Nothing Spells “Romance” Like P-R-E-N-U-P

 In Estate Planning, Family

Have you discussed marriage with your partner? Paying for the wedding might be your biggest worry: booking the venue, shopping for a dress/tuxedo, organizing the honeymoon…A pre-nup is probably not on your list.

Recently, I’ve been answering questions about marital agreements, aka pre-nups and post-nups. Although the title of this blog post is tongue-in-cheek, I’m glad that clients and prospective clients are broaching this once-taboo topic.

According to a 2003 Harvard study, only 5-10% of marrying Americans get a pre-nuptial agreement. Couples may fear they’re dooming the marriage before they’re even married. But pre-nups are becoming more prevalent, especially among Millennials.

There are three types of marital agreements:

  1. Pre-Nuptial Agreements, or “pre-nups”: for people who will marry.
  2. Post-Nuptial Agreements, or “post-nups”: for people who are already married.
  3. Cohabitation Agreements: for couples who will not marry and want to have a plan before they combine their household finances.

I’ll focus on pre-marital and post-marital agreements. I’ll comment briefly on Cohabitation Agreements at the end of the article.

Let’s first discuss what rules apply in the absence of a marital agreement.

Marriage and Property: Who Owns What

There are two systems that the 50 states follow when defining who owns what for married couples:

  1. Community property states
  2. Equitable distribution states (aka non-community property states)

I’ll focus on community property states like California.

Community Property

In community property states, marital community property is divided 50/50. For example, RSUs that vest during the marriage are community property. It doesn’t matter that only your name is on the RSU agreement. In other words, any assets and liabilities acquired between the date of marriage and the date of separation (if applicable) is community property.

California is one of nine community property states:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

Alaska is an “opt-in” community property state that gives both spouses the option to make their property community property.

Separate property

Community property states use another term called separate property. This is property that only one spouse owns, which they acquired:

  • Before marriage
  • By inheritance. Even if a spouse gets their inheritance while married, the inherited property is separate property.
  • By gift. If a spouse’s parents buys a condo for the couple to live in, the condo is technically the separate property of the one spouse alone.
  • Assets traceable to separate property. Let’s say a spouse owned a house before the marriage, sold it during the marriage. If the spouse uses this money towards for a down payment on a house purchased during the marriage, you might be entitled to a partial separate property claim on the community property house. Proving a separate property claim to community property is called tracing community property.

Pre-Nuptial Agreements

Pre-nuptial agreements outline who will own what if the marriage ends in divorce. Pre-nups override the default state laws around division of property.

Attorneys who specialize in family law are experts in marital agreements. A good family law attorney will draw out conversation from a couple about their feelings about money. Most people never discuss these issues before the marriage.

You shouldn’t have to review and update premarital agreements over the years if it’s well thought-out. A good family law attorney will ask the human questions, such as:

  • Will you stop working if pregnant?
  • Could you imagine starting a business?

Think of the pre-nup process as pre-marital counseling. This should be a collaborative process. And if you feel like an attorney is approaching the pre-nup as a bare-knuckles fight, find someone else who will be a better fit.

Pre-nups: Not Just For Rich People

You might think pre-nups are only for the very wealthy. A pre-nup can do more than protect assets from before the marriage, however. A good family law attorney can help you think through difficult issues like whether one spouse will exit the workforce to raise children. If a spouse becomes a stay-at-home parent, the couple can negotiate how to divide: (a) assets earned during a marriage, and (b) potential future earnings. This can protect the stay-at-home spouse from the significant impact on their future earning potential.

Pre-nups: Ground Rules

  • Start early: at least six months before the wedding.
  • Each spouse should have an attorney (independent counsel). A lawyer only wants one client to avoid conflicts of interest.
  • Disclose your finances in full: most people don’t know the full picture of their future spouse’s assets and liabilities. A good family law attorney will help you manage the emotions that will inevitably arise in the process.
  • Identify any rights that you’re agreeing to waive, and what the law would be otherwise. For example, you can waive your rights to spousal support in a pre-nup. If you’re being asked to waive spousal support but you’re the lower-earning or less wealthy spouse, your attorney is there to explain that California law entitles you to spousal support.
  • When you create your estate plan (legal documents like your will, which dictate what will happen after your incapacity or death) bring your marital agreement to the estate planning attorney.

Pre-nups: What They Can’t Do

Pre-nuptial agreements cannot:

  • Get involved with child support or
  • Get involved with child custody.

The state doesn’t want to get involved with issues related to your future children. These would be issues to resolve via the divorce process.

Pre-nups: How Much Will This Cost?

An experienced family law attorney will charge at least $2,500. Since each spouse should have an attorney, that’s $5,000 for the household, which isn’t chump change.

Another way of thinking about the pre-nup is that it’s a marital contract that serves as insurance. Given the high rate of divorce, it’s something you hope you’ll never have to use. In the words of Monica Mazzei, a family law attorney at Sideman & Bancroft in San Francisco, “This is your opportunity to negotiate what you want while the other person still likes you.”

Post-Nuptial Agreements

If you’re already married and didn’t get a pre-nup, a post-nup is an option.

Pre-nup vs. Post-nup

Pre-nups are better than post-nups. Here’s the legal reason:

  • Post-nups: there’s a presumption of “undue influence”. I’m not a lawyer, but I interpret this to mean that post-nups assume both spouses are under the influence of external pressure that prevent them from making an objective decision. In other words, post-nups are easier to contest in court compared to a pre-nup.
  • Pre-nups, on the other hand, are “presumptively valid.” Assuming all proper rules are followed (e.g., each spouse has their own attorney), courts will assume the pre-nup is legal and enforceable.

Post-nup Celebrity Example: Lisa Marie Presley

Lisa Marie Presley, daughter of Elvis Presley, married Michael Lockwood in 2006. They discussed a pre-nup but never signed one before the marriage. Two years later, they signed a post-nuptial agreement. As part of the agreement, they agreed that neither would seek spousal support.

Presley filed for divorce in June 2016. Lockwood attempted to argue the post-nup was unenforceable by claiming he didn’t read the document, and that his attorney didn’t explain the waiver of spousal support. Two years after the divorce filing, a judge ruled in August 2018 that the post-nup was valid and enforceable.

A pre-nup would have saved them two years of time, thousands of dollars in attorneys’ fees, and untold amounts of stress.

Neither a pre-nup nor post-nup addresses anything related to children, such as custody or child support. Four years after the divorce filing, they have a trial date scheduled for July 2020 to determine custody arrangements and child support.

Cohabitation Agreement, or “Marvin Agreement”

Cohabitation Agreements are like a pre-nup for unmarried couples. Cohabitation Agreements are also known as “Marvin Agreements” named after Lee Marvin, the actor, who was in a long-term, non-marital relationship with Michelle Triola. When their relationship ended, she unsuccessfully sued for “palimony”, which isn’t a legal term but is in the dictionary thanks to her court case. The notoriety of the Triola vs. Marvin case why cohabitation agreements are known as Marvin Actions, or Marvin Agreements.

California law recognizes non-marital relationship contracts. While spousal support (“alimony”) is only for married people, a non-spouse can sue for financial support. However, this is a very expensive process (as in multiple hundreds of thousands of dollars) where you must prove: (a) you were together as a couple, and (b) economic inter-dependency.

A Marvin Agreement is good for adult children of wealthy parents who expect a large inheritance. You don’t have to fully disclose finances, so the process isn’t as rigorous as for pre-nuptial agreements.

Random Fun Facts

  • The Jewish marriage contract known as the ketubah dates back to Biblical times.
  • The history of community property: five of these states that were under Spanish rule adopted the community property system because it continued what was already in place: California, Arizona, Louisiana, New Mexico, and Texas.

If you’re wondering whether a marital agreement makes sense for your financial situation, schedule a free consultation.

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