Pitfalls
and Possibilities
by
Douglas S. Segal
Editor's Note
Prenuptial
agreements—whether to have them or not, how to do them,
when to initiate them—are fraught with controversy.
In a recent New York Times article ("Cherished, but
for What?" Business section, June 2, 2002), writer Ellen
Spragins wrote of prenups, "Is there a more explosive
way for love and money to collide?" And indeed, the
potential for family division, even before the family starts,
can be great. Spragin notes that, according to Gary Schatsky,
a lawyer and financial adviser, "Simply having the discussion
in the first place is often an emotional nightmare. . . He
estimates that 10 percent of couples cannot stomach the discussion,
so they drop the idea, and that another 10 percent or so can't
reach agreement, so they drop the marriage."
On the topic of prenups itself, writes Spragin,
"Americans are sharply divided: nearly one-fifth believe
that a prenuptial agreement is not needed when two people
really love each other, according to a recent survey by
lawyers.com, a Web site with consumer legal information
from Martindale- Hubbell, while an additional 15 percent
think that such an agreement dooms a marriage to fail. (Twenty-eight
percent say prenups always make financial sense, while 25
percent see them as only for the rich and famous.)"
In that same article, Ellen Perry, president
of Family Office Solutions, a financial consulting practice
in Washington, D.C., disdainfully calls such agreements
"divorce planning when you're at the happiest
moment of your courtship." And Nancy, a participant
in More Than Money's online discussion group, asserts
that not needing a prenup when she was getting divorced
was directly related to the fact that neither she nor her
former husband would ever have considered having one. (See
her
discussion group commentary
, also in issue 30) Yet, attorney
Douglas Segal maintains that prenuptial agreements done
well can provide a sense of safety and security for both
parties, thereby promoting marital harmony.
In the spirit of resolving family differences
around money as harmoniously as possible, we offer Segal's
article below, which discusses how to make a prenuptial
agreement work optimally for both parties involved.
In
a 1989 "B.C." comic strip, one of the characters
is looking up the term
prenuptial agreement
in the
Book of Phrases
. He finds therein the following definition:
"A pact between two people who love each other almost
as much as their possessions." Ambrose Bierce, the
author of that masterpiece of cynicism,
The Devil's
Dictionary
, would have heartily approved. That text
defined love as "a temporary insanity curable by marriage."
The purpose of this article is to help those contemplating
a prenup to avoid "curing" their beloved in
the process!
When
to Have a Prenup
Prenups come into play most frequently in three situations:
-
when one party has substantially more wealth than the
other and wants to protect all or a portion of it in the
event of divorce;
-
when both parties have been married previously and have
children and want to preserve their separate estates in
the event of a divorce or death;
-
where
one party has been through a bitter and expensive divorce
and is hoping to preclude another such trauma, should
his or her next plunge into the sea of marital bliss prove
equally unsuccessful.
Obviously,
these three scenarios can overlap with each other. The second
scenario presents the fewest emotional difficulties for the
parties contemplating a prenup, particularly where both bring
approximately equal wealth into the relationship. However,
the first and third scenarios present a veritable minefield
of potential emotional conflict, particularly for the party
who has less wealth and against whom the wealthier party is
attempting to protect him/herself. ( For convenience, I will
refer to the wealthier party in this instance as Jim , and
the less wealthy party as Jane. Of course, either party may
be of either sex.)
Raising the Issue
Not surprisingly, Jane is less than thrilled when Jim first
raises the issue of having a prenup. Jane sees Jim's
request for a prenup as indicating a lack of trust in her,
implying either that her love for Jim may be tainted by
financial considerations, or that he does not trust her
to act in a reasonable and civil manner in the event of
divorce. Unfortunately, where substantial sums of money
are involved, few people do behave in a reasonable and civil
manner during divorce proceedings, and Jim's concerns
on this score are not without foundation.
The Problem
The problem here, as with most prenups, is that Jim wants
an agreement that gives Jane the absolute minimum allowable
under the law. This approach in turn generates two additional
pro blems: First, it makes Jane feel devalued, and even
if she does sign the agreement, the marriage begins under
a cloud of negativity that can poison not only the honeymoon,
but the entire future course of the relationship. Second,
a harsh agreement gives Jane every incentive to challenge
it in the event of divorce , which can produce precisely
the opposite result from that originally intended, i.e.,
instead of the prenup preventing litigation, it generates
litigation that may be even more bitter and expensive than
that which would occur in the absence of an agreement. Clearly,
these are two extremely undesirable outcomes.
The Resolution
I have a suggestion for Jim—and for all you wealthier
partners of the world who find yourselves contemplating
a prenup. Rather than approaching your beloved with a penurious
agreement and a "sign it or there will be no marriage"
attitude, try to create a prenup that:
-
addresses
your partner's legitimate concerns about his/her
financial future;
-
is
generous enough so that it creates a real disincentive
for your partner to challenge it, and;
-
makes
your partner feel loved and valued.
In other
words, although such an agreement may still provide your partner
with less property and/or alimony than he or she would ultimately
receive in an ordinary divorce proceeding, if you as the wealthier
partner approach the process with a view to meeting your partner's
legitimate emotional and financial needs, then what would
likely become a negative and divisive experience that damages
your relationship at least has the potential to become a positive
and unifying one. This is not to say that discussing a prenup
will ever transport the participants to dizzying heights of
romance. Nevertheless, at least half of all marriages end
in divorce, and given those odds, it is not at all out of
line for the wealthier partner to have concerns about taking
a major financial hit in the event the marriage fails. We
insure our homes and cars against fire and theft, even though
those eventualities are far less likely than a divorce. A
prenup is the closest thing there is to divorce insurance,
and it is far less unpleasant for people to negotiate financial
matters of mutual concern prior to marriage, when both parties
are, hopefully, deeply in love, than during divorce proceedings,
when love has all too frequently given way to hatred and recrimination.
This is particularly true if the wealthier partner takes the
approach recommended here.
Full Disclosure
In virtually every state, one of the prerequisites for creating
an enforceable prenup is full and complete financial disclosure
of assets, liabilities, and income. Obviously, the disclosure
by the wealthier party is more significant than that by
the less wealthy one, and the greater the disparity in wealth
between the two, the truer that proposition is. With Jim
and Jane, the first step in the process is, therefore, for
Jim to sit there down with Jane and "open the books."
If
x
years down the road after divorce proceedings
are underway, Jane can show that Jim either failed to disclose
significant assets or income, or substantially undervalued
those assets that he did disclose, then Jim's chances
of enforcing the prenup diminish drastically. Since not
all assets are readily or easily valued (e.g., shares in
a closely held corporation, stock options, defined benefit
retirement plans, and art work and antiques), the safest
approach is to use a range of values. For example, if Jim
is the sole or majority stockholder in a closely held corporation,
he would be well advised to value his interest "from
x
hundred thousand dollars to
y
million dollars."
Since this range of value will be explicitly designated
as an estimate, Jim should not be afraid to set the high
end of the range substantially higher than he actually believes
it to be. In some states, the burden of disclosure and valuation
falls entirely on the disclosing party, and Jane is under
no duty to investigate further to see if Jim has additional
assets or income, or to make any determination as to the
accuracy or reasonableness of the values used by him. So
as long as Jim errs on the high side in valuing his assets,
the chances of the prenup being set aside on the grounds
of lack of full disclosure are minimized.
Learning About Each Other
Once Jim has fully informed Jane as to the extent of his
assets and income, the next step is to ask her what she
feels she will need in the future to be financially secure
and comfortable, in light of (1) the assets that Jane then
owns, (2) her income-earning ability, and (3) Jim's
assets and income. Because length of marriage is such a
significant factor in the property and alimony awards that
courts make in divorce actions, awards of property and/or
alimony in prenups are usually tied to the length of time
that passes between the date of marriage and the date on
which either party initiates an action or proceeding for
dissolution, legal separation, or annulment. The longer
the marriage, the more property Jim will transfer to Jane,
and the greater will be the amount and duration of the support
he will pay to her. If Jim feels that Jane is overreaching
with her proposals, he may develop reservations about her
character. Conversely, if Jane feels that Jim is being parsimonious
in his proposal, she may conclude that Jim does, in fact,
love his possessions more than he loves her. The result
in either instance may well be a bad case of wedding bell
blues. In any event, the things that each party to the prenup
will learn about the other during this dicey but important
process are things that every person should know about his/her
intended spouse-to-be before either says, "I do."
Conclusion
The discussion and negotiation of a prenup are delicate
matters that can have a significant impact on the future
of a relationship. A little sensitivity and generosity from
the wealthier partner can go a long way toward assuaging
the less wealthy partner's anxiety and resentment
about the concept of entering into a prenup, and producing
a prenup that both parties can live with "happily
ever after."
An earlier version of this article was
published in the
Schnader Harrison Segal & Lewis
Business Law Newsletter
, June, 2000.
Douglas S. Segal, Esq., is a member of
the Litigation Services and Family Law departments of Schnader
Harrison Goldstein & Manello, the Boston office of Schnader
Harrison Segal & Lewis LLP. For more than 22 years,
he has concentrated his practice in Family Law and has been
involved in the negotiation and drafting of dozens of premarital,
postmarital, and cohabitation agreements.
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