Sunday, May 21, 2006

Should You Use a Prenuptial Agreement?

This week we're speaking with Attorney Katherine E. Stoner, a certified family law specialist, and the co-author, with Shea Irving, of "Prenuptial Agreements: How to Write a Fair and Lasting Contract," from Nolo.

NOLO: Katherine, there are a lot of popular misconceptions about prenuptial agreements, so perhaps we can start out with two basic questions. What is a prenuptial agreement, and how does a couple know when they need one?

KATHERINE STONER: A prenuptial agreement can also be called a premarital agreement; sometimes the archaic Latin term "antenuptial agreement" is used, which means "before the nuptials," or before the wedding. A "prenup" as I will call it, is a contract between two people who are about to marry, that sets out their agreements about finances and property. How do they know if they need it? Well, if they don't want the laws of their state, or a state that they might live in later, to determine what's happening to their property and finances, then they might need a prenup.

NOLO: Okay. According to the tabloids, I read that the reason for the delay in Tom Cruise's marriage to Katie Holmes was that Katie's dad, who is an attorney, has been rangling over the details of the prenup. And one of the rumors that circulated is that her dad secured a $15 million trust fund for her and the baby, regardless of whether the couple marries. And I was under the impression that prenuptial only apply if you marry. So how could that be that there's an arrangement where you would get payment even if you don't marry?

KATHERINE STONER: Good question. Technically, prenups only go into effect if you marry, according to most state laws that I know of. People who don't marry can sign an agreement, a cohabitation agreement, or a property agreement of some sort, even if they're not living together. You could have a combination agreement that was a co-habitation agreement and also qualified as a premarital agreement, or a prenuptial agreement. That may be what they're doing; I don't know the specifics of that particular one. So, it's possible to sign a cohabitation agreement. Technically, the laws that apply to prenuptial or premarital agreements usually provide that it only takes effect when the people marry, and if they don't marry, it doesn't have any effect.

NOLO: Prenuptial agreements... Since same-sex couples are prohibited from marriage, except in Massachusetts, is that correct?

KATHERINE STONER: Right.

NOLO: Is there any place for the prenuptial agreement for a same-sex couple?

KATHERINE STONER: There is. In Massachusetts, of course, couples are presumably entering premarital agreements, or prenuptial agreements, if that's what they want. In other states that recognize some sort of civil union or domestic partnership, most of those states also permit something like a prenuptial or premarital agreement, and have sort of imported the rules of law that apply to prenups to those agreements. Then there are other states that don't recognize the relationship at all where the same-sex couple would really be entering into what would be called a cohabitation agreement. I think that in just about very state those are now legal, although that's something that has evolved over time. It used to be illegal to even enter into such an agreement.

NOLO: Okay. At Nolo, we're not anti-lawyer, but we try to get people to do things as much as possible on their own. Yet in your book for the prenuptial agreements, you recommend that each party get their own attorney. Tell me a little bit about why a person would need an attorney in a prenuptial negotiation.

KATHERINE STONER: Well, our research shows that there isn't any state that actually requires people to have attorneys. So, theoretically, people could sign a prenup and not have attorneys, and, in fact, I'm sure they do that. We advise it, and it's generally advisable because it really does minimize the risk that if things go sour, or if one of them dies and there's a dispute with the heirs, that somebody's going to attack the agreement as not having been thoughtfully entered into. So, having lawyers on both sides really is kind of an insurance policy for the agreement. So it's very common to attack them and try to say that they won't be enforced if there hasn't been an attorney representing one side or the other or both.

NOLO: Another thing I noticed in looking through the prenuptial book is that you talk about it as an estate-planning tool, almost. So could you just talk a little bit about how a prenuptial agreement can function as an estate-planning tool?

KATHERINE STONER: It's really a compliment to the estate plan. If one spouse, or if either spouse, has separate property, and if they want to have some portion of the estate go to someone other than the surviving spouse, it's a good idea to have a prenup that deals with the statutory rights the surviving spouse would have, just to make sure that you don't end up with an unintended consequence of the estate plan saying one thing, and the surviving spouse having rights that are contradictory to that. Conversely, if both spouses want to protect each other, or if one wants to protect the other, from hostile family members, or even just to prevent misunderstandings when one of them dies, it's a really good idea to have the agreements spelled out in the prenup, so that everybody knows that it's there, that it was something the person who died thought about, and that that's what they wanted.

NOLO: You also recommend including a provision that confirms each person isn't responsible for premarital debts. I understand that principle, but how do you apply that when someone comes after you for your spouse's premarital debt? I mean, you can't just show them the prenuptial and say, "Hey, I'm not responsible," can you?

KATHERINE STONER: Well, actually, you can. In fact most states, I think all states, provide that premarital debts are the responsibility of the person that incurred them. Now, it's true that community property or marital property can sometimes be used to pay off a premarital debt, but if there isn't any community property or marital property, the other spouse can't be sued for the premarital debts of the debtor.

NOLO: You also used a term which was great, I love it, called "Negotiate Lovingly." Since prenups are usually considered as romance killers, can you tell me a little bit about how two people can negotiate lovingly?

KATHERINE STONER: Well, at some points the lovebirds are going to have to talk about money. And psychotherapists actually say that the things that married people argue about most are money, kids, and sex, in that order. So, our view is, why not start early having some constructive conversations about money, about your attitudes towards credit and debt, and people have kind of different ways of viewing money; they might as well find out what the differences are, and find some ways to accommodate those differences at the beginning when they are in love, and when they can talk to each other well, so that's where that term comes from.

NOLO: For prenups, does it matter if you're in a community property state, is there a difference in terms of how you have to structure the agreement? Do you have to think differently?

KATHERINE STONER: Yes, you do. In fact, in every community state you'd have to think differently, and in practically every state, you'd have to think differently. That's why we have kind of an extensive summary of state laws on the CD that goes with the book, because it's a state-by-state thing, and every state has different requirements for what you have to do in order to make the prenup be effective. You know, do you have to have notarization, do you have to have witnesses, and of course, community property is one way of dealing with marital property rights, and other states have other ways if they're not community property states. So you have to know what law applies to your marriage, and kind of write the agreement with that in mind.

NOLO: I read recently that some businesses talked to people who were getting married, some of their employees, and encouraged prenuptial agreements. So, I wanted to talk a little bit about business and prenuptial. How do you manage to keep your business interests so that the business remains with one spouse? How do you prevent the other spouse from peering into your business affairs later? How is that part of the agreement structure?

KATHERINE STONER: The first question is whether you want to do that. For example, you might have one couple where they really do want to be share-and-share-alike. They may be in a community property state where both spouses have a right to know a certain amount about the finances of the marriage, and that might include the right to know some things about the business dealings of one partner. If people don't want that, the prenup is an excellent vehicle for carving out an area of exclusion from that kind of sharing, if that's what they want to do. But it's really an opportunity for the spouses to decide, what is their attitude, what do they want to do? And of course, it's up to them; the business isn't going to be apparted to the contract.

NOLO: You also mention that you can set milestones; prenups sometimes have milestones. If the spouses stay married for five years, for example, a prenup might reward one of the spouses. So, I guess my question might seem naive, but is there any concept that that violates public policy, because you're basically paying one spouse to stay married to the other?

KATHERINE STONER: Well, what the courts say about public policy is that you need to avoid provision in a premarital agreement that gives somebody an obvious incentive to divorce, rather than to stay married. So, a milestone doesn't necessarily do that. For example, what we call a "sunset clause," where you say, the agreement's going to last for five years, and then we're not going to have it anymore, most of the time what that means is that there's going to be more favorable provisions for surviving spouses after the five-year period. Now, you could argue that that might encourage one spouse who stands to benefit from the prenup staying in existence to get divorced, but that doesn't seem to be what really happens, and I haven't ever seen a court set aside a sunset clause like that. The other kind of milestone you're talking about usually is, you get more and more money the longer you're married. Well, that's obviously an incentive to stay married, rather than to get divorced. The public policy example, the one that comes sort of to mind that's really kind of the classic case is one where, if the parties got divorced, the wife was going to end up with more than fifty percent of her husband's separate property. So, what did she do? She got married, and shortly thereafter, she filed for divorce, because she didn't own any of that property as a married person, and it was her husband's separate property to start with, but when she got divorced, she was going to get more than half of it. And the courts said, they struck that down and said, no, that's not a fair agreement. The reason that they entered into that agreement, of course, was because, in the culture that they came from, the husband could divorce his wife, but the wife couldn't divorce her husband. So, you move that whole cultural set to a state that's got no fault with the state, where the wife is free to divorce, and all of a sudden, it doesn't work anymore, and it violates public property.

NOLO: One last thing I want to make sure we mention... Your book is great; it has an agreement on the CD-Rom, and since you recommend or suggest that people talk with an attorney, is the plan for a person using that book to sort of try and work out the agreement themselves and then take it to an attorney?

KATHERINE STONER: Ideally they would talk with each other. Now, they might talk with each other with the help of their lawyers, in like a four-way meeting. In fact, one of the things that's starting to happen more and more is, people are using their lawyers collaboratively, having four-way meetings with the lawyers and both spouses, to really work from the ground up. What we don't recommend is that one person goes to an attorney who drafts an entire agreement without any consultation of the other side. Because then you're just asking for kind of an adversarial sort of reaction to the whole thing, when it comes across.

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