Usually by the time couples have come to see me at least one has already firmly decided they want a divorce. Every once in a while I will hear things from one or both spouses that give reason to pause, and explore if there are other options available to avoid a divorce. In some situations a big challenge in marriage is a difference of philosophies regarding the finances, investing and spending. Finding a way to navigate these differences may result in solving these differences so that the marriage can continue. In this week’s blog we explore the option of a post-marital agreement, or postnup to help couples navigate their financial disagreements to allow for the marriage to continue. I will briefly explain what pre-marital and postmarital agreements are, the legal differences that make postnups so challenging, and some considerations as you explore the possibility of addressing financial challenges in your marriage by way of a postnup.
So, what is the difference between a prenup and a postnup? The difference between the two is somewhat obvious in their names alone. A premarital agreement is an agreement between a couple not yet married, but planning to get married, that addresses their rights and responsibilities that will attach upon their marriage. A prenup is typically used to alter those rights but can also be used to simply clarify the financial circumstances of the couple at the time of their marriage. An example of clarifying financial circumstances is including in the agreement a recitation of what assets and debts each spouse has coming into the marriage. An example of altering rights is a provision that any retirement earned by either spouse during the marriage will remain their own separate property. If there was no prenup, each spouse would otherwise have an interest in any retirement earned by either of them during the marriage.
A postmarital agreement is an agreement between married spouses that typically alters their marital rights, but can also be used to clarify how certain property will be treated without altering any legal rights. An example of a clarifying agreement is if one spouse receives a large inheritance, a postnup might confirm that the separate funds have been received and are intended to remain the separate property of the recipient. This is not changing the law, but is just making a clear record of the character of the property received. An example of a postnup altering rights is an agreement that certain property accumulated during the marriage will now be awarded to one spouse or the other as their separate property, or where the spouses agree in a postnup to waive the right to spousal support in the event of divorce.
The legal issues that distinguish prenups and postnups. Timing is everything with these agreements. A significant shift takes place in the legal landscape once the marriage takes place. With a prenup the couple is entering into an agreement without any legal responsibilities toward one another. They are two individuals who can negotiate terms they find most favorable to their own interests. As they approach getting married they can choose to alter the impacts that their marriage will have on their rights and responsibilities toward one another. Since they are not yet married they are not impacting rights that they already have, but are instead making it clear that in getting married they are choosing to not have certain responsibilities toward one another as would otherwise be the case upon getting married.
With a postnup all this changes. First and foremost, married spouses have a legal responsibility toward one another. They have entered into a fiduciary relationship where they are legally required to treat each other with good faith and fair dealing. They can no longer seek to better their own lot to the detriment of the other spouse. The second big shift is that upon marriage certain rights arise. Married spouses assume a responsibility for taking care of each other financially, and community property rights attach where anything accumulated during the course of the marriage is presumed to be community property. Once married, any subsequent agreement to do something contrary to these rights is altering existing rights and potentially negatively impacting one or the other spouse.
So, with a postnup spouses are contracting with each other presumably to clarify their responsibilities toward each other to resolve conflict or disagreement in their relationship. There is not really much of an issue if the transaction looks fair. An example might be that we have $100,000 and our agreement is that we will each receive $50,000 and whatever we choose to buy with it we will receive as our separate property. Absent this agreement the $100,000 would remain community property. When assessing if either spouse took unfair advantage of the other in agreeing to these terms, it seems fair enough given each is receiving the same amount.
The real challenge is when the terms do not appear fair. One example might be when a higher earning spouse seeks a postnup that terminates either spouse’s right to seek spousal support. Another might be where that same higher earning spouse wants to end the accumulation of community property so that whatever income either spouse makes, and any assets thereafter accumulated, remain the property of the spouse earning it. The consideration might be that the advantaged spouse is willing to remain in the marriage, but only if some of these marital rights are terminated.
The pitfalls of postnups that lack fairness. Spouses are allowed to enter into agreements that impact their rights and responsibilities toward one another. Since they have a fiduciary responsibility to one another the terms of any such agreement are subject to scrutiny. One challenging thing is that the scrutinization of any such agreement will not typically take place until a divorce is filed and a spouse seeks to enforce the terms at that time. In a situation where a couple decides to stay married because they have resolved financial disagreements that were a source of strife in their marriage through signing a postnup that might favor one spouse over the other, a risk arises of it later getting challenged and thrown out. A couple that enters into a postnup to remedy such problems have an expectation of the agreement being honored, so having it challenged and thrown out would not necessarily be a fair result given the expectations of each spouse in entering the agreement. Absent the postnup a divorce could have taken place much sooner and the fact that it continued could unfairly treat the spouse who remained in the marriage solely based on the postnup terms.
Approach postnups very carefully. If you are going to remain married solely based on the terms of a postnup then there are a few considerations. First, be sure to get legal advice from an attorney who is well versed in postnups. Insist that your spouse also receive legal advice regarding the terms. Strive for fairness on the face of the agreement. Ideally, each spouse will be receiving something of equal value in the agreement or will be similarly situated and equally impacted by whatever terms are being agreed to. Do everything possible to make clear that there was no undue influence and that you have met your fiduciary responsibilities to one another in entering into the agreement. Understand the risks of an unfair postnup being scrutinized and perhaps set aside at the time of divorce. Postnups can be a tool that can effectively sort out financial differences between spouses, but do all you can to make clear that everyone knew what they were doing in accepting the terms and thus have been treated fairly and reasonably.