29/05/2024

Young Runs

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Do I Need a Pre-Nup? 10 Good Reasons to Insist Upon One

Do I Need a Pre-Nup? 10 Good Reasons to Insist Upon One

On the topic of prenuptial agreements, the first question to ask your lawyer is, “Do I need one?” Under current existing law in my state (which is New York), in most instances, an honest answer might be, “Probably not.” However, for various reasons, it’s not the answer you’re likely to hear. To be precise, there are a variety of special factors that may dictate that you should have one, even if you don’t absolutely need one.

When considering the inquiry, I often recall the advice of a former colleague now deceased (a pioneer in our field on behalf of the rights of women in divorce). When she was approached by a high-powered potential client, a successful businesswoman wanting to know whether she “needed a pre-nup,” my colleague paid little mind to the client’s heartfelt explanation of the financial complexities and emotional factors personal to her situation. Instead, she boiled the inquiry down to a single question “Who has more money, him or you?”

Upon being told that the prospective husband was without question the wealthier party, my colleague said, as if reciting one of the Ten Commandments, “Well, then you most certainly don’t need one. And don’t you dare breathe a word about it to your fiance. Don’t even mention the word pre-nup!”

Some other factors to consider that militate in favor of a pre-nup are as follows:

(1) You want or need to provide for persons other than your spouse in your estate plan. This could include parents, siblings, children of a prior marriage, even charity. If you don’t provide for this, under New York law, your spouse will have the right to elect to take up to one-third of your estate, no matter what your will says (a right known as the “spousal right of election”). And, if you were to die without a will (the legal term is “intestate”), your spouse could be entitled to an even larger share.

(2) You own an asset jointly with others that you don’t want to or can’t share with your future spouse in the event of divorce. Under New York’s system for division of marital property in divorce (known as equitable distribution), whether or not title to pre-marital property is held jointly with a third party, your spouse could have a right to share in its appreciation (or even the entire value, where the property has been so its “commingled” with marital property it is deemed indistinguishable).

(3) You trust that your future spouse isn’t marrying you for your money, but you still find it necessary to put that trust to the test. Most prenuptials provide that all jointly titled assets will be shared equally in the event of divorce; so, after your spouse gains your confidence, you can, if you like, choose to adopt a more share-and-share-alike approach. A less common provision sometimes proposed by the less monied party is a “sunset provision”, meaning that after a certain number of years of marriage, the entire pre-nup becomes null and void. I’ve never been comfortable with this concept, which to me seems like a built-in incentive for a party to initiate divorce proceedings prior to the “sunset” date.

(4) For other reasons, you want or need to establish a mechanism for sharing future living expenses with your future spouse. An example might be where one spouse can more readily afford to make a upfront investment in an asset like a home or a business, and the other has more available monthly cashflow. On the other hand, the true utility of this kind of a provision is questionable; it’s hard to imagine one spouse taking legal action to enforce this kind of provision against the other without triggering divorce litigation.

(5) You anticipate undertaking a significant joint investment, in the very near future, e.g., a marital residence, and want to address, in advance, your respective rights to share in any increase, how you will allocate responsibility for maintaining it, etc. If you want to provide that, in the event of divorce, the equity will be divided proportionally (according to your respective contributions), rather than on a 50/50 basis, now is the time to do it. Additionally, pre-establishing a mechanism for sharing common expenses, during your marriage, might serve the purpose of reducing tensions, or enabling one or both of you to commit more wholeheartedly to the purchase.

(6) You are in your own business, and you or your business partners don’t want your future spouse acquiring a share in it. Under New York divorce law, your pre-marital business, or at least its marital appreciation can be a marital asset subject to valuation and distribution. No judge will force you to sell your business, particularly if it’s your primary source of income, and certainly won’t require you to take on your former spouse-to-be as a business partner, but cash awards, determined by an appraisal of your business are routinely made. This may be particularly troublesome where your business is not, or not easily saleable, as with a minority interest in a close corporation, limited partnership interest or interest in a professional practice.

(7) More specifically, you have, or anticipate having, your own professional practice, and you don’t want your spouse to acquire an interest in it. While many businesses can be appraised with reference to sales of comparable businesses, professional practices typically cannot, and, accordingly, are valued according to established accounting conventions. This can result in appraisal values up to seven figures, where earnings are substantial. Moreover, since there is typically no asset to sell in order to generate the court awarded pay-out, the payor usually ends up paying the award out of the very income that has been valued.

(8) You’re pursuing or might pursue a course of study, take an exam, etc., that will lead to a degree, certification, license, or the like, and don’t want to risk having to pay your future spouse for a portion of its intangible value. If such intangible assets were acquired entirely or in part during the marriage, the resulting enhancement in earnings will typically be valued over the course of the actuary work life of the holder. Again, where substantial income is involved, the value can easily creep up to seven figures. And, a professional practice, a degree, certification, license, or the like, certainly can’t be sold to generate the funds necessary to pay an award of this kind.

(9) You are engaged in a business or occupation in which opening up your books, or otherwise disclosing your finances, in a divorce is a far from appealing prospect. There is liberal financial disovery in divorce proceedings in New York, which means that anything within reason that bears on income or assets is fair game. Enough said.

(10) And, last but not least, what to some may be the greatest motivating factor, the desire not to have to pay divorce lawyer fees that could be large enough to devour a substantial portion of your hard earned assets. Divorce litigation can be extremely costly. If that’s not enough cause for concern, consider that it’s possible that you could be required to pay not just your own fees, but also your spouse’s legal fees, if he or she is the economically dependent party. Pre-establishing your financial rights, pursuant to a prenuptial agreement, is one way to avoid expensive litigation on financial issues, but keep in mind that child-related issues cannot be legally resolved by pre-nup.

I’m certain that any one of my colleagues could point to ten or more significant reasons that I’ve omitted. However, if none of the 10 reasons above apply to you, and you’re not substantially wealthier than your spouse-to-be, you just may be one of those few lucky individuals that can avoid the usually painful (always unromantic) process of negotiating a prenuptial agreement on the eve of your wedding.