Why Valentines Day Starts Prenup Season

February 14th marks the beginning of the end for the “proposal season,” meaning that many newly-engaged couples are planning for weddings, honeymoons, and, if they're prudent, prenuptial agreements.

If Cupid has finally found his mark and you are engaged and planning a wedding, don't forget to budget time and money for a prenuptial agreement (or “prenup”). It's often the most important asset protection tool many successful people will ever need.

Risk prompts business owners, entrepreneurs and doctors to buy heavy levels of liability insurance, apply risk management plans, and implement asset protection planning to avoid a significant loss. Getting married also carries a significant amount of risk.

·      About half of all first marriages end up in a divorce

·      About 60 percent of all second marriages end in divorce

·      About 70 percent of all third marriages end in divorce

I routinely talk to people who have had years of high income and amassed significant wealth, and then lost half or more of their hard-earned net worth to a divorce. When I ask if they had a prenup, the response is predictably the same: “We didn't have anything to protect when we got married. We were not long out of school. We ended up successful and never thought a divorce would happen to us…”

Despite the divorce numbers, shockingly, less than five percent of married couples properly protect themselves with a prenup. While nothing can guarantee that a divorce won't be contentious, having a well-defined set of rules backed by the very clear legal separation of assets has proven to be an effective strategy that helps end frivolous claims early and gives you the best fighting chance.

A properly executed prenup is a voluntarily-entered, formal legal agreement that should be drafted by an experienced attorney that practices in the area of Domestic Relations law, not by your “buddy the real estate lawyer who can figure it out” and certainly not by using any online DIY kit. Doing so to save a few thousand dollars on legal fees would be exceptionally risky considering that divorce litigation itself can easily cost $100,000 or more and could end up costing you both half of everything you own and part your future income. How would that affect your retirement plans?  

State laws regarding the requirements and enforceability of prenups vary widely from state to state and are specific and unforgiving. Some states also require that each party has their own lawyer in place with whom they have reviewed the wide variety of legal issues the prenup typically covers, including:

·      Separating premarital assets including businesses or medical practices, savings, and real estate (like the condo you bought before you met)

·      Dictating the division and distribution of a variety of physical assets acquired during the marriage

·      Setting terms for any required spousal maintenance at divorce

·      Controlling what happens in the event of death, incapacity, inheritance, estate planning, and many other predictable conflicts issues including the division and attribution of income earned during marriage

·      Ensuring full and accurate disclosure of all assets by each party. Failure to disclose any assets can not only jeopardize the applicability of the prenup to that one asset, it can invalidate the entire agreement in the worst cases

·      Implementing the agreement well in advance of the marriage so that it is free of any duress or eleventh-hour presentation that could extort the other party to sign it under the threat of calling off the wedding. This means your prenup should ideally be done and signed months before the wedding, but late is better than nothing

·      Seeing that parties have independent counsel (or at least had full opportunity to consult with counsel and were explicitly advised to do so) and addressing any other formalities required by state law

·      And last but not least, determining the liability and division of premarital debt including student debt, which is commonly six figures for many doctors and other professionals.

Higher Level Prenuptial Asset Protection for HNW Individuals

One way to make a prenuptial agreement as predictable as possible, especially for those with significant premarital assets, is to combine a professionally drafted prenup (preferably drafted by a certified family law specialist) with traditional asset protection tools. Your premarital, separate property assets are disclosed and acknowledged as such by both parties and those assets are then put into the right legal structures that the owner solely owns, controls and benefits from.

Example:

The difference between the parties merely agreeing that my client's $4MM home that he owned free and clear before the marriage is his separate property, and that property also being held in an irrevocable trust that he is the sole grantor and a beneficiary of.

This planning is typically not just divorce risk specific, so it will also protect those assets from the owner's other, unrelated future personal and professional liabilities, including liability that may otherwise be attributed to both spouses in a community property state for the actions one spouse.

Example:

Both spouses are named in medical malpractice lawsuit against Dr. Smith for an issue in his surgical practice. This could also adversely affect the assets of his spouse, who is an attorney with both a significant income and inherited wealth. If her assets were properly secured as suggested, only the joint checking account they hold as community property would be exposed. 

If this separate property structure is both formally implemented and funded before the marriage and properly maintained as such it without commingling any community funds, it can also help protect the parties from future claims by their spouse for the appreciation of those assets.

In some cases, there is a disparity of net worth between spouses, and we help create two distinct buckets of assets that separate the higher net worth spouse's assets and create a new place to hold jointly owned or managed post-marital wealth, for instance a “his” or “hers” and an “ours”. In other cases, especially with my successful clients that marry later in life or where both are simply high earning or high net worth and both parties have significant wealth we may help create three separate buckets, “his”, “hers” AND “ours”.

Example:

-              Client owns $3MM home in AZ that she had had for years and high seven figures in investments. She holds these through an appropriate asset protection trust and holding company structure.

-              New spouse has $4MM home in Sand Diego that is held as his separate property they will now use a vacation home, and a similar amount of investments held in his own legal entities.

-              Joint property is limited to a joint checking household account they contribute to for shared expenses and a commercial property they jointly own through an LLC, with each of their separate holding companies holding their membership in the LLC and receiving their share of the rental income.

-              RESULT: Very little exposed community property available for the separate liability of either spouse and a well-defined and properly timed legal separation of ownership and control of their pre-marital assets.

Age doesn't protect you. Younger people are increasingly marrying later when they each often have some savings and a starter home, in addition to their practice and significant future income to protect.  Older individuals especially those entering a second or third marriage, have the higher risk of divorce and additional risk factors.

Put bluntly, they will have less time to earn, save, and rebuild wealth than they did after the first divorce in a substantially more demanding business climate.

ACT NOW: Timing is Vital

Finally, as with all asset protection strategies, timing is vital.  An enforceable pre-nuptial agreement is always executed well in advance of the marriage itself, to avoid any claims of “duress” meaning that one spouse was surprised with a pre-nup without adequate notice and was forced into signing it before they could think about it, get their own counsel, or to avoid being humiliated by cancelling a looming wedding date.

Ensure your financial “happily ever after” now, regardless of whether your marriage lasts a lifetime or not. There is no circumstance I've seen as an attorney where avoiding a tough conversation and the relatively small expense of a pre-nuptial agreement before a wedding, wasn't regretted in a later divorce.

Attorney Ike Devji has practiced in the areas of asset protection, risk management, and wealth preservation law exclusively for over two decades. He helps protect a national client base with over $8 billion in personal assets that includes thousands of doctors, real estate investors, business owners and entrepreneurs.