Barry Bonds, the San Francisco Giants slugger, has never liked losing. When he married his Swedish wife, Sun, he had her sign away all claims to his earnings and assets. The prenuptial contract was in English, a language she didn't understand well, and it was foisted on her the night before their Las Vegas wedding.
In time Bonds' career soared, but the marriage soured, and that did not bode well for Sun. When she challenged the prenup, it was upheld up by the California Supreme Court, but the verdict outraged so many people that California passed a new law to protect spouses from 11th-hour prenups they don't understand. Among its provisions is a seven-day waiting period and separate legal council for each party unless expressly waived.
There are a number of reasons advisors need to understand prenups and the battles that may accompany them, but one stands out above the others: If a client loses assets in a divorce, his advisor usually loses them as well.
Getting Past “I Do”
The first step in protecting your client assets lies in getting clients who need them to consider a prenup. Myra Salzer, CFP and president of the Wealth Conservancy in Boulder, Colo., says that when a client doesn't want a prenup, she tells them, “You already have one, in effect. Your partnership is defined by the laws of the state where you live. Why not take advantage of an opportunity to draft an agreement that's custom tailored to your individual situation?”
A financial advisor shouldn't risk offering legal advice, but it's important to provide financial guidance, and that's hard to do without a working understanding of prenups.
For starters, recognize that prenups are not only a tool for the rich and famous. People with hefty assets or high earning power are prime candidates, but other clients might well have assets they want to keep out of their marriage arrangement. A family business fits this category, as do vacation houses, inherited jewelry and retirement plans.
A “his-and-hers” approach to finances is increasingly popular, especially for those who've been married before.
Others who may benefit from a prenup include those with dependent children or elderly parents and those with hard-to-value assets, like patents, copyrights and stock options.
Further, a fiancé planning to support a spouse through years of graduate training may want an agreement that provides for reimbursement should the marriage dissolve before the financial benefits of that education emerge.
What's Love Got to Do With It?
Bringing up the prenup can be painful, especially for young never-been-married couples. The response from one side of the couple is often, “If you love me, you won't ask me to sign this!”
One way to temper the bad reaction is to exchange hot-button words like “divorce” for euphemisms. For instance, Gabrielle Clemens, a financial consultant with Smith Barney in Boston, calls the prenup a “prescribed exit strategy.”
But prenups are not always a tough sell. Many wealthy individuals know from the time they begin dating that a prenup is simply part of the package. Their families require it, perhaps at the suggestion of an attorney or a financial advisor.
There was no such requirement, though, for one of Salzer's clients who came into full control of his sizeable fortune at age 21. He had no immediate prospects of marriage but feared he wouldn't be able to broach the subject when the time came. The solution was for his trust to require a prenup.
“If my client doesn't want to be the one arguing for the prenup, I don't mind being the heavy,” says Mal Makin, CFP, president of Professional Planning Group, Westerly, R.I. “It's easier if a third party, not the father of the groom, initiates the discussion.”
The last thing an advisor wants to do is extinguish the fires of romance, but you can put a positive spin on the situation.
“I can sit down with a couple and let the person who doesn't have assets see that this is not a vote against the relationship, and that they, too, have something to gain,” says Makin. “Drafting a prenup can be an enlightening, invigorating, relationship-building tool.”
The Foundation of the Financial Future
Indeed, handled properly, a prenup can lay the foundation for the financial side of marriage.
It defines the financial partnership a couple will have — what's his, hers and theirs. It spells out which assets will be separate and which will be owned jointly, regardless of how state laws read. It can set forth what their lifestyle will be like and how each contributes to it, which is especially important when there's disparity in income or assets.
“The discussion can address points of disagreements long before they start,” says Ginita Wall, CFP, CPA, practicing in San Diego and author of It's More than Money, It's Your Life (Wiley, 2003).
For a rep or financial advisor, it can be an opportunity to talk to one or both parties about their future goals.
“Marriage is an event that triggers the need to create a new financial plan,” says Clemens. Though a couple may decide to have separate financial advisors, this doesn't preclude having a joint financial plan.
“Financial planning brings up the questions that need to be answered in a prenup. A comprehensive plan will pull together everything inside and outside our firm,” she says. “Also, we have planning tools that let us project out what the value of an asset would be down the road, 10 years, 20 years and so on.”
Call Your Lawyer
A rep should leave the writing of the prenup to the couple and their attorneys.
“What's important is that negotiating the prenup not be adversarial,” says Salzer, and this can easily be the case when separate attorneys are hired.
A lot of work may go on, however, before attorneys enter the picture. Salzer believes a team approach, featuring a wealth consultant and a counselor or therapist, helps foster a neutral, nonadversarial atmosphere. Reaching this point is crucial.
“Once they've reached agreement, then they can go to the attorneys and say ‘This is what I want,’” she explains.
There are some prerequisites for anyone considering a prenup. For instance, any client who is reticent to put all his or her cards on the table is probably a bad candidate for these sorts of contracts. “The most important part of the agreement is full disclosure,” says Violet Woodhouse, a CFP and certified family law specialist, in Newport Beach, Calif. “A rep can help in identifying the assets and liabilities. You do that not just by what people tell you but by having them produce the documents. Then you make an inventory which will be used in the agreement.”
Too Close to the Vest
Lack of disclosure, whether it's misrepresenting an asset or liability or concealing such an item, can cause a prenup to be challenged and even thrown out of court. A classic case involved an engagement ring valued at $21,000 in the prenup but was actually cubic zirconium.
It's important for the prenup to focus only on matters that can be quantified. Some couples want to include who does the housework or how often to have sex. Such provisions will not help the document in court.
But some lifestyle issues can be translated into dollars and cents. A spouse giving up a career may be reimbursed for lost earnings whether or not there's a divorce. Jane Fonda received compensation for quitting her screen career to marry Ted Turner. Wall cites a successful real estate broker who negotiated $4,000 per month for leaving her job to travel with her husband. Someone planning to be a stay-at-home parent could ask for money to make up for lost career time and/or lost retirement savings. Financial planning can help calculate the amounts.
All is Not Fair
A prenup that is clearly one-sided, such as when one spouse signs over all rights, may be declared “unconscionable.” For the agreement to stand up in court, even a partner with no assets usually gets something. Often it's a “signing bonus,” which is awarded immediately after the wedding and is his or hers to keep even if the marriage doesn't outlast the honeymoon.
Sometimes the less affluent spouse is given increasing amounts the longer the marriage last in an “escalator” clause.
Sharyn Sooho, an attorney practicing in Newton, Mass., notes that Donald Trump's divorce from Marla Maples was just before the five-year mark and that Tom Cruise split from Nicole Kidman just before their 10th anniversary. The timing could hardly be coincidental.
Woodhouse points out that when affluent people marry, estate planning is just as important as a prenup. Reps can remind couples that wills and estate-planning vehicles should coordinate rather than conflict with the prenup.
A common mistake is comingling separate property with marital property. For example, the house that was designated as hers could become theirs if a bank account in the name of both parties ends up paying for improvements.
Marriages may not be forever, and prenups acknowledge that sad fact, but prenups themselves aren't necessarily forever either. Laws change, but a well-thought-out prenup can supercede such unexpected events.
People change, too — sometimes in surprising ways. The thriving entrepreneur may accumulate business debts, or the penniless musician may score a recording contract.
“A contract written in 2004 can't cover all the issues that could come up,” warns Sohoo.
Even so, the prenup process forces a couple — and perhaps their financial advisor — to look at possibilities they might not otherwise consider.
No matter how you look at it, that's a good thing for the advisor.
