Prenuptial Agreements – An Efficient Way to Complete the Dissolution Process

Prenuptial Agreements– An Efficient Way to Complete the Dissolution Process

If you have learned nothing else from friends, family, and the media; a contested divorce can be very rough. It is emotionally taxing, both sides sling mud at each other in an effort to gain more custody of the children. A divorce is a constant drain on your finances between attorney’s fees, and the constant maneuvering of the parties to obtain more money in support. Finally, it is physically draining as a result of the sheer number of meetings, court hearings, and appointments you will be forced to attend. It should come as no surprise then, that the ideal situation is one where both parties can agree, before or after the divorce, that a certain distribution and custody plan is fair; this avoids the undeniably unpleasant process of a contested divorce. This article will focus on one of the most common agreements in the family law setting, which are designed to avoid the lengthy process of a contested divorce – the prenuptial agreement.

Many people have a misconception about prenuptial agreements, also referred to as “pre-nups”; they believe that only the extremely wealthy have pre-nups to protect their assets from “gold diggers.” While this is certainly one reason to have a pre-nup, there are several other, less sinister, reasons to have a pre-nup in effect before marriage. Some of these reasons include: (1) The person has previously gone through a contested divorce, and wants to avoid the negative impacts of the divorce process if it happens again; (2) the person has heard horror stories about a contested divorce, and wants to simplify the process in the worst-case scenario; (3) the person will receive a significant inheritance, and wants to ensure that it is not at risk; (4) the person has a family business, and wants to ensure that a divorce wont impact the business’s existence; and (5) the person is a partner in a business, and is receiving pressure from the partners to protect them in the event of a divorce.

The first two reasons are self-explanatory, so this article will not discuss those reasons. Protecting inheritance and business interests are legitimate reasons for a pre-nup, so we will discuss those.

(1) Protecting Your Inheritance in Case of Divorce

Inherited money is typically separate property. However, there is a possibility that any increase in the value of that inheritance during the marriage, as a result of marital labor, could be subject to equitable distribution in the event of a divorce. An increase in value of separate property during the marriage could be deemed community property despite the fact that it began as separate property. For example, the Pereira or Van Camp test dictates the community’s interest in a business, when a separate property business has increased in value during the marriage. One component of a pre-nup would be to ensure that the other spouse could not claim entitlement to the inheritance in any manner – including appreciation.

(2) Protecting Your Separate Business in Case of Divorce

The Pereira and Van Camp methods of determining the value of the community’s interest in the growth of a separate property business interest can be unreliable, to say the least. In short, the Court is not bound to choose one test, or the other. The practical effect of the Court’s freedom to select either test, is that there is no way of knowing, before divorce, how much of the business’s growth will be deemed “community property.” As such, a pre-nup can provide certainty where there was previously none.

(3) Protecting Your Business Partners in Case of Divorce

In a similar vein, if one spouse is a partner in a business, it is rarely clear how dissolution will impact the other partners’ interests in the business. There are a number of competing tests the Court can apply in dissolution, and most individuals prefer certainty to uncertainty. As such, a pre-nup could serve the important function of placing your business partners at ease; the knowledge that costly litigation will not occur is an important part of a business relationship.

Now that we have discussed the various reasons why a pre-nup could be preferable, let’s go into California’s requirements for a valid prenuptial agreement, as well as practical considerations.

(4) Necessary Formalities in Creating a Prenuptial Agreement

There are several “formalities” a prenuptial agreement must satisfy. While each “formality” is a topic itself, a prenuptial agreement will not be valid unless: (1) there is a formal agreement, signed by both parties; (2) the agreement was signed voluntarily; and  (3) the person asking for the prenuptial agreement provided full-disclosure.  This article will briefly discuss each “formality.” This is not a comprehensive analysis, and we urge the reader to contact an attorney at Maples Family Law if they have any questions.

(A) A Formal Agreement, Signed by Both Parties

The first requirement is that there was a formal agreement, which was signed by both parties – this portion of the article will discuss precisely what a “formal agreement”, in this context, actually entails.

In law, there is something known as the “statute of frauds.” It operates to bar the enforcement of certain oral agreements where there is a high risk of lying.   

Requiring a signed agreement avoids those problems.  Premarital agreements can only cover certain topics, however. Those topics include: (1) Property rights; (2) life insurance; (3) Executing arrangements – The making of a will, trust or other arrangements to carry out the provisions of the premarital agreement; and (4) issues that don’t interfere with public policy. 

A prenuptial agreement can include clauses regarding spousal support, but they have to follow statutory requirements as well. If your pre-nup involves spousal support, the following requirements must be met: (1) the person waiving spousal support must be represented by counsel, and (2) the spousal support provision is not unconscionable at the time of enforcement.

(B) The Agreement Was Signed Voluntarily

The second requirement is that the agreement was signed voluntarily. In 2002, California created a five-factor requirement to determine whether a prenuptial agreement was signed “voluntarily.” Unless all five factors are present, the prenuptial agreement is deemed invalid. The five factors the Court looks at include: (1) The other party had independent legal representation, or a separate written waiver; (2) the other party had at least seven days to review the agreement; (3) if the other party was in pro per (representing themselves), there was full disclosure; (4) the other party had legal capacity (this is an entire article itself) to enter into a contract; and (5) equitable factors weigh in favor of enforcing the agreement against the other party.

The term “equitable factors” can be a little vague.” The California Courts have identified the following factors as indicative of “ voluntary execution”:  (1) representation, or opportunity, to consult with independent counsel; (2) Sufficient time between presentation of the agreement, and execution of that agreement, for the signing party to fully appreciate the terms; (3) absence of surprise – for example being shown the agreement on the eve of marriage; (4) the business experience, and education, of the signing party; (5) the ability to understand the terms of the agreement; (6) the complexity of the agreement, is it designed to deceive;  AND (7) the disparity of income between to two parties, is one spouse using their higher earning power to force a signature. Each one of these considerations would warrant an entire article dedicated to it; if any of these considerations raise questions in your mind, you should contact an attorney Maples Family Law.

The final requirement is that the party being asked to sign the prenuptial agreement has received full disclosure. This requirement is a corollary to the concept of “unconscionability” in contracts. In essence, a contract cannot be valid if it so one-sided as to offend our sense of common-decency, and fair play.  At this point, it should be clear that having a skilled attorney on your side will increase your chances of success exponentially.

The value of an attorney, who is well versed in family law, cannot be understated. If you are contemplating marriage, and have a reason to protect you separate property, retaining Maples Family Law is a necessary first step. A contested divorce can produce unreliable results if you represent yourself. Utilizing the years of experience of Maples Family Law will ensure the best possible outcome, even if divorce is not an event you envision.