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Don’t Give It Up…Get a Pre-Nup

Since October 2013, same-sex couples have exercised their right to get married in the State of New Jersey. Now, the historic June 26, 2015 Supreme Court decision in Obergefell v. Hodges has made same-sex marriage legal in all 50 states. Along with the right to get married comes the right to get divorced.

  
It seems strange that at the time you apply for a marriage license, the government does not tell you what obligations you may have if you get divorced or separated. According to recent studies, while most people who get married believe their marriage has a good chance of lasting a lifetime, about 40% to 50% of first marriages end in divorce. The statistics for second marriages are worse, with about 60% to 67% ending in divorce.

Prenuptial agreements are tools that can be used to mitigate issues that can arise should the marriage fall short of a lifetime. A prenuptial agreement with your future spouse sets forth, generally, how financial issues will be treated during the marriage, in the event of a divorce, and even in the event of death. The issues addressed in a prenuptial agreement can be limited to a single issue or encompass nearly all financial issues, excluding those related to the support of a child of the relationship. The Uniform Premarital Agreement Act of 1988 requires full disclosure of the earnings, property and financial obligations of each party and that each party consult with independent legal counsel or expressly waive, in writing, the opportunity to do so.

Consulting with both an accountant in the area of family law services and a family law attorney is highly advisable, especially if there are premarital assets, current or possible future business assets, anticipated gifts or inheritances, or issues involving the treatment of income during the marriage. In the event of divorce or separation, one may want these assets treated in a certain way for the purpose of equitably dividing assets.
  
Under New Jersey, New York and California laws premarital assets, gifted assets and inherited assets (“exempt assets”) are not included in the overall division of assets as the result of divorce, if such exempt assets are maintained separately from assets generated and earned during the marriage (“marital assets”). However, any appreciation in the value of a business owned, which employs the efforts of a spouse, is subject to division, even if the business was premarital, gifted or inherited. If one desires such a business to be wholly exempt from the division of assets in a divorce, despite any potential increase in value during the marriage, such an understanding between the parties must be included in a written prenuptial agreement.

It is vital that the prenuptial agreement does not contain vague terms or ambiguous language in order to avoid the agreement being challenged with any foundation and/or deemed unenforceable. It is also important that any related issues, such as income taxes, be addressed.

Example: If a premarital asset and the income generated from it are exempt from equitable distribution in the event of a divorce, has the agreement addressed how the taxes owed on the income will be paid and at what tax rate?

While considering the terms of the prenuptial agreement, it is important to look forward through the marriage and evaluate the potential flow of funds and how they will be treated.

Example: If you use a premarital asset to put a down payment on a new marital home, before the prior marital home is sold, can you reimburse yourself from the proceeds on the sale of the first marital home and retain those funds as an exempt asset?

Commingling assets, mixing exempt assets with marital assets, is common during the course of a marriage. However, it can cause a big headache and legal battle if not addressed in the prenuptial agreement, as can the issue of proofs of the flow of exempt assets during the marriage, at the time of divorce. If you misplace your account statements from 15 years ago, which are no longer available from the institution, what happens then?

A properly drafted and executed prenuptial agreement is a wonderful thing. It allows you to define your marriage, and possible divorce, on your terms, not based on the obligations imposed upon you by the state or a judge. If circumstances warrant it, putting the proper team together to draft the prenuptial agreement is the best approach to getting an enforceable understanding.

If you married before having a written agreement, a postnuptial or mid-marriage agreement may be an option. Creating an enforceable agreement after marriage often requires additional analysis and procedures. Consulting your accountant and legal team before entering into a postnuptial agreement is very important.

The preceding should not be taken as legal advice.  This content does not address all the legal aspects of the New Jersey Uniform Premarital Agreement and Pre-Civil Union Act, the California Uniform Premarital Agreement Act, NY Gen Oblig L §3-303 (2012), or relevant case law.  If you are not an attorney, you should consult an attorney regarding legal matters

Hubert Klein is a Partner in the Financial Advisory Services Group with technical resources in various litigation actions. He has consulted in complex damages, business valuations and due diligence analysis.

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