Bill and Melinda Gates, a couple whose names have become synonymous with massive wealth and philanthropy, announced their impending divorce on Monday.
Though few details about the specifics of the split have been released yet, one’s mind inevitably goes to just how the pair will end up dividing their $146 billion fortune—built largely on the back of Mr. Gates’ co-founding of Microsoft.
The pair met in 1987—also the first year that Bill appeared on Forbes’ list of the world’s wealthiest people—and married in 1994. So, Mr. Gates’ fortune was already established when their relationship started. Normally, this scenario would imply that a prenuptial agreement—a powerful asset protection tool against which years of stigma also finally are starting to fall away—is likely in place, but in this case, that assumption would be incorrect. Court filings reveal that the Gateses have no prenup at all.
Interestingly, while you’d think this sort of divorce in the absence of a prenup would be uncharted waters, given the unfathomable wealth involved, we actually have a fairly recent comparison readily available in the form of Jeff Bezos and MacKenzie Scott’s split a few years back. Scott walked away with $38 billion—the largest divorce settlement in history—which instantly made her the wealthiest woman in the world at the time.
However, that comparison falters because Bill and Melinda prepared a separation contract before going public with their divorce, according to court documents (the contract itself was not made public in that filing, but it was revealed that they would both remain on the board of the Bill and Melinda Gates Foundation and pledged that its mission would not be altered by their split). While a prenuptial agreement is, as the name implies, a contract made between the two parties before the marriage, a separation contract is a type of postnuptial agreement made after the marriage is already in place.
The two documents serve largely the same purpose in outlining how assets, alimony payments, etc., are divvied up in the event of a divorce, though it’s important to note that in most states separation agreements cannot conclusively establish child custody or child support. While a prenuptial agreement generally requires death or divorce to become enforceable, a separation contract does not. Even if the couple never actually completes a legal divorce, the terms of the separation contract still go into effect. And, of course, if a divorce does eventually occur, the terms of the separation contract still hold.
This arrangement has both benefits and drawbacks. A legal separation is, by definition, not a divorce, so the couple is still considered married for purposes such as tax filing and Social Security. It can allow clients to take a “test run” so to speak of living apart without immediately incurring the heavy legal costs of litigating a full divorce, and it also removes some of the barriers to potential reconciliation, insomuch as that’s a possibility. As a contract negotiated during the marriage and without court intervention, the power dynamics between the two parties will generally also be different. Which spouse you advise and the exact nature of the pair’s specific circumstances will determine whether this is a positive or a negative.
Additionally, the feelings a couple have for one another may be very different when each of these respective documents would be drafted. A prenup, though often considered a bit of a distasteful topic to broach, is completed in anticipation of a marriage, when, presumably, the pair’s feelings for each other are at their strongest. On the other hand, a separation agreement is hashed out once a marriage has already deteriorated to the point that the couple no longer wish to live together. If the split is fairly amicable—as the Gateses’ appears to be—then you can end up with an egalitarian and easily enforceable document. If not, then it may be difficult to agree to the contract at all, and since there’s no court to mediate and keep everything moving along, a contested separation proceeding can easily turn out to be far more costly than a divorce. And there’s always the possibility that you end up with such an imbalanced contract that its enforceability is easily challenged on grounds of unconscionability and all of the effort and costs are wasted anyway.
Ultimately, neither a prenup nor a separation agreement is necessarily superior to the other. As with every planning technique, they’re just additional tools in the advisor toolbox that are important to be familiar with and understand when to apply.
