Prenups: Creating A Financial Plan For Marriage

THE FINANCIAL RISKS OF MARRIAGE

• Even if you have an agreement, marriage is a financial risk – albeit a lesser risk
• There is the risk an agreement will be set aside – although it is unlikely
• There are certain problems that a premarital agreement cannot protect you from

The Limitations of an Agreement

• California agreements are designed to apply to a divorce in California – although they may be enforced in other states
• Our courts have the power to divide property in our state and can only have an effect on out-of-state property by dividing in-state property

The Limits Of Premarital Agreements

They do not cover:

• Custody
• Religion
• Personal habits
• Liquidated damages for being unfaithful

What Will the Agreement Do?

• Waive community property rights, including businesses, real estate, retirement plans, and intellectual property
• Waive spousal support/spousal maintenance/alimony in certain circumstances
• Eliminate community property
• Proceeds of loans will not be community property
• Make sure that specific properties are kept separate
• Specify who will own a residence and who will live in it on divorce or death
• Waive probate rights

Premarital agreement will act as a contract to make a will – people can be compelled to provide for their spouse, their children, and/or their parents.

SPOUSAL SUPPORT/ALIMONY WAIVERS

• New to California, but many other states permit, and case law may control
• Unconscionability determined at time of enforcement (divorce)
• Weigh limitations of spousal support vs. outright waiver
• Risks of unenforceability
• Create wealth in spouse as protection
• You may need support one day – waivers are generally mutual
• Parties must be represented by counsel

Build a “Fair” Agreement

• Although no consideration is required, it is preferable not to give an incentive to attack the agreement
• If you want to enforce the agreement you must comply with the terms of the agreement
• The agreement cannot promote divorce (this is a technical term to be discussed with your attorney)

The California Rules — Seven Calendar Days

For the purposes of subdivision (a), it shall be deemed that a premarital agreement was not executed voluntarily unless the court finds in writing or on the record . . .
(2)The party against whom enforcement is sought had not less than seven calendar days between the time that party was first presented with the agreement and advised to seek independent legal counsel and the time the agreement was signed.

The seven-day waiting period mandated by FC §1615(c)(2) does not apply to parties who are represented by counsel at the outset. In re Marriage of Cadwell-Faso & Faso (2011) 191 Cal.App.4th 945

Recommendations

• Prepare Proof of Service of Agreement and Notice of Advice to Obtain Independent Counsel and attach to the Agreement showing that Agreement was served 7 days before it was signed.
• To be safe, sign the agreement no earlier than 7 days after the last amendment to the agreement

No Legal Representation

• There are a set of rules if one party is not represented by counsel
• We do not provide them here because spousal support limitations cannot be enforced without counsel

Tax Issues

• Transfers prior to marriage are taxable, transfers between spouses are not taxable
• No marital deduction for non-U.S. citizens; must have a qualified domestic trust – see IRC §2056, except as provided in §2056A (qualified domestic trust)
• Non-U.S. citizens: IRC §2523 (gifts to spouse limited to $110,000 outright each year – indexed for inflation)
• Tax-free exchanges between U.S. citizens, but IRC §1041 does not apply if not U.S. citizen
• Advise client to seek tax advice

Amending the Agreement

• If you change your residence
• If there is a change in your financial circumstances
• If there is a change in the law

See an attorney before you amend the agreement – there are different rules for married people entering into agreements.

Disclosure of Assets in the Agreement

• Provide full, fair, and reasonable disclosure
• Waive disclosure beyond that provided

Reasons the Agreement May Not Be Enforceable

• May not be enforceable outside California
• Spousal support clause may not be enforceable in CA if court determines unconscionable
• The law changes
• If separate property is not kept separate
• If there are conflicting agreements

More Reasons for Not Enforcing Agreement

• Nobody has a copy of the agreement
• If there is duress, fraud, or undue influence
• There was no representation by an independent attorney – particularly if spousal support is an issue
• Disclosure requirements not fulfilled
• For some reason that we cannot anticipate

Most Agreements Are Enforced

Despite the risks that the agreement will be set aside, most agreements are enforceable if written correctly and both parties are represented by legal counsel.

Seek the Advice of Counsel

• Make sure both you and your fiancée are represented by independent counsel
• Make sure the agreement has been translated for a non-English-speaking person