Acts of distrust or strategic wealth management?
- December 1, 2007
by Carol Schrier-Polak
Romantics might see prenuptial agreements as evidence of distrust, but business-savvy brides and grooms recognize their value as wealth-management tools. Marriage, after all, is a union that is legal and financial as well as emotional and religious.
Prenuptials protect assets such as family-owned businesses, gifts and inheritances, shield golden parachute clauses, help avoid estate problems and set expectations on financial and nonfinancial responsibilities during the marriage. The Wall Street Journal reported in February that about 20 percent of people entering their second marriage get prenuptials while an estimated 5 to 10 percent of people marrying for the first time execute these agreements.
Under Virginia’s divorce laws, premarital assets (including a business started before the marriage, a house, a retirement plan or an investment portfolio) lose their “separate” categorization if:
• they are commingled with monies earned during the marriage,
• asset-related debt is paid during the marriage, and/or
• there is active involvement of the other spouse in the appreciation of the asset.
Prenuptials, however, can change this outcome by stating that earnings during the marriage are separate, and that specified assets, such as a business, investment accounts and real estate, belong solely to the owner. Additionally, retirement plans and related survivor annuities earned partly before the marriage and partly during the marriage can be waived or apportioned based upon a specified formula.
In the unfortunate case of a spouse’s death, prenuptials can define rights of spouses. For example, the agreement can state that the future spouse waives the right to the minimum bequest required by Virginia law. The agreement also can provide that one’s will controls the distribution of assets or specify that a specific asset, such as the primary residence or the deceased spouse’s retirement account, belongs to the surviving spouse if the couple are still living together at the time of death.
In a divorce, Virginia courts may order spousal support, either for a specified length of time or until the death, remarriage and/or cohabitation of the recipient. By contrast, prenuptials can provide for a waiver of spousal support or specify the amount and length of time paid based upon predetermined amounts or formulas, such as the number of years married, time off from work, and/or the income and assets of the respective parties. Trusts also may be established setting different amounts and specifying beneficiaries based upon the length of marriage and resources of the parties. Prenuptials may also address financial and nonfinancial obligations for children and spouses from a previous marriage during the marriage and in the event of death.
While provisions regarding child custody and support are not binding on a court in the event of divorce or death, these provisions may be considered by a court because they show the couple’s intentions, at least at the time of the marriage.
Finally, prenuptials may also focus on a broad range of expectations of conduct during the marriage, such as:
• time off from work to care for children,
• payment of expenses and savings,
• career expectations/relocation,
• religious expectations,
• responsibilities of a spouse because of disability or incapacitation,
• requirements for obtaining disability, long-term care and/or life insurance,
• agreements to permit a religious divorce or annulment, or
• resolution of problems during the marriage, such as counseling, and in the event of a divorce, such things as mediation or arbitration.
Even the care of pets is increasingly being addressed.
Virginia has a statute that recognizes the validity of prenuptial agreements provided they are in writing, signed by both parties and voluntarily executed. Full disclosure of assets and liabilities is essential and separate legal representation of both parties is strongly recommended to avoid challenges alleging the agreement was unconscionable, involuntarily executed or the result of duress or fraud.
The enforcement of prenuptials will depend on the wording of the agreement. The provisions should be clear and comprehensive and precisely drafted to avoid challenges of ambiguity and varying interpretations. Couples are encouraged to begin discussing the terms of a prenuptial early in the engagement to avoid any accusations of undue influence. Execute the agreement before setting a wedding date. And finally, of utmost importance, identify early on the financial and nonfinancial expectations that will build the foundation for a satisfying and enduring relationship.
Carol Schrier-Polak is immediate past president of the Virginia Chapter of the American Academy of Matrimonial Lawyers. She has practiced family law for the past 24 years, is a shareholder in the firm of Bean Kinney and Korman PC in Arlington and can be reached at firstname.lastname@example.org.