Defining the Postnuptial Agreement
The definition of a postnuptial agreement is a document executed by couples after marriage that outlines how their assets, debts, and support (spousal and child-related) will be handled in the event of divorce. While they serve similar purposes to prenuptial agreements, they are generally viewed as a solution for couples who did not create a prenuptial agreement prior to getting married. They can also serve as a tool for couples who may have drawn up a prenuptial agreement years earlier but now need to modify its terms so it accurately reflects their current circumstances.
One reason a postnuptial agreement may be beneficial to newlywed couples is the fact that it helps promote financial transparency . While prenuptial agreements are certainly a form of financial transparency (necessary to ensure that courts are able to divide community property in accordance with state law), for some couples they may also be a form of financial manipulation or coercion – the presence of a prenuptial agreement may make one spouse feel as though the other is trying to secretly withhold community property from them, especially if they are not familiar with the value of the other spouse’s pre-marital property.
The threshold requirement for creating a valid postnuptial agreement in California is that the contract is entered into voluntarily by both spouses. Optional requirements that can help bolster the validity of a postnuptial agreement include but are not limited to:
California Legal Prerequisites
The California Family Code Section 1625 lists legal requirements for valid postnuptial agreement. Like prenuptial agreements, a postnuptial agreement entered into in California must satisfy the following legal requirements:
- Voluntariness;
- Full disclosure of the property or financial obligations of the parties;
- Representations made by the parties as to the property or financial obligations of the other if not voluntarily and expressly waived in writing;
- Both parties signing the agreement without undue influence, duress, fraud or mistake; and
- The postnuptial agreement must be in writing and signed by both parties.
A party may not be compelled to sign a postnuptial agreement or be further disadvantage by not signing. Each spouse should have independent legal counsel, and each spouse must have adequate time to review the agreement and to consider before having the agreement executed.
Advantages of a Postnuptial Agreement
Given the unpredictability associated with the start of any relationship, a postnuptial agreement may ease a great deal of your anxiety. If you have children, own a business, or if one of you has substantial assets, a postnuptial agreement can help to protect and preserve those assets. In addition, signed and recorded postnuptial agreements protect your assets from creditors. For families with high debt load, your agreement can also clarify liability for debts, protecting a spouse from having to assume liability for the debts of their spouse. In addition, it is helpful in thoughts of estate planning. In this situation, post nuptial agreements can help you preserve your property in the event that your spouse passes away. An unexpected and messy divorce can be extremely expensive, both in terms of time and money. A postnuptial agreement may save you from a loss.
Provisions Commonly Found in California Postnuptial Agreements
A typical California postnuptial agreement can contain several types of clauses, including:
Property Division: This clause details how community property and separate property will be divided if the marriage ends.
Spousal Support: This clause outlines each spouse’s rights to temporary or permanent spousal support in the event of a divorce or legal separation.
Debt Responsibility: This places responsibility for specific debts with one of the spouses, regardless of who originally owes that debt.
Dispute Resolution: This provides specific procedures for resolving issues during the term of the agreement, including mandatory mediation.
Estate Planning: This clause details how the spouses will determine estate division in the event one spouse passes away. This is usually important for couples who are not legal spouses and therefore would not automatically inherit from one another.
These clauses can be helpful in determining the way the couple should handle other issues, such as insurance coverage and income taxes. They can also help determine what absence of community property the parties desire.
Challenges and Restrictions
Like prenup agreements, postnuptial deals are not exempt from challenges on the grounds of fraud, wrongful inducement, non-transparency or unconscionability. If you and your spouse did not make full disclosures to each other, or if the process by which you entered into the agreement was not 100% full of candor and transparency, the agreement could be found to be void. That said, these cases are often very hard to prove and require substantial documentation and witness testimony.
More often than not, the litigant who challenges the enforceability of a postnuptial agreement will have to repudiate it as being fundamentally unjust or inappropriate. In other words , the litigant will have a more challenging road ahead of him or her if he or she is seeking to overturn a postnuptial agreement.
One of the major reasons that California courts reject postnuptial agreements – and seriously consider them as "unconscionable" – is that they treat certain types of spousal support provisions as being "unconscionable" in the eyes of the law. Here are some common examples:
• One spouse gives up his or her right to receive any spousal support whatsoever, even if he or she is essentially homeless and without a job, income or choice but to live with the economically dominant spouse.
• One spouse completely waives his or her right to even a minimum amount of spousal support, such as enough to cover daycare or to purchase basic clothes and a bus pass or cellphone, recognizing payments of this nature as a time-out for the less economically-dominant spouse to seek employment.
Courts seem virtually always to reject spousal support provisions that basically are tantamount to waiver of all support from the economically dominant spouse.
Preparing and Negotiating a Postnuptial Agreement
Smooth sailing for postnuptials requires the willingness and ability of both to sit down and negotiate at arms length, the former about financial, legal and other aspects of the marriage now and the later. The ability to combine market, industry and personal knowledge with experience with drafting and negotiating these documents and to identify potential issues and alternatives is critical. This means that contracting partners should review potential issues with a lawyer who has this ability and familiarity with the provisions of California postnuptial agreements and strong competency in drafting.
Key to achieving an enforceable postnuptial agreement is full and fair disclosure of each partner’s assets, debts and financial condition. The test is not the sufficiency of disclosure to arrive at a marital agreement. Rather, the test is whether material facts were undisclosed and would have been dealt with had they been known.
Another element of fair dealing is that each party should have, or have access to, independent legal advice. This requires the availability of competent counsel. It is unlikely that a court will enforce an agreement that comes from one partner’s lawyer to the other. Also, it is better if the lawyers have already established relationship with both partners. In other words, this should not be a margarine commercial.
While not required, it is often helpful to attempt to agree on fair executory provisions before grandiose demands are made. That is, decide on the duration of the marriage, level of income for spousal support purposes and allocation of payment to child support before starting negotiations about property division and the like.
We have described in other sections the roles and benefits which a postnuptial attorney serves to both spouses.
Examples and Case Studies
To illustrate how postnuptial agreements can play out in real life, let’s consider a few scenarios of California couples who found themselves served well by a postnuptial agreement.
Scenario 1: A tax benefit
As our hypothetical couple, Maria and James have been married for 15 years before James brings up the idea of getting a postnup. Throughout their marriage, Maria’s business has grown substantially, and the couple have a sizeable estate. After researching the benefits of a postnup, Maria agrees – but only if they can do so legally in California.
Months later, they’re sitting with their attorney, Robert. Robert explains that their postnuptial agreement could be a tax savings. An appraisal identifies their estate as worth $8 million. Based on a review of the family finances, and Maria’s expected income, Robert advises Maria and James that a business value of $3 million would be almost $200,000 in state taxes, using a tax rate of 9 percent. If James holds title to the property, it could be considered as a gift, which also raises the tax bill to about $600,000 based on a $6 million value.
James agrees to the wording of the postnuptial agreement as it’s written. It says that Maria’s business is her separate property, and that she will be awarded the business, and all its assets, in the event of divorce or death.
Scenario 2: Premarital property inherited during marriage
In another scenario, our hypothetical couple is Ben and Megan. Ben has been married to Megan for three years when Ben’s mother dies, and leaves Ben a house that will go to him upon transfer of title. Ben and Megan’s two children share bedrooms at that home on weekends when it’s his turn to have custody of them.
After some preliminary discussions, Ben and Megan decide that a postnuptial agreement is a good idea for their family. Ben is certain he wants to ensure that the house he receives after his mother’s death goes directly to his children when he passes. The couple sit down with their attorney, John, to hammer out the details.
John ensures that the language of the postnuptial agreement states that if Ben were to die during marriage, his children are the rightful heirs to the home, and that Megan acknowledges this. She agrees to a transfer of Ben’s interest in that property directly to those children.
Scenario 3: Leaving inheritance to children
Scenario 3: A 27-year marriage
Barbara and Doug have been married for 27 years and for most of those years, Barbara has been a stay-at-home mom and kept their two children busy making educated choices. Doug, on the other hand, worked hard as a real estate agent and was recently promoted to a managerial role. He’s always been responsible with money and is aware of investments. At a party for one of his promotions, Doug’s boss rightly points out that Barbara’s been a great support for him. While he’s grateful to her for being his emotional anchor, he’s never made it clear that he wants to be the sole owner of the couple’s home. He worries what Barbara might do with it if he were to die or the couple divorce.
After a few parties with Doug’s boss, whom he admires, Doug decides to discuss this issue with Barbara. He wants her to have half the home and all the business accounts. If the couple divorce, their retirement accounts would be halved, but Barbara would receive the whole area they’ve renovated for their four grandchildren.
They decide to go ahead with their hopes for the family home in an exclusive neighborhood. The couple works with their estate plan to provide for each other. They make it clear that if he dies, Barbara gets the house, and if she dies, Doug does. The children inherit the majority of their estate. In the marital agreement, Doug and Barbara detail their knowledge of the money they manage and how they want it distributed.
Final Thoughts: Is a Postnuptial Agreement Suitable for Your Relationship?
In evaluating whether a postnuptial agreement is appropriate for a particular marriage, several factors should be considered to make an informed decision. First, communication is paramount; both spouses must discuss their concerns and desires candidly to determine if there is a need to address specific issues in the eventual drafting of the agreement. This forms the basis for understanding each spouse’s goals and whether the compromise is acceptable.
Next, each couple should consider their financial situations and whether there are unique concerns that a postnuptial agreement could help mitigate. For example, if one spouse has considerable debt coming into the marriage, addressing how that debt will be treated in the event of a separation or divorce may be beneficial. Alternatively, if there is substantial property owned by either spouse before the marriage, the couple may want to clarify the division of those assets in the event of a divorce .
Tax and estate planning implications are also essential considerations. The spouses should discuss with a tax advisor or estate planning planner any potential ramifications the postnuptial agreement may have on their taxes or estate plans. A qualified estate planning attorney can help the couple understand how their estate would be divided under both scenarios – a divorce without a postnuptial agreement and with a postnuptial agreement in force.
Finally, understanding the process and legal guidelines for drawing up a postnuptial agreement in California is necessary. Consulting with a family law attorney can help clarify the steps involved and the exact process required to ensure the agreement is legally enforceable and valid.
Ultimately, deciding whether to enter into a postnuptial agreement is a decision unique to each couple. Taking the time to communicate openly, thoroughly consider the implications and interact with legal and financial advisors can help ensure the best possible outcome for both spouses.