Marital Exit Strategies That Can Make Good Sense
Key Takeaways
Prenuptial agreements can protect a family’s wealth and legacy and help avoid an expensive contested divorce.
Make sure to avoid the prenup mistakes that can lead to a court not honoring the agreement.
Parents of engaged children need to tread carefully when raising the issue of a prenup.
“Till death do us part.” Unless…
Options for Reducing the Tax Bite
It’s safe to say most people don’t enter into a marriage anticipating it will end. But, of course, the reality is significantly different Consider the sobering facts:
By some accounts, approximately 50 percent of first marriages end in divorce. That percentage rises to approximately 67 percent for second marriages and 73 percent for third marriages (see Exhibit 1).
In 2014, more than 813,000 couples in the U.S. divorced or had their marriages annulled.
The upshot: Creating a prenuptial agreement may not be the worst idea you and your future spouse come up with!
Prenup Pros and Cons
There are numerous reasons some more obvious than others prenuptial agreement before you marry or remarry. Prenups can:
Protect family wealth by ensuring assets (such as business interests and real estate) stay in the line of the biological family that presently owns them
Define separate property and protect it in case of divorce
The Dream Team
Protect a spouse from the debts incurred by the other spouse before the marriage
Safeguard the interests of children from a prior marriage
Avoid a contested divorce that might incur large legal fees and adverse publicity
Ultimately, prenuptial agreements give control to the spouses. Prenups let them make the decisions in case of divorce instead of using the default method of state law or letting a judge decide.
Source: Mark Banschick, MD, “The High Failure Rate of Second and Third Marriages,” Psychology Today, February 6, 2012.
Important: Without a prenuptial agreement, state laws will determine the rules about property and marriage. Some states are community property states, where assets are held jointly and divided equally in a divorce. What’s more, judges often have discretion when it comes to deciding what is equitable taking into account factors such as the length of the marriage and the contributions made by each partner to the wealth of the family
That said, there are a significant number of reasons people cite for not having prenuptial agreements, including:
Protect family wealth by ensuring assets (such as business interests and real estate) stay in the line of the biological family that presently owns them
Define separate property and protect it in case of divorce
EXHIBIT 1 Divorce Rate by Number of Marriages Stress Testing Family Offices
0 20 40 60 80 50% 67% 73%
First Second Third
It provides too easy a way out of marriage
It will increase the chance of getting divorced
An agreement shows a lack of trust and commitment.
Not surprisingly, then, discussing prenuptial agreements can be difficult for a couple especially when it’s the first marriage for both people.
But be warned: Failing to do so can prove very problematic down the line Generally speaking, discussions of prenuptial agreements are part of a larger financial conversation as a couple. Getting into the specifics about issues like splitting wealth, assuming debt and paying alimony focuses the conversation on the agreement itself. It is also important to make sure everyone is clear that these are “his and her” decisions not the decisions of a judge.
Well-enacted prenuptial agreements usually take time to think through and implement Being deliberate increases the likelihood that the agreement will be enforceable. It also enables the partners to seriously think through all the relevant issues and what the various terms of an agreement mean to them and to their marriage.
Important: Prenups are not cookie-cutter legal documents Each couple customizes the agreement, and each agreement tends to have somewhat different conditions from the others. Also important to know: Prenuptial agreements can be amended modified if circumstances change with the consent of both spouses.
Seven Prenup Mistakes to Avoid
Sometimes, prenups end up not being enforced by the courts. There are a few big reasons why that happens:
The prenuptial agreement will likely not be enforced if:
• It’s not a formal legal document. A prenuptial agreement on a napkin, for instance, is not valid as Steven Spielberg discovered. He had to pay $100 million to ex-spouse Amy Irving. The agreement also has to meet a particular state’s legal formalities and be free of careless errors Well-drafted prenuptial agreements can override states’ community property laws or equitable distribution requirements.
• It’s considered a “shotgun” agreement. If there is any sign that one of the people was coerced to sign the agreement, it can be unenforceable. This includes failing to provide an appropriate amount of time for each party to read the agreement.
• One party failed to read the agreement. When there is proof that one or both of the spouses did not read the prenuptial agreement, it might not be enforceable
Any assets and liabilities are unknown to either spouse. Full transparency between a partners is required All property and all debts must be disclosed
It includes invalid provisions. These are terms that are illegal or against public policy The courts will not enforce prenuptial agreements if they stray into areas such as waiving child support or requiring that the children be raised in a specific religion.
The couple fails to have separate legal counsel. Both parties should have their own legal counsel so that their separate interests are being promoted. In some states, this is a requirement
The agreement is unconscionable. If the prenuptial agreement is so completely unfair it puts one partner in a catastrophic financial situation and sets up things so the other partner is solidly positioned, for example the courts will very likely not enforce it. Unconscionable agreements are extreme.
Prenuptial Agreements and the Spouses‘ Parents
One interesting prenup dynamic to be aware of is the role and influence marriages, most couples even wealthy ones are unlikely to raise the issue of prenuptial agreements (unless the concept was part of their financial upbringing).
The affluent parents are often a different story, however. They do tend to broach the subject. Indeed, if you’re a parent, you may very well have raised this issue to your son or daughter.
In these situations, the parents usually want to ensure their family’s wealth will stay within the biological family (including adopted children) and not disappear with an ex-spouse. It is often important to address this matter and mitigate animosities.
Here are two strategies to make that parent-driven process more effective:
1
When a child is raised in an affluent household, it is often useful for the parents to discuss prenuptial agreements relatively early (e.g., in the child’s late teens or early 20s). This can be positioned as part of an ongoing discussion about family finances. Such conversations are much more effective before the child introduces his or her future spouse. That way, the conversation is seen as dealing with financial concerns—and not seen as aimed at the particular prospective spouse
2
In cases where there is a family business or the wealth is multigenerational, it can be useful to think about prenups in terms of family legacy. The issue then becomes more about stewardship and not just ownership. Moreover, it is framed as making sure the child’s children will inherit the assets.
Keep in mind: Parents promoting a prenuptial agreement need to realize that their son or daughter will have to make a full disclosure of assets. If so, this might be the first time the child is provided with a comprehensive understanding of the family’s wealth In addition, good estate planning at the senior generational level could potentially mitigate the need for extensive prenup agreements.
Getting Guidance
If you think you or a family member could potentially benefit from a prenuptial agreement, contact your legal or financial professional to explore the topic further.
ACKNOWLEDGMENT: This article was published by the VFO Inner Circle, a global financial concierge group working with affluent individuals and families and is distributed with its permission. Copyright 2023 by AES Nation, LLC.
This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services Past performance is no guarantee of future results An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Securities offered through Strategy Asset Managers. Victor Martinez is a registered representative of Strategy Asset Managers. Victor Martinez and Strategy Asset Managers are not affiliated with AES Nation, LLC
Victor Martinez
Strategy Asset Managers, LLC 790 E. Colorado Blvd. Suite 200, Pasadena, CA 91101 Office: 6266570559
