Considerations in Establishing Prenuptial Agreements

Considerations in Establishing
Prenuptial Agreements

Family Money

Here are responses from five attorneys sharing some experiences with prenuptial agreements.Many thanks for their time and thoughtful answers to the following questions.

  • William J. Butler, McDermott, Will & Emery (Chicago, Illinois)
  • Leon M. Cooper, Lewis, D’Amato, Brisbois & Bisgaard (Los Angeles, California)
  • Jon J. Gallo, Greenberg, Glusker, Fields, Claman & Machtinger (Los Angeles, California)
  • Judith V. Gordon, Gray, Cary Ware & Freidenrich (Palo Alto, California)
  • David W. Mitchell, Hoge, Fenton, Jones & Appel, Inc. (San Jose, California)

1. Do you typically discuss the emotional aspectsassociated with a prenuptial agreement with your clients?

Butler:Yes.I want my client to understand that the negotiation and execution of a prenuptial agreement may cause hard feelings between the parties that may linger for years to come. 

Cooper:Yes, the necessity of dealing with the emotional aspects of the prenuptial agreement and the financial perils of not facing some of the issues prior to the marriage must be recognized and dealt with.The basic problem arises because of the usual economic disparity between the parties.

Gallo: If my client is the party who wants to present the other with a Premarital Agreement, I point out that there may be emotional and psychological consequences–anger, hostility and the feeling that my client does not trust the other party.I ask whether engendering such feeling is worth proceeding.

Gordon:Yes.A general discussion regarding the emotional aspectsassociated with a pre-nup is most often the first thing discussed in a meeting.However, people are reluctant to talk about the details oftheir own emotions and the discussion usually is almost third party in nature, not personalized.

Mitchell:I always discuss the emotional aspects.It is easier to move to the agreement if we acknowledge at the beginning that we are dealing with difficult emotional material. The party with the assets who wants to protect his/her position or family frequently has no idea how threatening the proposal of an agreement is to the other party.

2. In a situation where one person has greater financial net worth than the other,how do you deal with the disparity?

Butler:It depends on whether or not my client is the “monied” party and whether or notthe parties wish to deal with the disparity.In either case, the fairness of the agreement ultimately may be an issue that determines its enforceability and the parties should understand that point. 

Cooper:The disparity needs to be dealt with in a straight forward manner.There must be full disclosure.The disparity is one of the reasons for the PrenuptialAgreement.It does afford the “monied” partythe opportunity to be somewhat magnanimous.However, it is important that the person with greater economic power not be taken advantage of.

Gallo: On some occasions the party with the lower net worthwants to negotiate a substantial gift–sometimes paid over a number of years if the couple stays married.Other times, the party with the higher net worth wants to reach an agreementin the event of dissolution of the marriage and wishes to negotiate a lump sum or installment payment in lieu of property rights.

Gordon:The most important thing is to make certain the less monied spouse has adequate legal representation and understands the consequences of the agreement.

Mitchell: Up front and openly!Part of it is estate planning.I find that it works well to make immediate provisions in the estate plan and to have some gradual transfer, over time, offunds from one party to community property or to the other party as the couple gets comfortable in their new relationship.

3. In formulating a pre-nuptial agreement, how do you deal with business partners and/orother family members, such as adult children or parents of the client?

Butler:Business partners should be dealt with in other arrangements, such as stock transfer restriction agreements.I recommend to my clients that they formulate the terms of the prenuptial agreement according to their own wishes, but that they should be mindful of the effect that it may have on other business and personal relationships. 

Cooper: Business partners would be brought in onlyif the Prenuptial Agreement in some way involves the business.

Other family members (adult children or parents) may be involved.This is true in cases where one of the partners might inherit money or property which the family wishes to keep in the family.

Under those conditions, the family members would probably be consulted insofar as their own property might be involved.However, the agreement may concern matters outside the scope of the interest of other family members and therefore, should not be consulted.

Gallo:I rarely deal with third parties during the premarital process. Often, parents who push their children into premarital agreements want an agreement that essentially restates California law.The children often don’t want an agreement because they feel it indicates a lack of trust in the other party.It is usually possible, through education, to satisfy all parties–the parents gaining satisfaction their children are “protected” and the child explaining to the other partythe agreement does not change their respective rights.

Gordon:This is a topic that I typically do not get into.It will come up in the subsequent discussions and the estate plan.

Mitchell:I may or may not have the opportunity to deal with such people, depending on the relationship and my client’s permission.I encourage open discussion of the marriage and the financial arrangements that are being made.Sometimes this works, sometimes it doesn’t.

4. When, for one reason or another, a prenuptial agreement that you have prepared doesn’t get signed by both parties, how do you handle the situation?

Butler:The situation has never happened to me.If it were to occur, I perhaps would consider having the parties sign a post-nuptial agreement if it was enforceable in this jurisdiction. 

Cooper: Sometimes a letter is appropriate setting forth the reasons for the Prenuptial Agreement, what was expected to be accomplished, and the results of an absence of an agreement in case of death, divorce or other circumstances.This letter, of course, would be confidential to the client.Care must be given in preparation of such a letter because the client, will, no doubt, show it to the other party who might take offense to some of the suggestions.It is probably better to have a conference with the client to discuss these matterswith a memorandum to the file regarding what advice was given to the client.

Gallo:It depends on the facts.Sometimes after both parties have reviewed my memo and the other party has consulted his/her own attorney, they decide that they simply don’t need an agreement.In that case, I see no particular signs of trouble on the horizon.In other situations, the agreement may be so one-sided that one of the parties refuses to sign.

Gordon:I follow up several times–usually for eight months to a year since it is the client’s decision as to whether to finally proceed.

Mitchell:Unfortunately, as attorneys, we have to start protecting ourselves by telling our client in writing the possible consequences, legally, of not having such an agreement.Frequently, the heat has gotten too great and the marriage too close in time so the best solution is to have a cooling off period on the agreement–then it can proceed after the marriage.It is not unusual for the person with the money to have come to terms with giving up more control than he or she might wish.The person with the money still feels strongly about the protection, but more strongly that he/she wants to go ahead with the marriage–the person without money may end up having more leverage.