When tying the knot, people generally believe that they will be together forever, and often commit to life-long partnership in their marriage vows. Despite the stubborn optimism of newlyweds, however, the statistics continue to bear out that close to half of marriages will not make it that far. People often fail to plan for keeping assets separate in case of divorce. Given the frequency of divorce today, it might be wise to look ahead more often.
One of the reasons people refuse to plan for the possibility of divorce may be that people usually consider divorce a failure. Peter Fabish, a Boulder-based divorce lawyer specializing in mediation, says, “Marriage, and the commitment it entails, can be a powerful container for growth and fulfillment. One reason is that being in a marriage usually activates whatever unhealed relational issues we have; while simultaneously holding our feet to the fire to try to work those things out, due to the commitment. That said, a marriage can reach a point where it is no longer a healthy or fruitful stage for growth or fulfillment for one or both of the partners, for a variety of perfectly valid reasons. When and how this threshold has been crossed is entirely individualized: no one can say to anyone else where that line should be for them. Having the courage to seek a divorce when it is the next necessary step in the growth and evolution of one or both of the partners is not only not a failure in my view, it is an act of integrity.” ”
Here are some things to consider before you get married:
If you have separate property at the time of marriage your spouse will be entitled to half of the equity appreciation of the property or assets during the marriage. So, for example, if you bought a house at $1 million for cash before your marriage (treated as “pre-marital separate property”), and then, at the time of your divorce, it was appraised at $2 million, you will most likely be paying $500,000 (one-half of the appreciated value) in order to get a divorce. Even worse, if you refinanced your house and put your spouse on the title, thereby commingling assets and converting your formerly $1 million “separate property” into “joint property,” you will be obligated to pay your ex-partner a full $1 million for your share of the value of the house at the time of divorce. That is, of course, unless you have a prenuptial, postnuptial or an operating agreement.
When you enter your marriage, consider keeping your separate assets separate. However, once again recall, that all of those separate assets (stocks, bonds, retirement funds, etc.) accumulated prior to your marriage are still up for grabs during the divorce, even if you keep your assets in a separate LLC, because your spouse can acquire half of the equity. Worse, if you get income or dividends, this is considered income, which they can also claim for themselves and for child support.
Peter Fabish found that most divorcing spouses say that their kids are the most important thing to them, but during mediation they often spend most of their time negotiating over money. This is in part because couples are often (not always) more in agreement over how to parent than how to divide their assets. However, it can also be because people strongly associate money with security, identity and safety, and their relationship to money is often anxious or confused.
Given all of this, many people who enter marriage with significant assets consider entering into prenuptial agreements. Those agreements are traditionally written in the most extreme way possible: they protect all separate assets, all income from those assets, and all growth of those assets, no matter how long the marriage lasts. This can lead to the disadvantaged spouse feeling increasing resentment and insecurity over time, as none of his or her commitment and contribution to the marriage results in any stake in the vast majority of property in the marriage. In times of minor disagreements, it can create a power struggle, and make problems worse. It can also give the person with the most to gain an easy way out of the relationship.
Instead, consider a “Vesting Agreement” or an “Operating Agreement” style prenuptial agreement, in which the disadvantaged spouse’s stake in marital property grows over time, and which anticipates some of the disagreements that might occur over time. Operating Agreements or Vesting Agreements can alleviate a lot of the issues that come up during the divorce. Finally, most people regard prenuptial agreements as a way to protect assets, but it can also be a way to protect your partner from debt loads in case of divorce or death. Once married, you can draw up a postnuptial agreement before diving into a business or large investment together.
A prenuptial agreement that allows the disadvantaged spouse’s stake of marital property to grow over time serves to protect the propertied party from owing their ex a large property settlement if the marriage ends quickly, while simultaneously acknowledging and protecting the disadvantaged spouse in a longer marriage. It also, as mentioned, avoids the resentment, tension and power plays that can arise during a marriage simply because an imbalanced prenuptial agreement exists.
Some mediation firms around Boulder are beginning to offer collaborative approaches to crafting prenuptial agreements like the ones discussed above. In a collaborative approach, the engaged or newlywed couple sits together with a family law professional and talks about how they can craft an agreement that both can live with over time. One that will best serve both the marriage and the financial interests of the parties over time.
While romantics will regard marriage as an institution of love entered into with the best of intentions, marriage is also a financial decision with a lot of variables (children, student debt, successful or failed businesses), and should be regarded with the same reverence as any large business decision. If any of this sounds overwhelming, then you might want to talk to a matrimonial lawyer prior to getting married.