Should Couples Sign Prenups or Postnups?

Posted: 22 September, 2019

I know. Talking about a prenup before getting married is a complete buzz kill. It’s like talking about life insurance at a baptism, or disability insurance at a college graduation.

You’re in love. You know in your heart that you and your spouse will be holding hands and gazing into each other’s eyes for decades to come. Divorce is not in the cards for you. Love will prevail as you overcome every challenge.

The rest of us are rooting for you and hope “happily ever after” is your destiny.

Unfortunately, I have a habit of being a wet blanket who sours the moment with notes on preparing for the alternative. I am the annoying conscience awaking you from the dream of optimism to show you reality.

This annoying conscience has one question for you. If you can answer yes, without a hesitation, then you don’t need to finish this article. Would you go into business with your brother-in-law without a written agreement?

You know, your brother-in-law who always has a business idea for you, but who has neither money nor business sense. Would you go into business with him with no written document agreeing on how the business will be divided if either of you passes away, or if either of you decides to do something else?

Probably not. Even if you would, can you see the potential problem of being in a partnership without a well drafted agreement?

When you marry, you and your spouse are now business partners in a business called Community Property, Inc. You are now sharing in all assets or debts earned or incurred after the date of the marriage. Your wages, your investments, and any business are all presumed to be community property. Split 50-50.

Community property is divided equally between the spouses. If a divorce is requested by either spouse, the assets are divided evenly. You might think dividing them equally is fine. But, what if your spouse has been having an affair? What if you can’t afford to buy-out your spouse from the house or the business?

It doesn’t matter why the divorce is requested. Your spouse could be the one who had the affair, or who has been wasting assets, or who is verbally abusive. Nevada is a no-fault state, as are most states.

The reason for the divorce, or whose fault it may be doesn’t change how the courts divide the assets and debts. Being at fault, or having an affair, doesn’t change spousal support calculations or the outcome of the divorce.

Your spouse’s infidelity or abusive behavior won’t prevent the court from dividing your pension and assets evenly. Even worse the court may award you to pay alimony to your cheating spouse.

What? That’s crazy! We know! That’s why we recommend prenups.

Who Should Consider a Prenup?

Most couples who have assets, or any bonafide prospects for earning assets, or earning good income should consider a prenup. A business owner is probably our number one candidate for a prenup. Especially a business owner with partners. We have seen dozens of businesses crash and burn because a divorce causes the business to be valued and divided immediately. This causes all the partners to get involved with the divorce buyout.

Not too many businesses can instantly buy out a partner. But, a divorce does exactly that. Your spouse is a silent partner who is entitled to half the value of the business. If your spouse files for divorce, then half the value of the business is due, almost immediately.

Prenups can evolve. A good prenup can evolve and change as your life changes. You can plan for events like staying home to raise children, leaving the workforce, early retirement, and infidelity.

A prenup isn’t designed to punish the other person and leave them with nothing after a divorce. Prenups are about peace of mind. The goal is to protect the assets spouses accumulate together and to pre-determine how those assets would be fairly divided in the event of a divorce.

What if you are already married?

As you are reading this you might thinking. Yes, I agree with this discussion. What if you are already married?

You are in luck. An agreement, called a postnup, can be used for couples who are already married. This agreement is similar to a prenuptial agreement but is signed after you are married.

Again, business owners are prime candidates for a postnup. Your spouse owns 50% of the business. It doesn’t matter they are not listed as an officer or director. It doesn’t matter if you are the qualified or licensed employee. It doesn’t matter if they don’t even know what you do at your business. They are entitled to half.

The following are some common rants heard in echoing through divorce court: “Only my name is on the corporation”, “I alone have been running this business for 20 years,” “I am the one who works every day until 8 at night, and Saturdays and holidays”, “She has never had to work, or deal with a customer.”

None of these rants (regardless of how true they are) changes the law. The truth is the court views all the time, energy, and effort put into building a business as community property. This means the value of the business is divided equally. This is a serious threat to your business and happens every day.

You probably think that there is no way you are having a conversation about divorce. No way will your spouse will agree to a postnup. The conversation is easier than you think. Especially, when you explain the advantages to them.

A postnup can protect your spouse against business debts. If collectors sue the business, your spouse is protected. A creditor who is entitled to recover a debt generally “steps into the shoes” of the debtor, or in other words, has the same rights as the debtor.

This means the creditor of the spouse who originally incurred the debt, has the right to satisfy the debt using their interest in the community property. Thus, the creditor can theoretically recover up to one-half of the value of community property to satisfy the debt of one spouse. Yikes!

Under Nevada law, the separate property of a spouse is a not reachable by creditors. With a post-nup, a couple may agree in writing that certain assets are the separate property of one spouse instead of community property.

By agreeing to make some assets separate assets of the partner who is not in debt, rather than community property, the couple may be able to prevent creditors from being able to “go after” those assets.

Some other issues that a postnup will resolve:

Easy valuation of the business. Courts are horrible at business valuation. Judges are lawyers, and lawyers are not great at math. It’s one of the reasons we went to law school. Valuing a business is all sorts of talk about gross income, net income, multipliers, and percentiles. Judges may get the numbers wrong, and now you and spouse are stuck. A postnup allows you to choose how to value the business.

We have seen couples with a business sink after the divorce is final because the terms are to drastic for the business. The business is the main source of income for both, and the judge just ordered half the business value to be paid by the spouse running the business to the other spouse. How? The banks won’t lend the money. The divorce has been so testy and emotionally draining that the other spouse isn’t willing to accept payments.

We have seen many couples’ business sink during a divorce. Both spouses become too emotionally charged. They can no longer see that they both need the business. Without an agreement while minds are cooler, the business becomes caught in a divorce tug-of-war. Most businesses cannot survive. A postnup allows for spouses to negotiate buy-out terms before the emotions of a divorce kick in.

An agreement detailing how the business will be valued and how the buy-out can be paid alleviates all of these issues.

What should be in a prenup or postnup?

The content of prenup (or postnup) is fairly simple. You and your spouse should discuss how assets should be divided, how debts should be divided, and whether alimony would be appropriate. An important clause is the terms of the buy-out of a home, or business. Predetermining the financial terms of refinancing a home, or business are important to discuss.

All material information about the other’s finances needs to be enclosed at the time the agreement is made. Both parties should receive separate and independent legal advice at the time the agreement is formed. The agreement should be made at least 28 days before the date of marriage.

Infidelity clauses are popular. A postnuptial agreement can decide what happens if a spouse is unfaithful. These clauses can impose restraints on spousal support for infidelity during the marriage.

The Nevada Courts do require some specific actions for a prenup to be enforceable. The agreement must be in writing and signed by both in the presence of witnesses. Oral agreements are not valid.

For more information on postnups or prenups contact one of our divorce attorneys at Right Lawyers.   Call (702) 914-0400 to learn more.