Depending on the Circumstances, Prenups Can be Broken in a Divorce
Together you fell in love. And of course, you thought you’d live happily ever after. That’s why, when he first broached the topic of the prenuptial agreement, you were surprised, sure, but you weren’t hurt. And to prove you weren’t there for the money, you went ahead and signed it: with a flourish, without a second glance.
Now that the marriage is over, you realize you may have given up more than you ever intended. Your pride is gone, that’s a given. Is it true you also signed away your half of some important shared assets, your pension, even your dog? Maybe not, says, Daniel R. Burk, certified divorce financial analyst (CDFA) and president of the Northern Virginia-based company, Resolution Point. “If for any reason, the prenup was signed under pressure, it can be broken. Clear proof of coercion, duress, fraud, undue influence or bad intent, will void the document.”
According to Burk, other breaches include:
- Ineffective or unbalanced legal counsel;
- Agreements that were made verbally, as opposed to written;
- Or if the document was never signed;
- Provisions regarding child support will be voided while the rest of the agreement might stand;
- Unconscionable provisions. “For example,” explains Burk, “a provision that says ‘One spouse must lose weight; or even ‘Child support won’t be provided upon divorce’ wouldn’t stand up in court.”;
- Severe financial imbalance before or after the marriage;
- And of course, false or incomplete information, particularly financial information.
In fact, prenups get blown up regularly, says Michelle Smith, CDFA, of Smith Financial Strategies Group in New York. “Judges are the ones who make the final rulings. And they are human beings, just like everyone else,” she explains. “They are reading the faces in the room — and the body language. They are thinking, ‘Does this smell fair?’ Blanket complete waivers aren’t viewed as fair. Did the partner have adequate legal representation? Were the issues thought about, negotiated, discussed, disclosed? The judges look for financial disclosure and the lack thereof. They weigh any appearance that you were trying to mislead, which will taint the entire document as disreputable. Consider this: Anytime there is nondisclosure, there is a 50/50 shot it gets thrown out. All the more reason you want to not only disclose but over-disclose.”
Gabrielle Clemens, CDFA and vice president of wealth management at Citi/Smith Barney in Boston, points out that the judicial system takes into account such discrepancies even after the document was signed by both spouses. “Judges believe in a thing called ‘equity powers’,” she explains. “You can write in anything you want, but sometimes a judge will throw out a clause that he feels is inequitable. In fact, judges can be inconsistent. Depending on the day, the weather, or the judge’s own life experience, he can ignore, or disregard any provision.”
The most common prenup-buster is the failure to disclose an asset prior to signing. Whether the item was overlooked, or the exclusion was deliberate, the revelation can void the whole document, which means all the other provisions can be revisited as well. “Both you and your future spouse have a fiduciary responsibility to bring all of this forward,” explains Susan Campbell, a CDFA, and principal with Buena Vista Financial Resources in San Francisco. “After all, the goal is to make informed decisions about your future.”
If not, the things you thought would never be up for grabs are suddenly in play. To help prod her clients toward an open and honest account of their assets, Campbell provides them with a list of possible items that should be covered.
These include:
- Property division;
- Future inheritances, and the income from inheritances as well;
- Irrevocable trusts;
- Off-shore bank accounts;
- Unusual investments, such as timeshares;
- All income sources;
- Caps on future alimony payments;
- Existing life insurance policies; and
- Any trusts or partnerships.
Even health insurance coverage can become a big issue in divorce, says Campbell. “That’s because most couples share the policy, and individual health insurance is next to impossible to find for many people these days.”
All of this does not mean that prenups have no place in forming a more perfect union. In fact, it can help lay the groundwork for an open and honest communication that potentially can protect both parties’ futures, regardless of the long-term success of the marriage.
“Prenups can form a basis for discussion on important issues that otherwise might go untouched,” explains Burk. “After all, before weddings, who wants to rock the boat by talking about what will happen with grandma’s inheritance or spousal support for someone’s ex? By using the framework of a prenuptial agreement, these topics can be discussed with a structure that doesn’t feel that one person or the other is being stingy, or raising needless questions. What will happen with gifts and inheritances as they are received from family members? While state laws often address what happens in the absence of agreement, one of the couple may have different ideas than either what the law provides by default, or what the other person might be considering.”
Clemens agrees. “The attitude toward marriage — and divorce — is so different from the past,” she says. “These days, everyone should consider a prenup, particularly if they have significant assets, or certain reasons for having a prescribed exit strategy for the marriage. Financially or emotionally, no one can afford to look at marriage through rose color glasses.”
Insights on how you currently interact with your intended spouse regarding financial issues help your certified financial planner put your long-term needs into perspective, adds Campbell. For example, if you and your partner have different retirement goals, planning the prenup opens the door for a discussion on that topic. “One partner may be the type that maxes out his 401K, and takes advantage of every retirement vehicle available, whereas the other may not save at all,” she says. “In a divorce, the one who saves would want to get those savings protected in case of a divorce. You’re far better off having this conversation now than 20 years from now.”
Here are some of the questions Campbell asks her clients:
- How are you going to treat household expenses?
- Do you have a joint account for income, or separate?
- If it is a joint account, how much does each contribute, and who decides what, and when, funds are withdrawn?
- How much debt have you and your partner incurred, separately and together?
- What is your payment plan on the debt?
- How much will be saved each month? What are these funds eventually used for?
- Does one of you have a spending issue?
Although credit card debt is split between the partners during divorce, legally the credit card companies can still go after both of you — which affects your credit, too, explains Campbell.
- Where will you live, if you both have property?
- If you’ve agreed to buy a new home together, what if any of it will be community property?
- What is your approach toward investments?
“If one of you likes risky stocks, and the other plays it safe with CDs, you’ll have to consider who’ll manage your investments, and how they would be split,” warns Campbell.
“Fear of the unknown is not a good reason to avoid the prenup. It is wise to know what your rights and obligations are going into the marriage,” says Daniel Burk. “Each [partner] should have a separate lawyer, in any event. Your lawyer can talk to you about your rights, with and without a prenup.”
“And while your lawyers will do the negotiating,” continues Burk, “I highly recommend that the couple speaks for themselves, perhaps using a mediator to facilitate and organize the conversation. Through the mediation, you can learn techniques that will help you with all your tough conversations throughout the marriage.”
