Texas Business Dispute Blog

Monday, August 21, 2017

Family Law Post (Part 1) - Love Is Forever, But A Pre-Nup May Be The Better Bet: The Financial And Other Benefits Of A Marital Pre-Nup

By Ladd Hirsch*

Not so long ago, marital pre-nups were viewed as devices solely for use by the rich and famous, who never seemed to stay married for long.  In today’s world, however, couples from all walks of life face a myriad of important financial and personal issues that a pre-nup can help them to address.  Pre-nups can benefit both spouses, including by:

  • Preventing costly, drawn out divorce litigation;
  • Protecting a spouse’s interests in a business;
  • Preserving valuable family assets, real property and heirlooms;
  • Assuring the inheritance rights of spouses and children;
  • Shielding one spouse or children from creditors; and
  • Giving peace of mind to the couple by reducing uncertainty about the impact of major life events in the future.

This is a two-part Post focusing on marital pre-nups.  Part 1 evaluates how a pre-nup can address important critical business and family issues for the couple.  Part 2 reviews the Texas law requirements for a pre-nup to be valid, and also considers the legal grounds for invalidating a pre-nup.  Spoiler alert:  pre-nups are fairly simple to create, they are subject to a presumption of validity in legal proceedings, and they are are difficult to set aside because the applicable statute provides only limited grounds to set one aside.

The Role of Family Law Counsel

Even if spouses ultimately decide to forego entering into a pre-nup, consulting with an experienced family law attorney before their marriage is beneficial.  Counsel will review with them marital property law works and how their property will be divided in a divorce, identify particular assets or debts they have and explain how they could allocate these assets in a divorce to protect the assets for their benefit or for the benefit of their children or other heirs.

Community Property Rules

The factors that have led to the increased use of pre-nups include all of the following: couples are marrying for a second or third time, spouses have racked up debts from college, or previous training programs, they own private companies, and/or they have children from prior marriages.  A pre-nup operates much like an insurance policy.  People do not expect accidents to happen, but they buy insurance to protect themselves in case negative events happen to them in the future.  While couples do not expect a divorce as they walk down the aisle, planning for unforeseen events like a divorce can avoid large legal bills in the future, and also lessen the emotional turmoil that is involved in a divorce.

Before discussing how a marital pre-nup can be helpful, the starting point is to review the rules governing the division of property in a community property state like Texas.  Under Texas law, all community property at the time of the divorce is subject to a just and right division.   A spouse’s separate property is not subject to division, but there is a rebuttable presumption that all of the property the couple acquired during their marriage is community property.  This includes any property the couple acquired during their marriage, such as wages and benefits and income generated from their community property.   

Many couples have some separate property at the time of their marriage, and they may receive additional separate property during the marriage through gifts or inheritances.  In the absence of a pre-nup specifying the separate property of each spouse, the rules for determining community versus separate property create a risk that, upon divorce, the couple will become locked in disputes over what is separate property and what belongs in the community estate.  It is not uncommon for divorcing couples to engage in costly legal battles over which assets belong in the marital estate, including real property, the ownership of a business and accumulated debts.

Example:  A divorcing couple has a total of $4 million in assets, which would be divided 50-50 if all of the assets are community property, or $2 million each.  If one spouse can show, however, that a piece of real estate worth $2 million is his or her separate property, the marital estate is then worth $2 million and one spouse will receive $1 million in the divorce action while the other spouse will walk way with $3 million, comprised of $2 million in separate property and an additional $1 million in community assets.

The Benefits of A Marital Pre-Nup

A pre-nup can be as broad or as narrow as the couple desires.  It can cover all property they hold, or it can deal only with certain, specific assets or categories of assets they hold.  For example, if the chief issue before marriage is protecting the ownership of a business that exists at the time of the marriage, the pre-nup can focus solely on that issue and make clear the business and all of the income that flows from it is the separate property of one spouse. 

The following is a list of financial and personal circumstances that can be addressed in a marital pre-nup to permit the couple to protect themselves from difficult, expensive legal battles if they ever divorce in the future.  One of the chief benefits of a pre-nup is providing the couple with peace of mind  knowing that they have confirmed the ownership of vitally important assets and that these assets will not be subject to any valid claim or dispute by the other spouse.

  • The Business Owner

A spouse who owns all or most of a private company at the time of the marriage should seriously consider the benefits of  securing a pre-nup before the marriage.  Without a pre-nup, the spouse who did not own the business at the time of marriage may nevertheless be deemed to be a full or part owner of the business by the court in the divorce case.  At a minimum, the failure of the business-owner spouse to obtain a pre-nup means the owner will be required to prove to the court that his or her ownership interest was separate property at all times.

  • Important Family Assets, Real Property or Heirlooms

Every pre-nup is different, because due to the different assets held by each couple, and the meaning they place on these assets.  The benefit of a pre-nup is that it is hand-crafted to permit the couple to specify how the assets should be divided between them.  At the time of a divorce or the death of one spouse, the other spouse or the executor of the decedent should not be required to fight about who owns what family heirlooms, real property and other assets.  Instead, the well-crafted pre-nup will attach a schedule showing what assets belong to each spouse, what they will receive at the time of divorce and what belongs to their heirs upon their death.

  • Large Personal Debt of One Spouse

If one spouse has a heavy debt load, a pre-nup can protect the community property from becoming subject to the debt of that spouse.  Stated another way, the pre-nup operates to make sure that upon divorce, the large debt that one spouse brought into the marriage will not become the responsibility of either the community (marital) estate or of the non-debtor spouse. 

  • High Net Wages or Assets

A spouse with a large, steady income stream may not be comfortable with the idea that immediately upon marriage, his or her spouse  has a claim to ownership of  50% of the annual income paid during the marriage.   For example, a professional athlete who is slated to earn more than $10 million annually may decide that his or her new spouse should not receive the right to receive 50% of that income stream as community property from Day 1 of the marriage.  Instead, the athlete may ask his or her spouse to enter into a pre-nup, which provides that 75% of the athlete’s income remains his or her separate property for the first five years of their marriage.  If the couple remains remain married for more than five years with no divorce petition being filed, the pre-nup restriction could be lessened or removed entirely.

The pre-nup could also address specific high value assets that exist in the marital estate and provide how they are owned at the time of marriage and will be allocated between the spouses upon divorce or the death of the spouse owning the assets.

  • Protect Children from Prior Marriage

A spouse with children from a prior marriage may have support obligations for those children.  A pre-nup will specify what assets will be protected for the benefit of the children from the prior marriage, as well as what assets will benefit children from the the new marriage in the case of divorce or death.  In effect, this is protecting the children’s inheritance rights.  The pre-nup can also specify, however, that it remains in force for a set period of years and, as a result, the agreement will not remain valid after the children become adults.

Conclusion

In light of the many financial and personal issues that most couples face when getting married, pre-nups are no longer solely for the rich and/or famous.  The pre-nup is a planning document in which the couple decides before marriage how to divide their assets in the event of their divorce or death.  This process is assuredly not a romantic one, but it is a smart decision that has many potential benefits, both financial and emotional.  On the financial side, a pre-nup provides a clear, thoughtful plan in which the couple determines how to structure the division of their assets. On the personal side, this pre-set asset allocation plan will help the divorce process go more quickly, smoothly and cost-effectively, which should lessen the conflicts between the couple in the divorce process.

In our next Blog Post, we will review the legal elements of a pre-nup under Texas law, and consider the ways authorized by statute to invalidate a pre-nup after it goes into effect.

*Many thanks to Kevin Segler, an exceptionally talented family law attorney with KoonsFuller, for his thoughtful comments, which were of great value in preparing this Blog Post. 


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