Everything You Need to Know
About Getting a Prenup
The venue, the guest list, the flowers, the cake... When it comes to preparing for marriage, many brides- and grooms-to-be spend countless hours toiling over even the tiniest of details of their big day. Much less time is devoted to planning for the possibility that the union won’t end in happily ever after—and understandably so. Still, it’s important that those entering a marriage take the time to have an honest, open conversation about what would happen to their assets in the event that divorce should occur.
A prenuptial agreement is a useful tool for guiding the dialogue, as it helps replace any “what-ifs” with a mutual understanding of how, exactly, each partner will be protected if they don’t achieve their storybook ending. Although it can be a sensitive subject, a prenup helps ensure that newlyweds enter into their union with peace of mind and as a united front.
What is a prenuptial agreement?
A prenup, also known as a prenuptial agreement or premarital agreement, is a contract entered into by a couple prior to marriage. Through this written agreement, the couple plans for what will happen to their existing assets and assets they acquire in the future if they ever choose to get divorced down the road, or how their existing assets will be treated if either of them passes away.
Uniform Premarital Agreement Act (UPAA): This is a law that governs how prenups are created and how they’re enforced. According to this law, prenups are required to be written contracts with lawful terms. In addition, they need to be signed by both parties, voluntarily and without coercion, intimidation, deceit, or duress. Prenups are only valid if both parties received complete information about the other spouse’s property and finances prior to signing and had at least seven days to review between receiving the final agreement and signing it. As a practical matter, both parties must be represented by a separate attorney when signing the agreement. Cage & Miles will not assist in preparing or reviewing prenups where both parties are not represented by counsel.
Marital settlement agreements (MSA): An MSA is a legally binding, written agreement entered into by divorcing spouses that covers matters like property division (real and personal property), spousal support, child custody, and child support. The agreement is reached outside of court, saving time and money. Having a prenup in place can make it easier to create an MSA.
Real property: This phrase refers to assets that are fixed and significant in nature, such as land and buildings. Use of real property after separation and during the divorce proceeding is often a highly contested issue that can be addressed in a prenup.
Personal property: This refers to any property not fixed to land. This can include vehicles, electronics, equipment, jewelry, furniture, and much more.
What does a prenup do?
There are some things a prenuptial agreement can cover and other things it doesn’t have the power to protect. Things that you can address in your prenuptial agreement include inheritance rights, spousal support, the making of a will or trust, ownership rights to death benefits from life insurance policies, and business ownership, management, and division.
In California, the terms of a prenup cannot violate public policy. This means that it cannot include provisions regarding child support or custody and visitation. In addition, a prenup cannot make requirements for things like fidelity or weight loss, nor can it cover anything regarding domestic services, care, or companionship. Since California is a no-fault state, it cannot penalize either party for perceived “fault” in the potential divorce. This includes a prohibition against liquidated damages for fault-based behaviors such as infidelity.
Community property: Community property refers to any real or personal property acquired by either party during the course of the marriage, except by gift, inheritance or bequest. Pursuant to the California Family Code, community property is divided equally between parties upon divorce. Through a prenup, the parties can “opt out” of the community property system.
Separate property: Also called non-marital property, this refers to anything either spouse already owned before they married or after the date of separation. Separate property includes property received during the marriage by way of gift, inheritance, or bequest. Through the prenup, parties can make specific agreements to share gifts or inheritance funds.
Inheritance rights: This refers to who has the legal right to claim your property after you die. If there is no will in place, assets generally go first to the spouse in accordance with intestate law, but you can stipulate otherwise. References to the creation of estate plans is a common practice in prenuptial agreements when either party has children from a previous marriage.
Spousal support: Also known as alimony, spousal support refers to payments made from one spouse to the other during the pendency of a divorce and after judgment. Spousal support is intended to allow the supported spouse to maintain the lifestyle enjoyed by the parties during the marriage.
No-fault divorce: California is a no-fault divorce state, meaning you do not have to prove anyone is at fault when you petition for a divorce. You can cite a reason that involves no wrongdoing, like “irreconcilable differences.”
Reasons to get a prenup
Marriage is more than an emotional commitment to your partner. Legally speaking, it’s also a financial agreement. By default, all married couples have a marital agreement set forth in the California Family Code. Unfortunately, the majority of spouses with this agreement are not familiar with the terms. That’s why it’s so important for couples to have in-depth conversations about their finances before walking down the aisle. One great way to do this, and to have an enforceable record of the decisions you make together ahead of your wedding, is with a prenuptial agreement.
If you don’t get a prenup and your marriage ends in divorce, the California Family Code will determine how your property will be divided. If you have something else in mind, a prenup is the best way to plan for that possibility—even if you believe your marriage is extremely unlikely to end in divorce. Not convinced yet? Consider, too, that pets are considered property under California state law. A prenup would also allow you to determine who gets custody of any family pets in the event of a divorce.
Income and Expense Declaration: As a matter of best practice, you should expect to prepare an Income and Expense Declaration (form FL-150), prior to the drafting of your prenup. This includes all information regarding your earnings and expenditures.
Schedule of Assets and Debts: This is another form for documenting your financial situation (form FL-142) should also be completed. It details not only everything you own but also everything you owe.
Fair Market Value: This refers to how much your house or another piece of property is worth. It should be the price at which the property would reasonably sell for.
AB-2274: This is California’s “pet custody” law. Essentially, it states that while pets are property, they are different from a car or house. Their best interest needs to be considered when custody is awarded to one spouse or the other.
How property division works in California
One of the most difficult parts of a divorce is figuring out how marital assets will be divided between the spouses. With limited exceptions, in community property states like California, marital assets (everything you’ve acquired individually and together since the marriage, including debts) is jointly owned, meaning it will be split 50/50 in most cases. There are many reasons this might not work for you, and a premarital agreement can help you have more control over division of property.
Some of the biggest factors that can make the 50/50 property split unfair or undesirable are high net worth, large amounts of debt, and ownership of business interests. Each of these issues presents unique concerns such as other business owners, tax considerations, and business valuation. Prenups allow you to put a plan in place for navigating these concerns.
Community vs. separate debt: In California, both spouses will be responsible for all debt acquired together or separately since getting married. In addition, community property could also be liable for separate debts one spouse incurred prior to marriage if a property crafted prenup is not prepared.
Commingled assets: Be careful! A gift to one party during the marriage can be considered separate property, but if it’s deposited in a jointly held bank account, it becomes commingled. That means that a tracing may be necessary to prove up the separate character of the funds.
Tracing: When assets are commingled, this method can help you determine what exchanges, sales, etc. your separate property has gone through. Documentation is an important part of this process. Tracing almost always requires hiring a forensic accountant and can be an expensive process.
Epstein Credits: A party to a dissolution can request reimbursement for payment of community property debts post-separation with separate property funds. The most common example of this occurs when one spouse pays the mortgage on the marital residence post-separation. Epstein Credits are discretionary and when making the determination of whether to order reimbursement, the court will consider factors such as whether the requesting spouse had satisfied a duty of support and which spouse had possession of the encumbered asset for the time in question. In order to get ahead of this issue, parties can include provisions regarding Epstein Credits in a prenup.
Watts Charges: If a spouse has exclusive use and possession of a community property asset (such as the marital residence) post-separation, the other spouse may request payment for one-half of the fair market rental value of that asset. In the example of a house, the rental value will be offset with any payments the occupying spouse made directly for the expenses such as the mortgage and property taxes. Again, this type of charge is discretionary and the court will consider a number of factors in deciding whether to grant such a request.
Protecting assets from divorce
Maybe you’re going into your marriage with some of your assets tied up in a trust or estate plan and you’re not sure the best way to go about protecting them. This is yet another situation where a prenup can give you the protection and peace of mind you need.
It’s a common occurrence for trusts established during a marriage to cause problems when a divorce rolls around because sometimes one partner doesn’t realize they’ve waived separate property or transmuted community property. A premarital agreement tackles these issues ahead of time. You’ll examine the terms of your trust and ensure that everything is divided the way you intend. Conversely, if the trust was established before the marriage, it may need to be revised now that your marital status has changed. Either way, a prenup can save you many headaches down the road!
Trust: A trust is an arrangement whereby a party (known as “trustee”) holds title to property and controls that property for the benefit of another party, known as “beneficiaries”. Often the trustees and beneficiaries are the same people; sometimes they are not. Trusts are often used as estate planning devices to avoid probate.
Probate: A probate proceeding is a court-supervised legal action whereby the debts of a deceased person are addressed and his or her assets are distributed pursuant to either a will or the laws of that person’s state. A probate proceeding is a matter of public record and often takes longer to complete and costs more than the administration of a trust post-mortem.
Revocable trust: A revocable trust isa type of trust that can be revoked or amended by those who created it until a certain event happens: usually the death of the creator of the trust. Revocable trusts are commonly used in estate planning to avoid the probate process, offering privacy to the family of the deceased and savings in legal fees necessary to distribute an estate in a formal probate. When a revocable trust is created and funded, the person transferring assets to the trust retains ultimate ownership and often control over those assets.
Irrevocable trust: An irrevocable trust is a type of trust agreement that cannot be amended or changed once it is created, except in extraordinary circumstances. When an irrevocable trust is created and funded, the person transferring assets to the trust no longer has control over those assets.
Will: A will (also known as a “last will and testament”) is a legal document signed by a “testator” that may provide for the distribution of real and personal property. Parents may also nominate guardians for their minor children in their wills. Even if you have a living trust, a will is an important part of an estate plan as it can provide that any property you fail to fund into your revocable trust is transferred (or “pours over”) into that trust.
Estate plan: An estate plan is a comprehensive set of documents that may include trusts, wills, powers of attorney, and other documents intended to express a person’s preferences and desires as to the ultimate disposition of his or her property at death or during incapacity.
Postnuptial agreement: Parties who did not enter into a prenup prior to marriage, but still would like to reach agreements regarding property division in the event of a divorce, can enter into a postnuptial agreement. Postnuptial agreements are limited and more difficult to enforce because parties owe each other fiduciary duties which become effective upon marriage. In addition, unlike with a prenup, parties to a postnuptial agreement cannot make agreements regarding spousal support.
Transmutation agreement: This is a type of postnuptial agreement that can change the character of property from either community to separate, separate to community or one spouse’s separate to the other spouse’s separate.
Can you fight a prenup agreement?
If a premarital agreement was not prepared according to statute or case law, all or some of the terms of the prenup might be set aside during divorce proceedings. Unfair or unreasonable clauses can make the agreement unenforceable, as can failing to take the seven-day waiting period or signing under duress.
One common reason premarital agreements are overturned by judges is a failure to disclose important financial information prior to execution of the agreement. Suspicion of hidden assets is very common in divorce proceedings, especially when one of the spouses is self-employed and doesn’t have a W-2 to break down their total income.
Unconscionable: Something is considered unconscionable if it’s shockingly unfair or unjust. A waiver of spousal support in a prenup will not be enforced if it is found to be unconscionable at the time of enforcement. The waiver of support is not evaluated for unconscionability at the time the parties entered into the prenup, but at the time one party seeks enforcement.
Duress/manipulation: Contracts are intended to be signed of your own free will and volition. A premarital agreement will be set aside if a party can show that the contract was signed as a result of coercion, force, or fraud.
Hidden assets: If your spouse has money or property that they do not tell you about before you sign the prenup or during the divorce process, they can face serious consequences. It’s illegal to hide assets in these situations.
Financial infidelity: This refers to when married couples lie to one another about finances, including debts, income, expenses, and more.
Forensic accountant: Your attorney may encourage you to work with a forensic accountant, who can search your bank records and other financial history documents for signs of financial infidelity or hidden assets.