More Than Money
Issue #30

When Differences Divide

Table of Contents

“Premarital Agreements”

Pitfalls and Possibilities

by Douglas S. Segal


Editor's Note

Prenuptial agreements—whether to have them or not, how to do them, when to initiate them—are fraught with controversy. In a recent New York Times article ("Cherished, but for What?" Business section, June 2, 2002), writer Ellen Spragins wrote of prenups, "Is there a more explosive way for love and money to collide?" And indeed, the potential for family division, even before the family starts, can be great. Spragin notes that, according to Gary Schatsky, a lawyer and financial adviser, "Simply having the discussion in the first place is often an emotional nightmare. . . He estimates that 10 percent of couples cannot stomach the discussion, so they drop the idea, and that another 10 percent or so can't reach agreement, so they drop the marriage."

On the topic of prenups itself, writes Spragin, "Americans are sharply divided: nearly one-fifth believe that a prenuptial agreement is not needed when two people really love each other, according to a recent survey by lawyers.com, a Web site with consumer legal information from Martindale- Hubbell, while an additional 15 percent think that such an agreement dooms a marriage to fail. (Twenty-eight percent say prenups always make financial sense, while 25 percent see them as only for the rich and famous.)"

In that same article, Ellen Perry, president of Family Office Solutions, a financial consulting practice in Washington, D.C., disdainfully calls such agreements "divorce planning when you're at the happiest moment of your courtship." And Nancy, a participant in More Than Money's online discussion group, asserts that not needing a prenup when she was getting divorced was directly related to the fact that neither she nor her former husband would ever have considered having one. (See her discussion group commentary , also in issue 30) Yet, attorney Douglas Segal maintains that prenuptial agreements done well can provide a sense of safety and security for both parties, thereby promoting marital harmony.

In the spirit of resolving family differences around money as harmoniously as possible, we offer Segal's article below, which discusses how to make a prenuptial agreement work optimally for both parties involved.


In a 1989 "B.C." comic strip, one of the characters is looking up the term prenuptial agreement in the Book of Phrases . He finds therein the following definition: "A pact between two people who love each other almost as much as their possessions." Ambrose Bierce, the author of that masterpiece of cynicism, The Devil's Dictionary , would have heartily approved. That text defined love as "a temporary insanity curable by marriage." The purpose of this article is to help those contemplating a prenup to avoid "curing" their beloved in the process!

When to Have a Prenup
Prenups come into play most frequently in three situations:

  1. when one party has substantially more wealth than the other and wants to protect all or a portion of it in the event of divorce;
  2. when both parties have been married previously and have children and want to preserve their separate estates in the event of a divorce or death;
  3. where one party has been through a bitter and expensive divorce and is hoping to preclude another such trauma, should his or her next plunge into the sea of marital bliss prove equally unsuccessful.
Obviously, these three scenarios can overlap with each other. The second scenario presents the fewest emotional difficulties for the parties contemplating a prenup, particularly where both bring approximately equal wealth into the relationship. However, the first and third scenarios present a veritable minefield of potential emotional conflict, particularly for the party who has less wealth and against whom the wealthier party is attempting to protect him/herself. ( For convenience, I will refer to the wealthier party in this instance as Jim , and the less wealthy party as Jane. Of course, either party may be of either sex.)

Raising the Issue
Not surprisingly, Jane is less than thrilled when Jim first raises the issue of having a prenup. Jane sees Jim's request for a prenup as indicating a lack of trust in her, implying either that her love for Jim may be tainted by financial considerations, or that he does not trust her to act in a reasonable and civil manner in the event of divorce. Unfortunately, where substantial sums of money are involved, few people do behave in a reasonable and civil manner during divorce proceedings, and Jim's concerns on this score are not without foundation.

The Problem
The problem here, as with most prenups, is that Jim wants an agreement that gives Jane the absolute minimum allowable under the law. This approach in turn generates two additional pro blems: First, it makes Jane feel devalued, and even if she does sign the agreement, the marriage begins under a cloud of negativity that can poison not only the honeymoon, but the entire future course of the relationship. Second, a harsh agreement gives Jane every incentive to challenge it in the event of divorce , which can produce precisely the opposite result from that originally intended, i.e., instead of the prenup preventing litigation, it generates litigation that may be even more bitter and expensive than that which would occur in the absence of an agreement. Clearly, these are two extremely undesirable outcomes.

The Resolution
I have a suggestion for Jim—and for all you wealthier partners of the world who find yourselves contemplating a prenup. Rather than approaching your beloved with a penurious agreement and a "sign it or there will be no marriage" attitude, try to create a prenup that:

  1. addresses your partner's legitimate concerns about his/her financial future;
  2. is generous enough so that it creates a real disincentive for your partner to challenge it, and;
  3. makes your partner feel loved and valued.
In other words, although such an agreement may still provide your partner with less property and/or alimony than he or she would ultimately receive in an ordinary divorce proceeding, if you as the wealthier partner approach the process with a view to meeting your partner's legitimate emotional and financial needs, then what would likely become a negative and divisive experience that damages your relationship at least has the potential to become a positive and unifying one. This is not to say that discussing a prenup will ever transport the participants to dizzying heights of romance. Nevertheless, at least half of all marriages end in divorce, and given those odds, it is not at all out of line for the wealthier partner to have concerns about taking a major financial hit in the event the marriage fails. We insure our homes and cars against fire and theft, even though those eventualities are far less likely than a divorce. A prenup is the closest thing there is to divorce insurance, and it is far less unpleasant for people to negotiate financial matters of mutual concern prior to marriage, when both parties are, hopefully, deeply in love, than during divorce proceedings, when love has all too frequently given way to hatred and recrimination. This is particularly true if the wealthier partner takes the approach recommended here.

Full Disclosure
In virtually every state, one of the prerequisites for creating an enforceable prenup is full and complete financial disclosure of assets, liabilities, and income. Obviously, the disclosure by the wealthier party is more significant than that by the less wealthy one, and the greater the disparity in wealth between the two, the truer that proposition is. With Jim and Jane, the first step in the process is, therefore, for Jim to sit there down with Jane and "open the books." If x years down the road after divorce proceedings are underway, Jane can show that Jim either failed to disclose significant assets or income, or substantially undervalued those assets that he did disclose, then Jim's chances of enforcing the prenup diminish drastically. Since not all assets are readily or easily valued (e.g., shares in a closely held corporation, stock options, defined benefit retirement plans, and art work and antiques), the safest approach is to use a range of values. For example, if Jim is the sole or majority stockholder in a closely held corporation, he would be well advised to value his interest "from x hundred thousand dollars to y million dollars." Since this range of value will be explicitly designated as an estimate, Jim should not be afraid to set the high end of the range substantially higher than he actually believes it to be. In some states, the burden of disclosure and valuation falls entirely on the disclosing party, and Jane is under no duty to investigate further to see if Jim has additional assets or income, or to make any determination as to the accuracy or reasonableness of the values used by him. So as long as Jim errs on the high side in valuing his assets, the chances of the prenup being set aside on the grounds of lack of full disclosure are minimized.


Learning About Each Other
Once Jim has fully informed Jane as to the extent of his assets and income, the next step is to ask her what she feels she will need in the future to be financially secure and comfortable, in light of (1) the assets that Jane then owns, (2) her income-earning ability, and (3) Jim's assets and income. Because length of marriage is such a significant factor in the property and alimony awards that courts make in divorce actions, awards of property and/or alimony in prenups are usually tied to the length of time that passes between the date of marriage and the date on which either party initiates an action or proceeding for dissolution, legal separation, or annulment. The longer the marriage, the more property Jim will transfer to Jane, and the greater will be the amount and duration of the support he will pay to her. If Jim feels that Jane is overreaching with her proposals, he may develop reservations about her character. Conversely, if Jane feels that Jim is being parsimonious in his proposal, she may conclude that Jim does, in fact, love his possessions more than he loves her. The result in either instance may well be a bad case of wedding bell blues. In any event, the things that each party to the prenup will learn about the other during this dicey but important process are things that every person should know about his/her intended spouse-to-be before either says, "I do."

Conclusion
The discussion and negotiation of a prenup are delicate matters that can have a significant impact on the future of a relationship. A little sensitivity and generosity from the wealthier partner can go a long way toward assuaging the less wealthy partner's anxiety and resentment about the concept of entering into a prenup, and producing a prenup that both parties can live with "happily ever after."

An earlier version of this article was published in the Schnader Harrison Segal & Lewis Business Law Newsletter , June, 2000.

Douglas S. Segal, Esq., is a member of the Litigation Services and Family Law departments of Schnader Harrison Goldstein & Manello, the Boston office of Schnader Harrison Segal & Lewis LLP. For more than 22 years, he has concentrated his practice in Family Law and has been involved in the negotiation and drafting of dozens of premarital, postmarital, and cohabitation agreements.


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