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Sand Hill’s Premarital Agreement Guide
November 18, 2020
For over 25 years, the team at Sand Hill has collaborated with family law professionals—not just to assist clients in navigating the complex financial aspects of the divorce process, but also to assist with financial considerations related to marriage, such as merging assets. While planning a marriage, it may be in a couple’s best interest to also work with both financial and legal professionals in creating and signing a prenuptial agreement.
In this edition of the Sand Hill blog, contributor Nanette S. Stringer provides legal insights relating to preparing prenups. Nanette specializes in premarital and post marital agreements as part of her family law practice based in Menlo Park, California. Our Sand Hill Wealth Managers also provide guidance on financial considerations when setting up prenups.
Please utilize the links below to skip directly to a topic of particular interest:
Why Consider a Prenup?
When most couples get engaged, they begin dreaming of their future life together and planning their wedding. They are typically NOT thinking about writing up a premarital or prenuptial agreement, also known more informally as a “prenup”. For many, there is the attitude that a prenup will create a negative, self-fulfilling prophesy and inevitably lead to divorce; but in fact, such agreements may serve as a roadmap for a healthy financial relationship in marriage.
A more positive way to look at the prenup process is to view it as an opportunity to discuss and develop a mutual understanding of the important topic of shared personal finances. Discussing this, along with applicable state laws before marriage, can lead to a more thorough understanding of any potential issues or concerns at a time when your relationship is likely at its best.
Using California as an example, anyone getting married effectively has the equivalent of a “complementary prenup” because California law defines what property is separate, what property is community, how earnings are treated in marriage, and what rights each spouse will have in the event of divorce or death. However, there are some circumstances where a formal prenup may still be helpful, such as:
- A second marriage
- One spouse has significant family wealth
- A lopsided income component, for example, one spouse lives on trust income while the other relies on earned income
- Couples who philosophically prefer to keep their finances separate
Introduction to California Marriage Law and the Uniform Premarital Agreement Act in California
California marriage law is based upon the concept of community property, which means that earnings during marriage, and assets acquired with those earnings, are considered equally owned by each spouse. California law also provides that property owned by one person before marriage, and property gifted to, or inherited by one person during marriage, is that person’s separate property and the other spouse has no ownership interest in it.
However, there are a number of ways in which the lines between what is “separate” and what is “community” property can become blurred, for example, when both separate property and community property are used to:
- Purchase an asset
- Pay down debt on an asset with earnings during marriage
- Commingling separate and community property in bank or investment accounts
California law also includes provisions for spousal support in case a marriage ends and gives a surviving spouse certain inheritance rights.
California has enacted the Uniform Premarital Agreement Act, which specifically authorizes couples to create their own agreement about property, income, and divorce and estate rights, so long as certain formalities are met. These agreements can be different than what California marriage law would otherwise provide.
In a premarital agreement, couples can include their own language about how property will be characterized, how earnings during marriage will be treated, how joint expenses will be paid, and anything else about property that is not against public policy and/or local laws.
A premarital agreement can also include provisions for:
- Transfers of wealth over time
- Spousal support
- Estate rights
In our view, a consultation with a family lawyer will help you to understand how California marriage law will apply to you in the absence of a written premarital agreement, and will help generate ideas for what you can (and cannot) include in an agreement, if you decide to have one.
Ideally, at least six months before marriage, couples should share and discuss their financial information with each other as well as with their financial and legal advisors and determine whether they want or need a premarital agreement. Initial discussion and disclosure should include:
- Each person’s current property and debt
- Each person’s current income and expenses (and any expected changes)
- Potential for future wealth acquisition (through gift, inheritance, earnings or deferred compensation, etc.)
- How to treat earnings during marriage
- How to handle expenses
- Whether to include provisions for spousal support in the event of divorce
- Whether to include provisions about estate and inheritance rights
Hire lawyers: In California, each person should have a family lawyer, as courts tend to invalidate agreements that did not involve independent counsel on both sides. The family lawyer’s expertise may be in the area of divorce law and/or estate planning, but should be someone with extensive experience in the premarital agreement process. In addition, couples may want to consult with financial advisors, and if they are not in agreement regarding the content of the prenup, they may want to involve an existing couple’s counselor or a trained mediator.
- Review and revise: Create a list of things you would both like to include in a prenup, as well as any points of disagreement or uncertainty that need to be resolved.
- Draft the agreement: Once any disagreements are resolved, one lawyer will draft a term sheet, or a complete draft agreement depending on their individual practice, then the agreement can be refined as needed until complete and satisfactory to the couple.
Sand Hill’s Financial Planning Team and Their Role in Premarital Agreements
A financial planner’s role is to help quantify different scenarios, or benchmarks, that may happen during a marriage, with reasonable assumptions for portfolio return, inflation, and life expectancy. Some examples of what couples model include:
- Longevity of marriage
- Whether the lower earning spouse would receive support
- Liquidity/wealth event
Cash flow planning illustrates what each spouse’s standard of living would look like if the marriage ended after each of these benchmarks. The objective for these discussions is fairness in preventing an overly lopsided existence for each spouse (i.e. one living in a cramped apartment while the other lives in a mansion). Planning will be of most value to the spouse who has fewer financial resources going into the marriage.
Each party’s goals and concerns will be different. In our opinion, for a good prenuptial agreement outcome, both parties need to have their wishes honored.
Most effective planning involves straightforward projections, such as using dollar amounts for specific scenarios, while an overly complicated prenup is just going to create confusion if the marriage does end. Endeavor to keep it clear and as simple as possible.
Post-Marriage Tasks and Long-Term Considerations
Ideally, a prenup will be flexible enough to work even when life changes in unexpected ways, such as for a child’s special needs, illness or disability, economic changes, etc.
The premarital agreement can be a road map, but couples are advised to check in with their financial advisors and attorneys
- before making a significant purchase or other economic decision;
- when there is a change in their circumstances (for good OR bad); or,
- if they move to another state.
It is also very important to keep good financial records, and to stay in close communication with your partner about how the agreement is working for you individually and as a couple.
While the hope is that a prenup will only end up serving as a planning document that gathers dust in your file cabinet, being prepared for any scenario is always the wisest course of action—especially when it comes to sharing your life with another person. As with financial planning, knowledge is power, and being proactive towards your financial arrangements prior to entering a marriage can potentially save stress and heartache in the event of a divorce. It’s better to explore these potentially sensitive topics when the relationship is strong, and there is less of a chance of emotions or biases to influence decision-making.
To read more about Nanette and her practice, click here to view her website. We welcome the opportunity to help you navigate the prenuptial agreement process if you have wedding bells in your near future.
Prenups for Lovers: A Romantic Guide to Prenuptial Agreements. By Arlene Dubin
Prenuptial Agreements: How to Write a Fair and Lasting Contract. By Katherine Stoner
*Although California law will not enforce agreements about child custody and support in a premarital agreement, couples can still include provisions for a child’s future security, such as the creation of a college savings account, as part of an overall financial plan.
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