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Prenuptial Agreement: To have or not to have? That is the question!

We are pleased to have Doug Perkins as our guest author this week.  As a Certified Divorce Financial Analyst, I am brought in to help with the financial division of assets in a divorce. I also work with a number of clients who have survived a divorce and now find themselves in a new relationship. My recommendation is to do it right, at least the second time around. I have two clients in this situation now, and I have not been shy about mentioning a prenuptial contract. We very much appreciate Doug’s insights about prenuptial agreements, as we believe it is important to provide other professional perspectives on financial topics that impact our clients. We strive to work cooperatively with a client’s team of professional advisors and consider that an important piece of delivering excellent client service.

Cathie Straub, CPA, CFP®
Director, APCM Wealth Management for Individuals


Perkins

Many think it morbid or crass to consider a prenuptial agreement, while others recognize the wisdom of, and even the inherent fairness in, protecting and preserving assets which you alone accumulated prior to marriage. Prenuptial agreements are fair and equitable because they ensure that premarital wealth will still be there for you in the event of divorce or, if you stay married, to pass on to your children or heirs from a prior relationship.

As a trial lawyer who specializes in divorce work, I can say with confidence that having a prenuptial agreement is no more morbid, crass or unfair, than having a good will, trust documentation, or power of attorney prepared by an estate planning attorney. Just as there is nothing morbid about planning for one’s inevitable demise, it is also wise to consider that, statistically, at least half of us will experience the divorce courts. Like estate planning, a prenuptial agreement is simply another strategy for smart and fair asset protection.

In my work, I am often frustrated by the absence of prenuptial agreements, or even more so, by shoddy, thoughtlessly-prepared agreements which do not thoroughly address certain key elements. More on this later, but first the basics:

In a divorce trial involving property, the judge is tasked with three things: (1) characterizing property as marital or separate, (2) valuing the marital property, and (3) equitably distributing the marital estate.  Prenuptial agreements are designed to guide the court on (read: simplify) the first and third tasks, characterization and distribution of property.

On the issue of characterization, I can tell you from my own experience and that of my legal colleagues that a lot of client money is spent litigating whether property is marital or separate. This is because ALL separate property can be “transmuted” (lawyer speak for “changed”) into marital property if the divorcing spouse says things or acts in such a way as to treat otherwise separate property as marital.

Take, for example, the home owned free and clear prior to marriage. All it might take to transmute this into marital property, awardable in a divorce, is for the marrying couple to move in and occupy it as the “marital” home.

If, however, the prenuptial agreement specifies that occupancy and use of the home may not be interpreted to change “my” home into “our” home, then the question of the owner’s intent cannot be easily challenged.

The question of intent is now even more significant given recent changes in the laws of domestic partnership. In such a partnership, defined as cohabitation by partners in an intimate relationship, ownership of ALL partnership property is defined by intent. A good prenuptial agreement defines the owners’ intent, making the judge’s task of characterization all but complete.

Solid prenuptial agreements also define other important property issues, such as what property IS included in the marital estate, how property is split by percentage, entitlement (or not) to spousal support, and so on. To be enforceable, the touchstones of prenuptial agreements are full disclosure and fairness.

One final thought:  No matter how thoughtfully your prenuptial agreement is prepared, it is equally important that the terms of the agreement be honored. One of my clients, a prominent physician, gave me permission to illustrate this point with his story. He and his now-ex-wife downloaded from the Internet a “canned” (form) prenuptial agreement which he believed protected his substantial premarital assets. However, my client then commingled his marital income into a sizeable premarital account (and the agreement failed to authorize this), so the entire account was considered to be marital. Similarly, his marital income paid the mortgage on his premarital home (and again, the agreement did not specify that this did not transmute the home), so “his” home became “our” home. It is critical that the terms of the prenuptial agreement be observed and followed.

We all should now know that asset protection, including a solid prenuptial agreement, is an important piece of our investment portfolio as a means of preserving what may be a lifetime of accumulation for your use if you divorce, or if not, for the later use of your heirs. Pairing the right team of financial advisor, CPA and estate planning attorney, with the right documents will help you protect your assets from taxation and from the expensive claims of others including perhaps in the case of divorce.

Doug Perkins
Hartig Rhodes LLC

Doug Perkins is the managing member of Hartig Rhodes LLC, and has practiced law in Alaska for 30 years. His practice is limited to family law, including (of course!) preparing prenuptial agreements, divorce and custody litigation, and adoptions. For any questions on family law issues, you may contact him at dp@hartig.com. Doug’s website can be found at www.hartig.com.

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