PRENUPTIAL AGREEMENTS: DOES LOVE REALLY CONQUER ALL?
As a financial planner, I believe in planning bigger futures for my clients, but I have learned that there are subjects where I am unable to add value because they fall outside of my area of expertise. Pre-nuptial agreements (commonly called pre-nups) fall in to this category. Pre-nups identity the separate property of each fiancé (assets owned prior to marriage) and if, or under what circumstances, those assets or their future earnings should remain separate property or become community property (assets owned equally by both spouses). This process begins with questions of law but quickly transcends into the emotional questions of "fairness,” the definition of which depends on one's perspective.
When two young people with few assets meet, fall in love and marry, their life is simple. All assets are community property. Upon separation, all assets are divided equally.
However, when one party comes to the marriage with substantially more assets than the other, he or she wants to assure that those assets are secure should the marital bliss end in dissolution. That person usually believes that a pre-nuptial agreement is fair. The other person often believes that their love is being diminished by money. Who is correct?
Is it naive to believe that the marriage vows will result in a lifetime of happiness? Or should the statistics of broken marriages and no fault divorces justify self-preservation at the outset? Does either view increase the likelihood of either result? Both views have some merit.
If pre-nups were illegal or if they had a time limit whereby 20% of separate property vested into community property every five years, would marriages last longer or would they be terminated before each five year anniversary?
Confused? I am perplexed.
My only conclusion is that the "haves" see perfect clarity, as do the "have-nots". As the disparity of wealth increases, the issue of fairness becomes clearer.
The equitable solution is easier to resolve if the couple included someone on the Forbes list of the 100 richest people. Because of the huge disparity of wealth, no reasonable person could claim a community property right to the assets but the wealthy party could easily provide a separation package of several million dollars and still be financially secure.
Circumstances involving the merely affluent person running a family business or the professional who built a practice over many years prior to marriage are different and potentially more difficult. Lacking the resources, they might disagree about the terms of an equitable agreement. For example, the woman who agreed to put her career on hold, become a stay-at-home mom, raise the children, and support her spouse with a stable home life might refuse to sign a pre-nuptial agreement. She might claim that she would be contributing to the family’s financial success. In such case, should all the separate property assets remain separate forever? Should a portion of the assets become community property? If the assets increase in value during the marriage, should the profits be shared either equally or equitably?
I don't know the answer. There are equities in the positions of each spouse.
What I have learned are the limits of my mandate as a financial planner and the wisdom of not taking sides. When I was a young attorney and planner, I honestly answered a client's question about whether he should prepare a pre-nuptial agreement and I still regret not suggesting that he discuss the question with a domestic relations attorney as the expert. It would have avoided years of hurt feelings, blame and discord. Fortunately, I was a quick study and never repeated that lack of judgment. Some questions demand clear answers while others require absolute neutrality.
The attorney could give clear advice to one client as his or her advocate but could not represent both parties because their interests are conflicting. Likewise, if my client is the couple, I have a fiduciary relationship with both parties and cannot act as an advocate for them individually where their interests may conflict.
If only one party is my client, I could be both an advocate and a fiduciary before the marriage. However, my client and I should realize that our relationship would quickly change after the marriage and conflicts of interest may require termination of the relationship. Such potential conflicts are foreseeable and should be discussed. Success of a long-term relationship relies on trust, so positions that undermine trust should be avoided.
A referral to an attorney who can be an advocate for each client is essential. Each party should have their own attorney. The individuals will ultimately resolve the issue of fairness to their satisfaction, and most importantly, without any resentment or distrust toward the financial planner with whom they have a continuing relationship. Where the success of the relationship is dependent on the respect and trust of the client, both wisdom and compliance with the financial planner’s legal obligations require neutrality when facing conflicting positions.
Marv Kaye, J.D., CFP® | Kaye Capital Management