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Prenuptial Agreements heart and money image

Prenuptial Agreements As Divorce Insurance

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It’s time to recast prenuptial agreements.  Prenups are commonly considered the exclusive domain of wealthy, older parties.  They are seldom used by moderately-heeled, younger couples, except in except in certain zip codes, where the prenuptial agreement is seen as a status symbol.

Prenuptial agreements shouldn’t be viewed as a tool only for the privileged.  By taking issues off the table, prenuptial agreements can act as a form of de facto divorce insurance.  Fewer issues means reduced litigation.  Reduced litigation means less attorney’s fees.

A prenup works the same way as a last will and testament.  The law provides a “default” for what happens in the event of a divorce or death.  For example, without a prenuptial agreement providing otherwise, assets in divorce are “equitably” divided in equitable division states.  Similarly, the assets of a person dying without a will pass according to the laws of succession in that state.  Prenuptial agreements and wills take divorces and estates outside of this “default” setting.  They allow the parties to determine ahead of time what happens in such an event.  They essentially privatize the law.

The advantage to privatizing the law when it comes to prenups is that it means that decisions regarding assets and alimony can be made when both parties are thinking clearly, without the haze of hate fogging their minds, as so often happens in a divorce.

There are several “fee drivers” in a divorce that can determine whether a divorce will cost only one monthly mortgage payment, or as much as the entire house.  Custody, asset and debt division, business valuations and divisions, and alimony issues cause soon-to-be ex-couples to incur fees faster than the global debt clock.  Prenuptial agreements can determine most of these issues in advance, taking those minefields out of play and therefore reducing the time and attorney’s fees spent contesting them.

Most couples who run up tens, if not hundreds of thousands, of dollars in attorney’s fees during their divorce do so chasing a disproportionate share of the assets.  In equitable division states, property isn’t split evenly; it’s divided “equitably.”  This could be 50/50 or it could be 100/0 or anything in between depending on several factors, including conduct and the cause of the divorce.

What’s “equitable”, though, is in the eye of the beholder.  Husbands with stay at home wives think it’s “equitable” that they keep most of the assets.  And every spurned wife who’s been told her meatloaf is dry believes they’ve been “verbally abused” and wants recompense.  Victims of adultery want to burn the world in search of a lopsided asset division.

Most attorneys won’t dissuade the parties from chasing the unicorn of an unequal division.  After all, the more hours spent fighting, the more money the attorneys make.  It’s not in the attorney’s interest to tell the parties that, absent unique circumstances and truly horrific conduct, the division will still be somewhere around 50/50.  It’s not until the end of the day, when the judge decrees a near even division, that the couple realizes they’d have been better off saving the $120,000 in attorney’s fees and dividing things equally from the start.

The same goes for business divisions.  The fight over the valuation and division of a privately held business is a guaranteed money maker for divorce attorneys.  When businesses are at issue, we know the payday is going to be substantial.  Valuing the business and understanding that value takes significant time and fees.  Moreover, arriving at a “buy out” number for the spouse who isn’t keeping the business is a fertile battleground because it’s one place where the division is not necessarily, or even usually, 50/50.

Lastly, wars are wagged on alimony.  In most states, the amount of alimony awarded is subjective.  Whenever discretion and subjectivity is involved, litigation has the possibility of spiraling.  Again, husbands don’t believe they should be forced to continue supporting a spouse who’s chosen to leave.  Wives believe that, since their husband’s affair caused the divorce, the husband should pay dearly for all of eternity.

Prenuptial agreements can protect from these scenarios.  Prenups can set out in a prenup how the assets will be divided.  They can provide that assets will be divided 50/50, 60/40, or any other ratio.  They can make this decision regardless of whether the assets currently exist or are acquired in the future.  Parties can agree as to how a business will be valued, whether that value is divisible in any divorce, and how a “buy-out” number will be calculated.  They can determine whether alimony is on the table in a divorce.  They can predetermine a formula for calculating the alimony.  For example, alimony could be set at 20% of average adjusted gross income from the previous three years’ tax returns.

A prenuptial agreement cannot control all issues or completely insulate parties from the expense of a divorce.  Custody, a battleground where parties can run up enormous attorney’s fees, cannot be predetermined by a prenuptial agreement.  Moreover, a prenuptial agreement can be ironclad, but it still must be enforced by the court, which can be a battleground itself.  I’ve seen parties incur over $100,000 each in attorney’s fees to fight the enforceability of a prenup.

Considering the average cost of a prenup coming in around $5,000, though, the level of potential protection is enormous.  Very few parties are going to throw good money after bad contesting an enforceable prenup.  While custody issues remain a battleground, it’s far preferable to wage war on one front than several.

It’s time to reimagine the prenuptial agreement, not solely as a tool for the elite, but instead as a tool for all to ensure that the worst case scenario doesn’t devolve into an even larger nightmare.

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