house that he owned prior to the marriage, and that should the couple divorce, Dave would retain the property in the divorce. The agreement also states that Dave will be fully responsible for the mortgage and all other costs associated with the house. They both agree and sign the pre-nup and get married. At first, Dave pays the mortgage out of his own funds. However, as time goes on, Dave and Donna pool their accounts into a single joint account, and Dave begins paying his mortgage with funds in that joint account. In that regard, some of Donna’s money is going to pay for Dave’s house. A court could easily rule that once Dave started to do that the house started to become a marital asset and Donna had some share in it regardless of what the pre-nup said.
Overall, a pre-nuptial agreement is a very good, efficient, effective and relatively inexpensive way to protect your property in the event of divorce or death. However, they must be properly draft, carefully considered and closely followed.