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Afford Anything | Make Smart Money Choices
The Marriage Contract You Never Saw (But Can't Escape), with Harvard Law Alum Aaron Thomas
01:33:53
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- [00:00]
Paula Pant
We need a prenup. Those four words can stress test an engagement, or they can double your net worth and protect everything you've ever built. Today, for a special Valentine's Day episode, we welcome family law attorney Aaron Thomas. Aaron Thomas is a Harvard graduate who specializes in prenups and runs the website prenups.com he talks to us about the most significant financial decision you will ever make in your life. Who to marry and how to protect your assets within and after that marriage, who to marry and how to protect your assets within and God forbid, after that marriage. If you are someone who thinks, I don't need a prenup because I'm never going to get divorced, this episode is definitely for you. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade off and that applies applies to your time, money, focus and energy. We cover five pillars. Financial, psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. How do you protect everything that you have ever built, particularly in the context of your investments, your real estate, your business? If you are an entrepreneur, it protects everything that you have ever built. To say nothing of child custody, which we actually will say a lot about it in the upcoming interview. We're going to learn that from Harvard trained family law attorney Aaron Thomas right now. Welcome, Aaron.
- [01:39]
Aaron Thomas
Thanks so much for having me. Paul, I'm excited to be here and excited to have this conversation with you.
- [01:43]
Paula Pant
I'm very excited about today. Thanks for spending Valentine's Day with us.
- [01:46]
Aaron Thomas
Absolutely.
- [01:47]
Paula Pant
Erin, what is marriage?
- [01:50]
Aaron Thomas
Great question and something that a lot of people don't ask. So the dictionary definition would tell you that marriage is the legal union between two people in a romantic relationship. I think that it goes a step further than that. Having spent most of my career in family law doing divorces of couples, I know that marriage is a legal relationship that also gives you rights to each other's finances and provides financial responsibilities between you and your spouse.
- [02:22]
Paula Pant
Okay. And if the dissolution of marriage is off the table, if you're simply never going to get divorced, then why would anyone need a prenup?
- [02:32]
Aaron Thomas
Most people who have some idea of what the divorce rate looks like in the United States know that a lot of people end up going through a divorce who never planned on that happening. I read some statistic that said that 96 or 98% of marrying couples believe that they are never, ever going to split up. Which of course begs the question, what are those 2 to 4% thinking when they're going into Marriage. But also the majority of people who do end up going through a divorce do not see it coming. It takes two people to agree to enter into a marriage, but it only takes one person to file for divorce. And even if the other spouse doesn't want it, the court is going to move forward and proceed and allow that one person to end the relationship. So even if you never plan on getting divorced, divorce can happen to you.
- [03:21]
Paula Pant
So what if you're going into a marriage? And I'm playing devil's advocate here, but I really want to press this issue because I know a lot of the people listening feel this way. You're going into a marriage and you have firm beliefs, maybe religious beliefs, ethical, moral beliefs, that in your belief system, divorce is wrong, it is not an option. It is perhaps in your religion, it is immoral. And let's say both partners entering the marriage share that common set of beliefs. Would it not stand to reason that this is simply irrelevant to them?
- [03:58]
Aaron Thomas
I think that a lot of people do assume that going into the relationship. I think my response to some of those couples would be that life is a very long time. The people who got married last generation say, you know, my parents generation got married in the 1960s. They got married on average of maybe 21 years old, was the average spouse when they got married. Today, the average person gets married at 30, which is much later in life for a first marriage. But life expectancy is 88 or 90. And you talk to anybody today who's in their 40s and they'll tell you they were. They're a completely different person than they were five years ago or 10 years ago. And a lot can happen. A lot can change in your life. You get a lot of perspective. I certainly wouldn't want to be held to all the decisions or my way of thinking when I was 21 or even 28, being somebody who's now in his 40s. And I think that's what happens is people change, Their partner changes, their relationship changes over time. And it is very difficult for someone who is 21 or even 25 or 28 to envision what their life might look like, what their partner's life might look like, and what their relationship with each other might look like 10, 20, 30, 40 years down the line. And so, yeah, it's difficult to see what might happen in your relationship because you don't know what you don't know.
- [05:14]
Paula Pant
Right. But there is one irrevocable decision that people often make when they're young, and that is the decision to have Children. So if you are 19, 20, 25, 30, 35, 40, no matter how old you are and you have a child, that there's no going back. Right. You can't change your mind when the kid is five. That is an irreversible decision. And there are many people who say, well, once kids are in the picture, divorce is off the table.
- [05:41]
Aaron Thomas
Yeah. Unfortunately, that's not the reality that we live in. That's not the case either. I think that a lot of people find it easier to maintain a bond with a child over the course of their life than. Than they do with a partner. There are some couples who you will grow in the same direction, and there are people who you grow apart from the same way that may have friends from high school or friends from college. And some of those, you maintain those relationships and you grow in similar directions. And some people you grow apart from. And as difficult as it is for people to think about when they are in the throes of love and they see their partner as someone they want to spend the rest of their life with, there is a reason that over 40% of American marriages end in divorce. It is just a fact of life that people grow apart. Relationships are tricky. And maintaining a marital relationship for an entire lifetime is a feat that I think a lot of people don't recognize.
- [06:37]
Paula Pant
Right. But often duty supersedes love. And, you know, not all marriages are love marriages. So my parents had an arranged marriage when my mom was 13. My dad was 14. And in the arranged marriage culture, which is still common among many groups today, those marriages are not rooted in love. They're rooted in duty. And that duty is something that one maintains out of honor, regardless of how they feel.
- [07:03]
Aaron Thomas
Yeah. I think that even the expectations of what we have for our marital partner have evolved over time, over the decades. If you go back to your parents or your grandparents, a lot of them would say, I wanted a good person, maybe somebody who had a good job and was kind and, you know, shared the same values or background or faith as me. And that was pretty much it. That was seen as like a good basis for a lifelong relationship. And I think that over time, romance has entered the picture in a way that I think a lot of people assume that romance was always the basis of marital relationships. And it is really relatively recent that we look at finding a life partner being based on this butterfly's version of love, this romantic love. And this person is my soulmate, and they complete me. The Hollywood picture of, you know, what a marriage is. And now we have expectations that Are not only do you need to have a similar background and morals and ethics, but I need to feel these butterflies in my stomach type of love. You've got to be a good partner. You've got to be a good co parent with me. You've got to be a good roommate. We've got to share the household duties together. We have expectations a lot of times that both spouses are going to contribute financially to the relationship. And so I think there really is a much higher bar of expectations that we have in a relationship. Whereas your great grandparents may have just said they have a good job and they come from a good family and what else do you need? And so I think that a lot of these different factors contribute to the difficulty in maintaining a lifelong relationship like marriage.
- [08:46]
Paula Pant
Well, and you. Based on historical records of the earliest marriage, you actually calculated that 1.6% documented human history of marriage has been rooted in a time where people used love as the basis for entering that marriage. And the other, what, 98.4% of the time, it was rooted in creating family ties or creating ties across tribes or clans. It was rooted in very logistical reasoning.
- [09:17]
Aaron Thomas
That's exactly right. The original marriages were about joining families together. They were much more about strategic bonds between families, which is why historically, families have played a much greater role in arranging marriages, or even if not officially arranging marriages, kind of, you know, steering spouses toward each other, because it was about economics, it was about financial ties, it was about what was right for the family or right for the community, or like you said, even tribal elements of it. And in fact, not only was love not the primary factor in finding your life partner, it was seen as maybe a detriment to marriage. There's a lot of texts from European history where the priests there or authors there would write things such as, never would you leave something as important as marriage up to something as fleeting as love? Because they recognize that those feelings of love that we have for each other can be. Feel can be fleeting. They can go away. Even in the happiest of marriages. It is rare that you have the exact same butterflies in your stomach in year 20 or 30 that you do in year two. I mean, we'd all love to have that, but the reality is there is a difference in the feelings of romance that you feel in the very beginning stages of a relationship than you do decades into the relationship. And so in a lot of cultures, even still today, they see love as something that is separate and apart from the reasons that you would use to go into marriage. In fact, you Know, there were even a priest in England who said that love is something that you reserve for your mistress, your paramour. It is something that is for a temporary relationship. And your marriage should be based on something more foundational. Family ties or backgrounds or your community.
- [11:06]
Paula Pant
Right. And as somebody myself who was reared in an arranged marriage culture, I'm very sympathetic to those arguments because I was brought up in a culture that very much believed that, that the purpose of marriage was not love, but rather duty and obligation. And so that's part of the reason why I'm pushing you on these questions of how would you respond to all of the listeners who say I don't need to learn about prenups because it's not going to apply to me because I am honor bound and I am duty bound, regardless of something as ephemeral as I'm unsatisfied?
- [11:38]
Aaron Thomas
Yeah, that's a good point. And I'm sure it is not lost on many people that the cultures who have more arranged marriages, whether formally or informally, have lower divorce rates. And I think a lot of it is about those expectations. I think that I've worked with many clients in my divorce work over the years who they had these beliefs coming in and their partner did not have these beliefs. And so you can believe very strongly that you have a duty, that you are going to stick in there through thick and thin and you will be with your partner for life. And you do not have expectations that they're going to wow you with romance in year 40 of the marriage. But if your partner does not also believe that divorce can come to you, even if it's something you never seek, even if it's something you don't want, even if something you fight, a court can grant a divorce over your objection if your spouse wants it.
- [12:27]
Paula Pant
Right. It takes two to marry, but only one to divorce.
- [12:29]
Aaron Thomas
That's exactly right.
- [12:30]
Paula Pant
Right. What is a prenup?
- [12:32]
Aaron Thomas
Great question. So a prenup is a set of rules that defines your financial relationship with your spouse both during and, if necessary, after marriage.
- [12:43]
Paula Pant
Your take is actually a novel one. Most people I have heard define a prenup as something that kicks in after a marriage, or more specifically, as a marriage is dissolving. But your take is that during a marriage, a prenup is something that can actually strengthen and support and enhance a marriage. Tell me about that.
- [13:05]
Aaron Thomas
Yeah, that's absolutely right. A lot of people, including myself, before I began practicing family law, believe just what you said, that a prenup is essentially just a plan for divorce. And even if you're not planning for a divorce. You are essentially writing your divorce settlement agreement before you get married. Once I got into actually drafting prenups and working in family law, I realized that we put a lot of things in prenups that deal with how you're going to manage your money during the marriage itself. So, for example, a very common setup for a prenup might be all right if we split up, I keep what's in my name, you keep what's in your name, and we split everything that we have in joint names. 50.
- [13:45]
Paula Pant
50.
- [13:46]
Aaron Thomas
Right. Well, that could either be a very fair arrangement or a very unfair arrangement, depending on what you're doing during the marriage itself. If all of your paychecks are going into a joined account, then you may say, yes, that makes sense for us to split that 50 50. But if my paycheck is going into just my account and your paycheck is going into a joined account, then splitting everything in joint names no longer seems as fair. And so a lot of the details really come down to what is it that you're doing during the marriage. I like to look at a prenup more as like a partnership agreement. If you were going into a business partnership agreement with somebody else, yes, of course you're going to have what you might call a termination clause. Yes, you're going to have something that says, what happens if this business partnership, this business venture, doesn't work out? How do we settle things out without ending up in court? But that's not the purpose of the partnership agreement. The purpose of the partnership agreement is to make things run smoothly during the pendency of the business itself. And a prenup is the same thing. It should help you manage your finances during the marriage itself. And yes, of course, we're going to address what happens if you break up. But the real power is in helping you resolve conflict during the course of the relationship, particularly when it comes to finances.
- [15:07]
Paula Pant
So what would be an example of something that might be written in a prenup that would help strengthen a relationship during the marriage?
- [15:15]
Aaron Thomas
I think there are a number of things. Probably the first thing is for a prenup or postnup to be enforceable. This is true in all 50 states. Both spouses have to disclose all of their assets and debts to each other. Typically, we do this in writing. You prepare essentially a net worth statement for each spouse. They trade them, they look at them, they initial them, and something extra interesting that I've found over the years is for many couples, this is the first time that they've had anywhere close to this amount of visibility into each other's finances. We start dating, and certainly is atypical to lay out your net worth on a first date. You're not typically going to slide your balance sheet across the table on the first date or second or third. And because money is already taboo to talk about in our society. And then you throw all of the awkwardness and difficulty of navigating the beginning stages of a relationship on top of that. And often people get years into dating or even years into marriage and do not know each other's finances, do not know how much debt that their partner has, do not know what their partner's income is. And certainly a lot of couples don't get as far as talking about, are you the kind of person who pays off your credit card every single month, or do you carry balances? What is your relationship to death? What was your experience with money growing up? And often just that first step of trading your assets and debts with each other sparks the conversations that, that opens the door to have these conversations. And it provides a time for couples to try to see if there are areas where they are misaligned financially and areas where maybe they gel very well together financially. So even just disclosure of assets and debts is a good starting point.
- [17:00]
Paula Pant
So what strikes me though, is that disclosure of assets and debts is a point in time analysis that happens prior to entering the marriage. But over the span of, let's say, a 50 year marriage, those assets and debts are going to change pretty significantly. Twenty years into the marriage. There have been numerous examples of one spouse either racking up debts or acquiring assets that they don't disclose to their other spouse during the marriage itself. What do you do about that?
- [17:27]
Aaron Thomas
Yeah, great point. And so that is the reason that a lot of times what we'll include in prenups are something that I'll sometimes refer to as annual shareholders meetings. Right. So you're in this, and forgive me for beating the business partnership analogy to death here, but you're in this relationship. You're in a financial partnership with your spouse. Yes, you trade that information at the beginning, but you can also write into your agreement an ongoing obligation, an ongoing expectation that we're going to sit down every year, maybe twice a year, some couples every quarter. And we're going to revisit these numbers, we're going to update each other on the balances. Some couples will even use a spreadsheet that both of them have access to. And that's where all of that financial information will Live. Often couples will write into their agreement that anything that is considered a joint asset, both spouses have access to it. If that's an account, they both have their own logins for it. If you use financial advisors, both spouses have access to the financial advisor. So you put in place in the agreement itself certain checkpoints to make sure that that information continues to flow. Another common tool that couples will use is, and this is something that I have in my own prenup is my wife and I have a rule that neither one of us can spend over $500 from any joint account unless we both approve of the expenditure ahead of time. And some people hear that and they feel some kind of way about it, some kind of negative way about it, because, oh, that feels like getting permission or checking in. But what I found is when you're talking about joint accounts, something that belongs to both of you, one spouse going and making kind of unauthorized expenditures is a huge source of tension in the couples that I've worked with over the years. And some couples believe that that barrier should be $250. I want to know everything over $250. And I've worked with couples who say I don't need to know about any of expenditures under $10,000, but everybody has some amount of money where if it's going to go missing from a joint account, they would like to know ahead of time and kind of building in that respect for one another and an expectation that this truly is our joint money. And so I have an obligation to you to let you know what's happening with it before I go and spend it is something that I think is healthy for the financial relationship. But also, and maybe I'm naive for believing this, but that kind of respect can bleed out to other parts of the relationship. We are going to respect each other enough to keep the other one in mind. When we are making a decision that impacts both of us as a couple.
- [19:57]
Paula Pant
How are those enforceable? So like for example, the annual shareholders meeting or even the check in for expenses over a certain threshold. If five years into a marriage, one spouse or the other just doesn't do that, how does that stipulation get enforced?
- [20:14]
Aaron Thomas
Yeah, great question. So some couples will actually write in certain enforcement mechanisms that can happen in real time, like we're going to go to arbitration or you pay some kind of financial penalty. So for every act that you've done, you know there's going to be a financial penalty. Most couples though, and I would say that 99% of the benefit of these Types of provisions in agreements are about the explicitly defined expectations that are being put out there at the beginning. Because the alternative is there's no rule about, for example, spending from joint accounts. And it just is a constant ongoing friction where, I can't believe you bought that. I can't believe you're spending on that. Again, using my own relationship for an example, I'm a much bigger spender on gadgets, electronics. I like to upgrade my phone every year. That's kind of my one splurge expense, but I'll brown bag it for lunch most of the time. I'm frugal in many other areas of life. Whereas my wife, she likes to have her variety in her lunch, she likes to go out to eat, but she doesn't care about the new phone. She'll take, you know, my old hand me down phone. And at the end of the year, we may be spending the same amount, but we're spending it on different things. And rather than have those kind of spending decisions be a source of tension in our relationship, we just create some rules around, this is your spending allotment per month, this is my play money per month. And anything that comes from the joint account is only going to be a true joint expenditure. And so most of it is not about enforcement. But for couples that have this rule in, at least you've said upfront that this is your expectation. And when somebody breaks that rule, then you know that it's happened. It's similar to infidelity, right? If somebody considers if you go out and have a meal with your ex alone, a lot of couples would consider that being unfaithful. But if you haven't explicitly defined, this is the area where I feel uncomfortable. I don't want individual meetups with your ex. I don't want individual text message conversations happening, then at least you put it out there and the person can't come back and say, well, I didn't know that that was a problem. I think it's the same kind of thing that happens in spending. You put these rules out there, you have an expectation. And if one year your spouse stops sharing what their finances look like or begins going and making huge purchases from the joint account, then you know that they've broken a rule. And it's not just, oh, well, I didn't know that I couldn't do that. I didn't know that that was a problem. You're overreacting. You've set down what the expectations are ahead of time. And I think that's where a lot of the power is right.
- [22:41]
Paula Pant
That makes sense. So, like, another example would be strip clubs. Right. If for some couples, a person going to a strip club would be an egregious act, it would be some violation of fidelity for other couples, who cares? No big deal. Right. And so it's very unique to each couple, based on their own set of values, as to whether they find that to be a, an infringement or not. But if that discussion is never had, then oftentimes you don't know until retrospect and then there's a fight.
- [23:11]
Aaron Thomas
Yeah. And I think there's something about putting it in writing. You're not going to put your signature on something that you just completely disagree with altogether. There is something formal about putting your signature on the document that people want to live up to it. Yes. It's not every provision that goes into one of these agreements is going to be as practical to enforce as others. I liken it to, you have a lease agreement and you say you got to pay a $50 late fee if your rent isn't in by the 5th of the month. If somebody pays their rent on the 6th, is it really practical to go and file a lawsuit to get that $50 back? No, probably not. But most people are going to pay the late fee because that is how our society works. We have expectations, we put them in contracts, and often 99.9% of contracts are enforced without having to go to court just because you put it in writing. And both people agree to those expectations up front.
- [24:02]
Paula Pant
What happens when a couple agrees to a set of expectations up front, but then over the span of their marriage, their financial circumstances drastically change, either for the better or for the worse, and it causes them to want to recalibrate the way in which they operate.
- [24:19]
Aaron Thomas
I think that is a natural and great and healthy thing for couples to do. It is one of the reasons that I am such a big fan of including something like an annual shareholders meeting in your agreement. So you have a time where you can sit down and talk about certain things that otherwise can go years without really being addressed head on. So at a basic level, most couples will discuss, okay, what are our incomes, what was our spending last year? And what's our budget for this upcoming year? But couples will also often choose to discuss things like family planning during that time. Or do we want to make a move? Or maybe we put an allowance in place, Is it time to increase that allowance? Or is this the year that we need to replace somebody's car? Or do we want to budget for upcoming travel, an annual Meeting is a good cadence to talk about insurance or what insurance policies do we have available to us? Medical insurance, life insurance, what subscriptions do we have in place? And so I think it's a natural time, if you have that rhythm built into your relationship where you sit down and you talk about these financial things, that, that provides an opportunity for you to say, all right, we need to adjust this financial arrangement because it's no longer working for me. Maybe when we were both making similar amounts of money, we felt that it was fair to contribute the same amount of money to the joint account to pay for joint expenses. But if you're making triple what I'm making, it's time to readjust that so that we don't end up as one of those couples who were living under the same roof but in different socioeconomic brackets, because that doesn't work well either.
- [25:53]
Paula Pant
Right, right. And there are many people who believe that once you're married, all money is joint money that needs its own set of agreements in terms of how that is handled.
- [26:01]
Aaron Thomas
Yeah. And that is an expectation. If that is something that you and your spouse believe, then why not make it explicit, put it down in writing that this is joint money. We consider all of this joint. And yes, if anything ever happened in our relationship, we would divide all of those pots of assets 50, 50.
- [26:19]
Paula Pant
And then where that gets tricky is, all right, but does that apply to the inheritance that one person got from their deceased father or grandfather? Right. Does it apply to the business that one of the two started that the other had no hand in? Does it apply to the vested, restricted stock units in one person's occupation? That's where it's one thing to divide up a paycheck because that's typically what people, how people manage their cash flow on a day to day level. It's another to divide up the inheritance that, you know, that your World War II veteran grandfather very painstakingly saved for you and now your cheating ex spouse is going to get half of that?
- [27:04]
Aaron Thomas
What you just brought up is exactly the reason why I think these conversations need to be had early and often and explicitly is because it is on a theoretical level, it is very easy to say, we're in this together. Everything that's mine is yours. Everything is 50, 50. Because what I found is once you start peeling back the layers even a little bit, that everything, literally everything is 50. 50 turns out to hardly ever be true. Right. Most couples, you may believe that, okay, all of our incomes while we're both working, yes, those are all 50, 50. But like you said, what about the inheritance? What if I came in with six figures of student loan debt? Maybe I don't want you to be responsible for that. It could be just as simple as my student loan debt or your credit card debt is in the mine and yours columns, and everything else is in the hours columns. But most couples go further than that. This is my laptop. That is your cell phone. This is my car, and that's your car. This is my inheritance. Under the law, inheritance is virtually always considered to be separate property. And so some couples I've seen over the years, they will take an inheritance and they'll pay off the mortgage on the house that is in both names. And then if that couple splits up the next year, they don't realize that I have just taken money that my grandfather gave to me and wanted to stay in their family, and now I'm splitting it with someone that I'm no longer going to be with. And if that's a decision that you want to make, then that's fine. I just think that people should be making that decision knowingly and after a conversation, and they are intentionally taking something that the law might otherwise consider to be their separate property and converting it into marital property. But what I found over the course of my work as a divorce lawyer, after hundreds and hundreds of divorce cases, is most people who commingle or their separate property with marital property, or they convert their separate property into marital property under the law, did it unwittingly. And they don't find out that they've done it until they're sitting in my office going through their divorce case. And then they say, what do you mean I have to split this retirement account that was in my name that I had prior to the date that I got married? What do you mean? That I have to give him half of the house that I paid the mortgage on for years before we even met. And then they only then do they find out, oh, because we didn't set down rules at the beginning, we've commingled things that we didn't know that we were commingling. There are certain things that, yes, I considered them the income that was generated during the marriage to be joint. But now that the marriage is over, I have this business. I still have to get up and go to work every day. Why would I split half the value of a business that my spouse never worked in or never touched? And so I think that when couples sit down and have these conversations, they realize that rarely, rarely is everything just ours and a prenup at a very basic level can just help couples navigate that decision between what's mine, what's yours and what's ours.
- [30:22]
Paula Pant
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- [32:18]
Aaron Thomas
1, 2, 3 will that be cash or credit?
- [32:23]
Paula Pant
Credit.
- [32:24]
Aaron Thomas
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- [32:34]
Paula Pant
Results may vary based on input.
- [32:35]
Aaron Thomas
Check responses for accuracy.
- [32:44]
Paula Pant
What strikes me as I reflect back on the conversation that we've had so far is that while the overt topic that we're discussing is prenups, much of our discussion has really been about how couples share money. Much of our discussion hasn't actually been about the dissolution of marriage, but rather about the ongoing action of marriage when you're still in it.
- [33:07]
Aaron Thomas
I think that is a great point. My observation from doing divorce work is that things don't go wrong, they start wrong. Most of the problems that I saw my divorcing couples go through during divorce stemmed from a failure to ever have gotten on the same page in the first place with respect to their relationship with each other and particularly the relationship with money. When couples go through divorce cases that get messy and where there are big money fights during the divorce cases, often it is because they never had a full understanding as to what's mine, what's yours, what's ours, or what are our financial responsibilities to each other. Big common thing is alimony. Alimony is a huge fight in divorce cases. Alimony is money paid from one spouse to the other spouse after the marriage comes to an end. Couples make all kinds of decisions based on certain assumptions. The higher earning spouse may say, well, I never intended to have a financial obligation to you after the marriage was over. And the low earning spouse may say, but I sacrificed furthering my career based on this idea that we were going to be together forever and that you were going to financially take care of me. And that mismatch of expectations, because it's a conversation that was never had explicitly, can end up being very, very expensive and stressful litigation when those couples split apart. And it was my observation that if you are marrying somebody who expects you to leave your career to play a homemaker role, that you should be clear about what the financial obligations you will have to each other. Do you both have access to money during the marriage? Do you both have the same ability to spend money? Does the earning spouse have more ability to spend money than the non earning or lower earning spouse? And those kinds of issues often lead to divorces and very expensive and messy divorces. I had a case one time where the husband made $200,000 a year and the wife stayed home with their two kids and he gave her an allowance in quotation marks of $300 a month. And that's all she had access to to spend.
- [35:28]
Paula Pant
And wait, did that include like groceries and clothes for the kids?
- [35:33]
Aaron Thomas
He would put some things on his own credit card. But in terms of her spending, yes, she had to. That was her going out budget, that was her clothing budget and anything else she had to go and individually ask him for money ahead of time. Now no one would knowingly go in and sign up for that contract. Two people working with attorneys to help them structure what Their financial relationship is going to look like over the course of their marriage would never end up in that type of situation. But it is only accidentally and gradually and slowly that people find themselves in these relationships. And the husband in this case didn't think that he was doing anything wrong. It wasn't even visible to him. But it all stemmed from them not having clear understanding as to what does our financial relationship look like. It's very easy to focus on the romantic side of the relationship when we're getting together without even recognizing that, yes, you do have a financial relationship as well. And what do you want that relationship to look like?
- [36:32]
Paula Pant
Right. And, and loans given to other family members, loans given to friends. Those types of one time things can also play a big role in some of the conflicts that couples have around money.
- [36:44]
Aaron Thomas
Absolutely. A lot of people will put rules around loaning or gifting money to family members in their prenups. Some people will even use it as a, as a tool to be able to go back to family and say, I'm sorry, I can only lend you money from my play money account. And the way that our accounts are set up, I just don't have a lot of money in there. And they use that to avoid it. But even having a spending rule in your agreement would give you the ability to say, this is something that I have to discuss with my spouse. It's over $500, it's over $1,000. And all of those decisions we make jointly in my household.
- [37:20]
Paula Pant
But does that not then create conflict where your spouse is then the quote, unquote bad person? Right. Oh, my dear old mother or my dear sister, I would lend you money, but my spouse won't let me. And then all of a sudden they become the fall person.
- [37:35]
Aaron Thomas
I suppose that that is a risk, but given that the financial ties that you have with your spouse are legal and have much wider ranging penalties, perhaps that maybe it's more important to focus on the relationship that has legal financial responsibilities versus your family. What I advocate for is really making decisions as a couple. You deciding what your financial relationship should look like versus the government deciding what your financial relationship should look like, which is what typically happens when you do not have an agreement in place. And if your mode of action, if your default in your relationship is we make these decisions together, then hopefully that puts you in a position where you're not communicating to family that, oh, my spouse is being the bad guy. They're like vetoing my ability to give you money. You're saying, these are decisions that we make Together as a couple. And then the same way that you would with your kids, once you've made that decision, you present a united front to the outside world.
- [38:40]
Paula Pant
Right, which sounds good in theory, but often what can happen is a couple might discuss a particular decision, like, should we loan money to this particular family member? And they both feel very strongly about their respective positions. And even after a lot of back and forth, they still can't come to an agreement. And then the question truly becomes, in the absence of an agreement, what then becomes the default decision? Is the default decision a yes? Is it a no? What I've seen happen is that in the absence of a given agreement, one person's point of view becomes the default. One partner's point of view becomes the default.
- [39:20]
Aaron Thomas
Yeah, I think that that is another reason why I am a skeptic of the one bucket of money being all ours in relationships, particularly in modern relationships where my parents got married in the 1960s. Back then, like I said, the average couple got married at age 21. And so that kind of.
- [39:41]
Paula Pant
My parents were 13 and 14. Yeah.
- [39:44]
Aaron Thomas
So, like, that was. And that was the norm. My grandparents were teenagers, you know, when they got married as well. And that couple was likely to have maybe one bank account between the two of them. They had no business, they had no car, they had student loans, weren't anything like they are today. Credit cards hadn't been invented, 401ks had not come out yet. Your pension had not kicked in yet. And so that couple who got married in the 1960s, they were a financial blank slate. They got married and they were like, if they were a business, they'd be a startup in your garage, you know, like they're doing everything together and learning their financial world from scratch. And you compare that to a couple who gets married, not that much older, but like 28, 29, 30. And that couple is likely to have four or five bank accounts each, three or four credit cards. Each one of them make crypto account. Yeah, they got a crypto account. They've each got cars, somebody's got equity in a condo, somebody's got a stake in a small business. And it is a much more complicated merger. And maybe more important than just the numbers on the page, the assets and the debts, is each of these spouses, they've got a decade of managing their own finances and having their own financial habits and their own financial life before they got to come together. And so you're not just merging the bank accounts and the debt, you're merging two different financial personalities. So to Speak. And that can be even trickier when you talk about I've had autonomy over my own spending since I moved out of my parents house. And now 10, 15 years later, I'm having to check in every time I go to the grocery store. My take is that it is much healthier to have, yes, have an hour's bucket of finances in your relationship, but still have a mine and a yours bucket. And if we divvy up that money in a way that we see as fair, then you'll have plenty of money to do with what you want. I'll have plenty of money to do with what I want. And if me and my wife disagree about an expenditure, I always have the option of going and making that expenditure from my money. But if every single financial decision has to be agreed upon or somebody's being the dominant player or someone's feeling resentment, yes, that is going to make you probably even more prone to arguments. And so I challenge the couples who say, we don't need to have these conversations because everything is 50, 50, everything is together. I think that you're exactly right. I think when you peel back the layers, somebody is actually controlling those decisions and the other one is going along with it. Rather than setting up a framework where each spouse has some autonomy while still building a joint pile of resources together.
- [42:20]
Paula Pant
There are a lot of people who would push back on that. And one thing that I want to kind of emphasize, draw out here and emphasize is I don't want to conflate the question of should we have joint finances with the question of should we have a prenup. Regardless. What I understand you saying is, your individual opinion is that couples should have a yours, mine and ours bucket. But regardless of whether or not a listener agrees with that or not, and there are going to be many listeners who disagree and say, no, everything is all joint. There's no such thing as yours and mine in marriage. Everything, everything is all ours. That question should not be conflated with the separate question of, well, should we have a prenup? I don't think we need a prenup. Why should we have a prenup? We're not getting divorced.
- [43:04]
Aaron Thomas
Great point. In fact, the couples who believe that every single penny should be 50, 50, no questions asked, definitely need a prenup because the default prenup does not say that in 41 out of the 50 states in the U.S. 41 out of the 50 states. What we would call equitable division states. And what that means is if the court is dividing up your assets in A divorce, they are not required to divide everything equally. They have to divide them equitably. And equitably can mean 60, 40, it can mean 70, 30, it can be 80, 20, based on the judge's subjective opinion of each spouse's contributions made during the marriage, both financial contributions and non financial contributions. And that becomes a very, very tricky thing because in most married couples, that I've seen, even in a couple where both spouses feel like they're doing, both spouses are objectively doing half of the work, each spouse in that relationship is going to feel like they're doing two thirds of the work. It is just the nature of humanity. We see the things that we do, we see our contributions and our spouse's contributions are less visible, they're less in our face because we are not the ones making them. And what it does is it sets up a system that when these couples get divorced, everybody feels like they deserve 60% of the assets, 65% of the assets. And so those couples who believe that everything is 50, 50, no questions asked, you have to opt out of the default prenup because the default prenup says you don't get to decide. You don't have the ultimate authority to decide whether everything is 50, 50. That decision lies with a judge. The only way that you get to lock in a situation where your assets are completely 50, 50 legally is by putting that in your own prenup. And I think a lot of people don't get that. I think that a lot of people assume that choosing a prenup means what's mine is mine, what's yours is yours. That there is this one prenup, and it basically says that you're not joining your finances at all. And that turns a lot of people off. And it's actually the opposite. If you believe that everything is 50, 50, that is not what the law usually says. And you can choose that you can protect yourself from hurt feelings 20 years down the line or somebody changing their mind about something. You can protect yourself from a judge who maybe they just don't like the way that you look, you know, or maybe they have their own preconceptions or misconceptions, or they only get to hear your story for four or five hours for you to describe what your contributions were over the course of a 30 year relationship. And then they're going to make a decision of how to divvy up every penny of assets and every penny of debt that you've accumulated over decades of marriage. Or you can take that Power back and put it in yourself. So, you know, for the couples who are the 50, 50, everything is ours. Couples, they may actually need a prenup more than any other couples.
- [45:57]
Paula Pant
Can you explain what you mean by default prenup?
- [46:00]
Aaron Thomas
Yes. A prenup is if you accept the idea that a prenup is a set of rules that governs your financial relationship with your spouse, then every married couple has a prenup. You are either accepting the state laws of the state where you happen to live or you are writing your own prenup. You are the state laws are the default prenup. And a customized prenup is one that you do your own. And the biggest difference is with a customized prenup, you and your spouse are deciding the parameters of your financial relationship. And you're doing it at a time that you are best equipped to do so. You're doing it when you're loving each other as much as you ever have. You're doing it when trust is high, when communication is high, when you are planning to spend the rest of your life together. That is when you are most likely to be fair. Take the other person's concerns into account. And the default prenup says the decision as to who owns what is not made until you are divorced, until the trust has been destroyed, until communication is at zero, when you are worst equipped to do so. And guess how that works out. That is why divorce cases are so notoriously messy and difficult and painful and drag out. And why it is not unusual to watch a couple spend 20 to 25% of their net worth. Fighting over who gets the other 75 to 80% is because one, you're making that decision at a time that you're least equipped to do so. And two, you don't have the final say. If you don't agree, start paying lawyers. And a judge who barely knows you is going to make that decision.
- [47:38]
Paula Pant
In the absence of a prenup, you are handing decision making authority over to the government.
- [47:44]
Aaron Thomas
That is exactly right. You are saying the government is going to make a decision that could not be more highly personal to a couple. And drafting a prenup is an act of taking that power out of the government's hands, out of a judge who doesn't know you, and taking that power and putting it in the hands of you and your partner.
- [48:04]
Paula Pant
What would you say to people who are listening who say, you know what? I think a judge knows better than me. They do this all day, every day. They're the expert. I want to defer to Them. What would you say to them?
- [48:16]
Aaron Thomas
Having been a lawyer practicing law for many years and now I'm at an age where the judges are often my friends. I will let you in on a couple of secrets. One is the lawyers who have risen to this level in the profession, family courts, where they are now wearing a black robe and they are sitting on a bench. Some jurisdictions do have specific family court judges where that's all they do, but most jurisdictions do not. And most of these judges are not people who ever specialized in family law. They may be prosecutors, they may be business attorneys, they may do areas of law nowhere related to family law. And then they're brought in. And divorce cases make up such an overwhelming part of the litigation that goes to court that these judges have very little time to spend per case. And then they have to make a decision that is so monumental for the couples that are before them to split up every asset and debt. And my argument would be a lot of these judges are not interested in hearing the back and forth of 30 years of your relationship. Number one, that's not what they dreamed about doing when they rose to this level of the profession. Sorry to say they don't want to hear couples fighting with each other other number one. And number two, even as well intentioned as they may be, they have a very limited amount of time to hear your story and what each spouse's contributions are and all of the dynamics that even the best meaning judge, it's like making a decision with your hands tied behind your back. You may have a few hours to hear from each spouse and then you have to decide what is the correct parenting plan for their children. You have to decide the child support amount that is best going to serve this couple. You have to decide whether one spouse should pay the other one alimony and then you have to divide up all of their assets and debts with just like I said, very limited amounts of information. It is a huge risk. And these judges, God bless them, they're doing the best they can. But they are just humans like the rest of us. They have their own biases. You could walk in there and maybe you just remind the judge of their ex boyfriend from college. Maybe the judge is hungry and you just caught them at the end of the day and they are making these huge monumental decisions for your life on basically very little information and sometimes not nearly as much expertise as you might think. Yeah, I am a firm believer that couples are much better positioned to decide what their financial relationship should look like than a judge who hears from them for a few hours at the end of a 30 year relationship.
- [50:58]
Paula Pant
You've just described four issues that get hashed out. You've talked about the division of assets and debts. You've talked about alimony. You've talked about child support and custody. Can a prenup cover all four?
- [51:11]
Aaron Thomas
No. A prenup can address the asset division, division of assets and debts and alimony. A prenup cannot address child custody or child support. And the reason for that is child custody is something that is determined based on what is in the best interest of the children at the point in time that the decision is being made. So a couple who gets married, they may say, yes, we agree that we should have 50, 50 custody. If we ever split up, we should have 50, 50 custody. That couple, though, could end up being a situation where one spouse works and the other one doesn't. Maybe they live in different states by the end of the relationship. Maybe one spouse develops a drug addiction or has a severe debilitating mental illness. And so there are so many circumstances that can change that would impact what is in the best interest of children that courts will not allow you to predetermine something like custody. And child support is often based on, number one, what is the custody schedule and number two, what are the incomes of each spouse at the point in time that custody is being determined. So those are two things that you cannot address in a prenup.
- [52:23]
Paula Pant
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- [52:37]
Aaron Thomas
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- [52:42]
Paula Pant
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- [52:44]
Aaron Thomas
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- [52:49]
Paula Pant
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- [52:51]
Aaron Thomas
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- [53:01]
Paula Pant
Many fathers in particular feel as though the divorce courts are not friendly to fathers when it comes to child custody. What advice would you have, particularly for men who want to somehow put safeguards or preventative measures in place that would increase their odds of being able to get equally shared parenting. 50, 50 custody of their kids if that's what they wanted.
- [53:28]
Aaron Thomas
Definitely a common perception of the family court system that it favors mothers. I think that over time there has been a shift. There's a legal basis in this belief. It used to be in some jurisdictions that mothers automatically got custody. I mean, we're talking about 60, 70, 80 years ago. But it used to be that in a lot of jurisdictions mothers automatically got custody. And there are a lot of judges who still kind of hold that belief of moms are better at raising the kids and dads are better, you know, playing this other role. Number one, I think that there is a trend towards more shared custody, more 50, 50 custody. And the other advice that I would give is the same that I would give my clients when I was practicing divorce work, which is parent during the marriage, like you are fighting for primary custody. The kinds of questions that are asked when you take the stand in a custody trial are no surprises. Do you know the teacher's names? Do you know the doctor's name? Do you know the dentist name? How much of the drop offs and pickups do you do? Do you attend the extracurriculars? How much do you participate in the medical decisions for your children? A lot of it is just the day to day work. And showing that you are a participant in all of these types of activities gives you a better shot at custody. No matter what judge you're in front of. You're going to be better off if you know your kids friends names and know how they're doing in school and know their favorite subject than if you are in the shadows on those types of things. And so part of positioning yourself for custody is playing the role of a child custodian during the course of your children growing up.
- [55:07]
Paula Pant
I've seen contentious divorces in which there's one in particular that I'm thinking about. One of the divorcing spouses has spent at least $250,000 so far, just his side alone. And it's over a very, very long. It's gone on for six years now and it's a very long custody battle of their four children. It's gone on for so long in fact, that the eldest of the four kids is now 19 and she lives with her boyfriend. So he's fighting over custody of an adult who has moved out of the house.
- [55:41]
Aaron Thomas
Right.
- [55:42]
Paula Pant
In that particular case, thinking of my friend's case, there have been a number of what he says are false allegations that have been, you know, false criminal reports that have been made about him that he believes have been made for the sake of bolstering his ex wife's claim that she should be awarded full custody of all four children. What can a person do before or during a marriage to inoculate themselves against such things?
- [56:15]
Aaron Thomas
That is so tough. I have seen similar cases. I've worked on a divorce case where our client alone paid over a million dollars in legal fees over the course of several years of litigation. And while certainly there's not gonna be a panacea that exists, that takes all possibility of messy litigation off of the table, There are a number of things that I think you can do to put yourself in a better position to not end up in a courtroom under circumstances like this. And a lot of them do relate back to things that you can put in a prenup, but that you could also do if you do not have a prenup in place. One of those is an expectation of counseling during the relationship. When situations get to where, you know, one spouse is making allegations that are so horrendous, it always struck me during my divorce work that here's a couple where this used to be the person you love more than anybody else in the world, and now not only are they your enemy, but you believe that they're this horrible person who has committed crimes, essentially. It was my observation that a lot of this comes down to a breakdown in communication. Yes, that is an understatement. But a very serious breakdown in communication that could at least be tempered by having some earlier intervention. Common clause that a lot of clients are including in their prenups these days are counseling clauses. An example might be during the course of the marriage, either me or my wife have the ability to trigger up to three counseling sessions per year of the marriage. And we've agreed ahead of time that we're going to go. Why is this important? Because a lot of couples that I worked with that were going through their divorces, their explanation to me of their attempts to do counseling looks something like I suggested counseling. But it was right on the tail end of a big argument that they had. The other spouse got defensive. They thought that I was suggesting that he had something wrong with them. He told me, no, you go to counseling. And so we never ended up going. Or if we did, we didn't do it in earnest, because by the time it came up, it seemed like it was punitive. It seemed like it was a punitive request. And when couples agree ahead of time, this is the framework that we are going to use to resolve conflict in our relationship. And it doesn't have to mean that the relationship is at a 2 out of 10. It doesn't mean that our relationship, our marriage, is on death's door. It can just mean that we're at a seven out of 10 and we want to get back to a nine, and we're going to treat this counseling in Our relationship like an annual physical, we're going to go every year, no matter whether things are going well, whether things are going poorly, and we're going to have a release valve that we can use to express our frustrations and to communicate with each other and to get some help resolving conflict before it rises to this level of a complete drag out fight. Another extension of that is having a second separate rule that says if one of us wants to file for divorce, if one of us wants to end the relationship, we have to do, say, 12 counseling sessions together before we do that. And that may play the role of let's actually try to salvage the relationship, if that's possible. But it could also mean the relationship is on the way out. But can we put ourselves in a position where we can really focus on what's best for the children? Can we get back to a level of communication where it doesn't become an immediate retreat to our separate corners and we lawyer up and we're just going to try to destroy the other one in court and with legal fees? Can we?
- [59:39]
Paula Pant
And really only one person has to.
- [59:40]
Aaron Thomas
Do that, and only one person has to do that. But if you have this, you have to come together, you have to work with a third party. And yes, I've seen many courts enforce the provisions where they say you filed your case, but your prenup says you have to do 12 counseling sessions first. I'm going to dismiss this until you finish the requirements of what you have to do. And then often what we'll do is we'll put something in that says once you finish those 12 counseling sessions, if you still want to move forward with the divorce, now you've got to go to mediation within a certain amount of time. So we're going to give you an opportunity to address the issues that are in dispute, like custody, like child support, things that you can't address ahead of time in the prenup, you, you're going to try to give it a shot at addressing those in mediation. And let's say, if custody is in dispute, if you disagree on the parenting plan, maybe we'll put in a rule where you have to go do three sessions with a co parenting specialist, a co parenting coordinator who can listen to both of you and hear your situation and suggest some parenting plans that may work in your situation. And yes, while none of these steps are going to be 100% foolproof, if we can save any more couples from six years of litigation and a quarter million dollars of legal fees, if we can save any couples from Having to go through, I cannot imagine the emotional and psychological stress that this has put on not just this couple, but their children. Then to me, that alone is a worthy aim, a worthy goal. Putting these expectations in writing, putting these things in a prenup, and giving people the tools to resolve this kind of conflict before it starts.
- [61:10]
Paula Pant
Don't some states mandate counseling prior to going to divorce court?
- [61:15]
Aaron Thomas
I am not aware if they do. If you have kids, many states, many jurisdictions do require that you do a co parenting class or a co parenting seminar. I think those can be very helpful. But again, there is something about it feeling like it is state mandated.
- [61:34]
Paula Pant
Right.
- [61:35]
Aaron Thomas
Versus this is something that you and I decided at the beginning that we were going to do. Again, putting the power back in the hands of the couple rather than the government has benefits, even when it comes down to situations like this.
- [61:48]
Paula Pant
Right? Right. Nobody enjoys doing things that are state mandated.
- [61:51]
Aaron Thomas
Right?
- [61:51]
Paula Pant
Right. Nobody loves jury duty.
- [61:54]
Aaron Thomas
Exactly. And I've had many clients tell me that they go to the co parenting seminar when it's been forced upon them. They sit through it, they don't pay attention. Now, you can do them online a lot of the time and you can guess how much attention that gets. And they check the box and they move on rather than knowing ahead of time. If the worst case scenario happens in our relationship, we've got a plan in place to resolve these difficulties that reduces our chances of ending up in court. And I think a lot of people can get behind that.
- [62:24]
Paula Pant
You mentioned earlier that 41 out of the 50 states are equitable distribution states. Now, the other nine states are community property states. What is the distinction between the two?
- [62:34]
Aaron Thomas
Yes. So in community property states, with rare exceptions, everything that is accumulated due to the efforts of the parties during the marriage is considered community property that is divided 50, 50 between the couple. In those states, judges have a lot less wiggle room than they do in equitable division or equitable distribution states to decide how they split up the property. The idea is that it doesn't create this incentive to go and smear your spouse in court in the hopes that you will convince the judge that you were the virtuous spouse and they were the evil spouse. And as a result, you should receive the majority of the assets. And so a lot of people think, well, if I'm in a community property state, why would I need a prenup? And what I found is that a lot of the dispute comes over what is actually considered the community property because the rules still apply for what you had coming into the relationship. Is considered your separate property, your inheritance is considered your separate property. And when those two things get mixed together with community property, it can become a very difficult and tough fight.
- [63:46]
Paula Pant
So that goes back to something you said earlier. Most people accidentally commingle their separate property with community property unknowingly. Can you describe how that might happen?
- [63:58]
Aaron Thomas
Yeah, absolutely. The issue is, again, when we thought about the couple who came in with no assets at 18, it's a very simple formula. Everything you have is community property unless it's inheritance. But when couples are getting married later in life, they've already got some accounts open and some assets in play. So the most common example is a 401. You've got a retirement account, it's in your name, you've contributed some money to it, and you don't change employers on the day you get married. So you are taking money that you earned during the marriage and putting it into that same account.
- [64:32]
Paula Pant
So you're commingling it.
- [64:33]
Aaron Thomas
Yes. And a lot of people don't realize that because in the normal context, commingling means, I'm taking money from this pot over here and I'm mixing it with your pot of money over there. That's commingling.
- [64:44]
Paula Pant
Right. I'm taking money from my business account and I'm mixing it with personal money. That's commingling business assets and personal assets.
- [64:51]
Aaron Thomas
Exactly. But in the context of marriage, commingling can be the same person depositing money into the same account titled in their own name. But it happens before marriage and after marriage and after 10, 15, 20 years of marriage. How do you know how much of the growth of that 401k is due to the money that you contributed before the marriage and how much of the growth is due to how much you contributed after the date of the marriage. Particularly when you're talking about the portfolio is getting rebalanced, you're buying and selling stocks and you can't figure out what dollar came from what. And that alone can become something that is half of somebody's net worth now is in dispute.
- [65:33]
Paula Pant
So you have financial statements, though. Can you look back on the financial statements, see the value of the portfolio at the time of the marriage, and then base it off of that?
- [65:43]
Aaron Thomas
You could. And if only it were that simple, maybe us divorce lawyers wouldn't have such high employability.
- [65:50]
Paula Pant
I mean, and then making the mathematical equation for the compounding and the growth that came from that initial balance.
- [65:57]
Aaron Thomas
Yes, right. Yes. But there are no legal statutes that say this is how you have to calculate the growth of account and Separate out, separate from marital property. And in fact, what the law typically says in these scenarios is if there is something where it is partially separate property and it's partially community property, but it's been commingled, the court is going to assume that the entire thing is community property unless the person who has a separate property interest in that kind of account can prove their separate property claim. And so it is the burden of the person who had the accountant coming in to prove to the court satisfaction how much of that account should be considered their separate property versus community property. And if your spouse wants to fight it and there's half a million in play, guess what, that's going to court. They're not going to just let you keep an additional several hundred thousand or maybe a million dollars that they know you are the one with the uphill battle to try to prove to the court what should be separated out as yours. And there you have, we're just talking about one type of asset without getting into the bank accounts and the credit cards and the equity you had in your home coming into the marriage, that's just one simple asset. A 401k that creates disputes left and right when it would be such so much easier, I think for a lot of couples to say, all right, if anything ever happens, I take the first. You could take that kind of formula that you're talking about, Right? I get my current balance as of the date of the marriage plus 10% per year compounding compounded or 8% per year compounded. You can come up with a formula to separate out what you consider to be your separate property or what you consider to be community property. But you can only do that by agreement. And typically you're only going to make that kind of agreement at the beginning of a marriage, not when you're on the brink of divorce.
- [67:54]
Paula Pant
Right. And you mentioned equity in a home as well. So how would it work in terms of separate property versus community property? If somebody comes into a marriage, they own a home, but then over the course of that marriage, both partners contribute to mortgage payments, repairs, maintenance, major capital expenditures, other home related costs.
- [68:16]
Aaron Thomas
Yeah, someone coming into a marriage with a home with equity in it is one of the number one reasons to consider getting a prenuptial agreement is to avoid that dispute. And we have a calculation that we use in these situations where we basically take the premarital contributions and that creates one percentage and we take the postmarital contribution. So if you've got 100 grand of equity in the house prior to the marriage, that's one pot. We say we wrap up a circle around that. That's $100,000 of contributions that you get credit for coming in. And then you as a couple, say you put $200,000 into that house in the form of mortgage payments, renovations, repairs and the like, pay down a mortgage, what have you. Then if that couple splits up or if you just sell that property, it doesn't have to be in the event of a divorce, if that property needs to be liquidated, then you have 100,000 of premarital contributions by one spouse. You have 200,000 of contributions by the couple. Whatever the proceeds are, will be divided 1/3 and 2/3 so that the spouse who owned the house prior to marriage, they get one thirds of those proceeds back to go into their separate property column. And the couple splits the 2/3 accumulated during the marriage. And again, that is something that you can put in place when you are getting married in the form of a prenup. That is much trickier or impossible to do if you try to convince a judge or your soon to be ex spouse of that on the tail end of the relationship.
- [69:54]
Paula Pant
So what you're saying with the 1/3 and 2/3 example is that would be an example of a type of agreement that a couple could proactively decide to put in place for themselves in a prenup. But if the issue lands in front of a judge, then it's really up to the judge's discretion.
- [70:11]
Aaron Thomas
It's up to the judge's discretion and you do not know what the judge is going to do. You can have the exact same fact pattern and walk into one courtroom and a judge may look at that situation and say, you've been together for too long. I think this is all community property. I'm splitting it up. I'm splitting the whole thing up. 50, 50. And you could walk into the next courtroom down the hall and the judge will say, you had a lot of equity coming in and you should get that back. Plus some of the growth on that investment that you had coming in. And the fact that there is no set way that judges have to make these decisions, the fact that all of this discretion is given up to the judge means that the incentive is you might as well roll the dice and take it to court. Because you could get a swing of 1000-002000-00500,000 in your direction. If we're able to go and convince the court that the way you're proposing is the most fair way. And that creates long cases, expensive cases, litigation, and really fractured relationship between spouses that often have to still co parent their children together. And so having an agreement ahead of time, one can prevent you from having that argument in a divorce, but I also think that it can help couples going into marriage itself. Because what a lot of couples do in that situation is they say, well, I already own this home coming in, so let's just keep it in my name and it'll be my home. But the other spouse moving in is like, I'm paying part of the mortgage. Certainly it's not fair for me to get 50% of the equity they've been building up for the past decade. But now I'm, I feel like I'm living in my spouse's home that doesn't really belong to me, but I'm contributing. Am I paying rent to my spouse? And couples don't really know how to navigate this situation. Not only does this give them the opportunity, putting a clause like this in their prenup, not only does it give them the opportunity to not have to fight about this in a divorce, down the line, it helps them understand, okay, we can make this our house, we can put both of our names on it, and we can still protect and respect the equity that you built up before spouse number two moved in. But spouse number two is also getting a share of the equity that is built up as the couple pays down the mortgage over the course of the marriage.
- [72:25]
Paula Pant
Right. And you know, you're talking right now about financial contributions, but one thing that strikes me is I, I know a lot of couples where one member of the couple will put a lot of sweat to equity into the home. I know a lot of people who are rental property investors and real estate investors, and particularly at the beginner, mom and pop investor level. Some people, not all, but some, some people will choose to put that sweat equity in, pull out the floorboards, paint or, or if they're managing contractors, they're the ones who are meeting the plumber, they're meeting the electrician, they're coordinating all of these subcontractors. And their name might not be on the property, but they're the ones who are putting in long hours working on the renovation and the upgrades of the property in one way or another. Does the law have any kind of accounting for that?
- [73:12]
Aaron Thomas
Again, it is within the discretion of the judge who is sitting over the case. And a judge who is familiar with real estate, has worked in real estate, may be likely to give a lot more credit for that. Whereas a judge who is not familiar with that area or for whatever Reason has different feelings on the topic, May not give any credit for sweat equity, but a couple can come together and decide, here is how we are going to credit sweat equity. Sometimes couples will say, we're going to be working on this property. So even though I may own all of the equity coming in each year of the relationship, 10 more percent of this property's equity is going to move from the separate column into the community column. So that if we're together for 10 years, maybe I agree that, yes, the entire house will become community property on that time. Maybe I don't want to set it up so that if we split up six months down the line, you take half of the equity in the home that I built. But again, couples can address what their expectations are for these types of situations and negotiate what that arrangement will look like at the beginning so that everyone knows exactly what the deal is on the back end. And you don't have a situation where one person is investing all of this time and sweat equity into a property only to get to the end and they expect that they are going to get some equity back and the other spouse doesn't. I would look at that situation and say, if this was not a married couple, if this were just two people interested in doing a real estate transaction together, would they just leave it up for chance and say, if we don't like each other, you know, in 10 years we'll figure out who owns what portion of the house after the house is sold, we'll just talk about it then? No, they're probably going to come to some kind of arrangement or some kind of agreement to compensate the partner who is putting in more of the physical effort or the sweat equity versus the partner who is putting in more of the financial contributions. There is no reason that we can't do that in relationships as well.
- [75:13]
Paula Pant
What I'm hearing over and over is that if in the absence of a prenup, it's simply up to the discretion of a judge. And that's especially true in 41 out of the 50 states that are equitable distribution. But even in the other nine states that are community property, where in theory a judge has less discretion, there's still a lot of room for interpretation. And so functionally, it's random or near random how this all might shake out in the absence of a prenup.
- [75:42]
Aaron Thomas
Yeah, it's kind of wild when you think about it, because there's no other financial partnership that you could enter into in life, a real estate partnership, a business partnership, where you would say, we'll figure out who owns what only if the business fails, we split apart. We'll figure out who owns what only when we sell this real estate property after owning it for 10 years. It is only in the context of a marriage where it is normalized because we focus so much on the romantic side of the relationship and not as much on the financial side of the relationship, where it is normal to say we'll figure out who owns what only if things go wrong. And what I found is defining who owns what is important for the relationship itself. You don't have to get divorced to benefit from getting on the same page as to what your expectations are on. If you think that all of your income belongs to you, and I think that our income is 50, 50, even if we never get divorced, that is going to impact our relationship. And so a lot of couples, I think, avoid this conversation because they think it may be difficult, it may be sticky on the front end, but you are still negotiating this partnership whether you do it verbally, whether you do it explicitly or not. And it will benefit you to get on the same page about these things, even if it causes a little bit of tricky conversations on the front end. It is an investment in having clarity in your relationship going forward.
- [77:11]
Paula Pant
We're nearing the end of our time, but there are three additional things that I want to ask you about. One is postnups. Can you explain what is a postnup?
- [77:20]
Aaron Thomas
A postnup, at its most basic level, is a prenup that is signed after a couple is already married. There are a few different scenarios that I usually see postnups come up. One is couples are getting married. They meant to get a prenup, they ran out of time with all the wedding planning, and they sign a postnup shortly after the date of their wedding. But very often couples who are already married, they have either had some kind of financial change or they have had some kind of event happen, whether it is infidelity or financial infidelity, or one spouse decides they want to cash out their retirement and invested in the business. And the couple recognizes a benefit in defining what's mine, what's yours, what's ours. So there is no confusion going forward. Postnups are very common. A lot of people are people who someone might be listening to this podcast and they're just now recognizing that 401k that they've been assuming. A lot of couple just informally assume, my 401k belongs to me and your retirement belongs to you. And maybe they're learning right now that that is not how the law treats their property. And they say, I don't see divorce on the horizon, but let's just go ahead and get the clarity that comes with defining mine, yours, ours, what are our expectations on alimony, what are our methods to resolve conflict, that type of thing.
- [78:37]
Paula Pant
Right. Well, and so much of what you've talked about sounds like, again, not just guidelines for how to dissolve a marriage, but also guidelines for how to run a marriage day in and day out, month in and month out, year in and year out, that it stands to reason that a person might want a postnup simply to have a formalized structure to put into place the framework that can help create a healthier, stronger marriage.
- [79:02]
Aaron Thomas
Absolutely.
- [79:02]
Paula Pant
This is one that will last.
- [79:04]
Aaron Thomas
Exactly. Treat it as the operating agreement for your relationship.
- [79:07]
Paula Pant
Right. What about no nups? What about for people who decide to have a life partnership or to cohabitate, whether or not it is for life, and they commingle part or all of their finances, but they haven't officially gotten married?
- [79:25]
Aaron Thomas
A lot of couples in those scenarios are doing what we call cohabitation agreements. Often it's when a couple is going to be living together. Most often they probably come about when a couple is owning a piece of property together. But certainly it would work in any scenario where you have common expenses, you have shared expenses that both spouses are contributing to, and they want to be clear about what your expectations are, who owns what. Even something as granular as if we split up, which spouse gets to remain in or which partner gets to remain in the property that we're living in, obligation, does the other one have to contribute to utilities or other expenses of the property? How would we split up furniture? All of the things that you can address pretty much in a prenup or postnup, you would cover in a cohabitation agreement.
- [80:15]
Paula Pant
Does it have the same legal standing as a prenup or a postnup?
- [80:19]
Aaron Thomas
It is a little bit different because it doesn't fall under the umbrella of family law. It's just it's a contract like any other contract. So you would sue someone for a breach of contract rather than file it in the course of a divorce case. But in terms of practically how it's going to be interpreted by a judge, it is pretty much the same process in the case.
- [80:38]
Paula Pant
I suppose if a contract is in place, then it doesn't matter if you're living in an equitable distribution state versus a community property state, so jurisdiction wouldn't matter. It would be a contract law type of a Situation.
- [80:49]
Aaron Thomas
That's exactly right. You are trading what the state's laws are, what the default agreement would be for your own terms.
- [80:57]
Paula Pant
Right. And we established earlier that prenups cannot cover child custody. Can they cover pets?
- [81:04]
Aaron Thomas
Yes. Interestingly, in most states that have addressed this, pets are treated as property, not custody. Now, there have been some moves toward treating pets more like children and having shared custody arrangements for pets. We will see how that plays out over the next decade or so. But right now, yeah, we absolutely address pets in prenups and postnups. I say anything that you would be heartbroken not to end up on your side of the column where it's your understanding, your expectation that this is something that belongs to me, let's go ahead and address it in a prenup or a post note.
- [81:41]
Paula Pant
Yeah, yeah. I was hanging out with my pets. As I was reading that portion of your book where you talked about how pets are considered property, I looked over at my pets and said, ah, to me you're sovereign, right?
- [81:54]
Aaron Thomas
You're, you're a being. To me, you're not just property.
- [81:57]
Paula Pant
The final thing I wanted to ask, and it's one of the most heart wrenching stories that you've written about. There was a story that you told about a couple that was. They'd been married, I think, 40 something odd years. They were in their 60s. They had gotten married as teenagers and they are now, I believe, in their 60s. At the time that you met them, they had had six children. Husband made I think 200,000. And the wife was a stay at home mom to their six kids. At the time that they divorced, all six kids were adults, grown, grown adults out of the house. They all had their own lives and stay at home mom found out in her 60s, far too late, that her husband actually had no assets. What does a person do in that type of a situation?
- [82:44]
Aaron Thomas
Yeah, really heartbreaking situation. In this particular situation, the husband had had a very lucrative career and his wife had every reason to believe that they had substantial retirement savings. She did not have access to the accounts. She had no visibility to them. There were no annual shareholders meetings taking place in this household where she would be able to check in and get an update on the status of the investments. Had no access to their financial advisor. And what had essentially happened was this man had, I would say, gambled away their retirement, their entire life savings in essentially penny stocks. They had the house that they were living in and the land that that house sat on left to divide. And the court was able to give the majority of the of the those assets, the value of those assets to her. But the court can only divide what's left. And often one spouse can end up paying the price for the other spouse's financial mismanagement. She will never be made whole for what should have been her share of the marital assets that this couple built up over the course of four decades. And to me, it is just a another reason to really get explicit about what rules we can put in place for people's financial relationships to help them avoid these most nightmare of scenarios that can come about. There was no communication. There was no equality of access. And these are very common things that people put in their prenups and postnups when they structure them, because they recognize that is how both spouses exercise their rights over the course of marriage. And that's how they both protect their own interests. I truly believe that this is a couple that never would have ended up in this type of situation if she had simply had her own logins to the bank accounts.
- [84:43]
Paula Pant
Wow. So financial transparency is key to avoiding a situation like that.
- [84:48]
Aaron Thomas
Yeah. I think that the same things that make for a healthy relationship are the same things that make for a solid and healthy prenup. Transparency, communication, and fairness.
- [85:02]
Paula Pant
Well, thank you for spending this time with us. Where can people find you if they'd like to hear more?
- [85:06]
Aaron Thomas
Yeah, thank you so much for having me. If people want to learn more, our website is prenups.com, pretty easy. Prenups.com and I am on Instagram prenupguy.
- [85:16]
Paula Pant
Oh, nice. Excellent. And your book is the Prenup Prescription.
- [85:20]
Aaron Thomas
Available on Amazon and anywhere else you buy books.
- [85:24]
Paula Pant
Thank you. Erin, what are three key takeaways that we got from this conversation? Key takeaway number. Every married couple already has a prenup. It's called state law. Many couples think that they're avoiding prenups altogether, but they're actually defaulting to their state's prenup. There's no such thing as saying, we don't have a prenup. You do have a prenup. Your default prenup is given to you by the government. The only question is, do you want to accept your government mandated default prenup or do you want to customize one for yourself?
- [86:01]
Aaron Thomas
You are either accepting the state laws of the state where you happen to live, or you are writing your own prenup. The state laws are the default prenup, and a customized prenup is one that you do your own. And the biggest difference is with a customized prenup, you and your spouse are deciding the parameters of your financial relationship, and you're doing it at a time that you are best equipped to do. So you're doing it when you're loving each other as much as you ever have.
- [86:30]
Paula Pant
Everybody has a prenup. You either create one or the government will assign one to you, whether you live in a community property state or in an equitable distribution state. Things get hairy when you let the government decide how to handle your assets rather than take control over those decisions yourself. And so that is the first key takeaway. Everyone has a prenup. Key takeaway number two Regular financial check ins strengthen marriage. Successful marriages have regular quote, unquote shareholder meetings in order to review accounts, to discuss goals, and importantly, to maintain transparency because this prevents financial infidelity and it makes sure that both of you are aligned on your money management.
- [87:23]
Aaron Thomas
Most couples will discuss, okay, what are our incomes? What was our spending last year? And what's our budget for this upcoming year? But couples will also often choose to discuss things like family planning during that time or do we want to make a move? Or maybe we put an allowance in place? Is it time to increase that allowance? Or is this the year that we need to replace somebody's car? Or do we want to budget for upcoming travel?
- [87:47]
Paula Pant
And finally, key takeaway number three, clarity about what's mine, what's yours and what's ours can prevent future conflicts. Even couples who plan to share everything, couples who plan to not have mine and yours, and only have ours, even those couples will benefit from explicitly defining which assets belong to whom. And this becomes particularly important when it comes to inherited money, when it comes to businesses, when it comes to any assets that you brought into the marriage, when it comes to ongoing residual income from assets acquired during the marriage. These are critical conversations to have.
- [88:33]
Aaron Thomas
What I found is once you start peeling back the layers even a little bit, that everything, literally everything, is 50. 50 turns out to hardly ever be true, right? Most couples, you may believe that, okay, all of our incomes while we're both working, yes, Those are all 5050. But like you said, what about the inheritance? What if I came in with six figures of student loan debt? Maybe I don't want you to be responsible for that. It could be just as simple as my student loan debt or your credit card debt is in the mine and yours columns and everything else is in the hours columns.
- [89:07]
Paula Pant
And so those are three key takeaways from this conversation with Harvard trained family law attorney Aaron Thomas. Thank you for tuning in. If you enjoyed today's episode, please do three things. First, subscribe to our newsletter@affordanything.com Newsletter Second, share this episode with your friends, family, neighbors, colleagues. Oh. Share this episode with your favorite family law attorney or your least favorite family law attorney. Either one. Send this episode to your financial advisor, your HOA president, your Peloton instructor, your CrossFit coach, your kid's math tutor, your work spouse, your actual spouse, your accountant, your estate planning person, and everyone who regularly comes to poker night. Sharing these episodes is the single most important way that you can spread the message of building a strong financial foundation. Finally, don't forget to open your favorite podcast playing app and hit the follow button so you don't miss any of our amazing upcoming episodes. And you can also watch this interview on YouTube. YouTube.com afford anything we have a course on rental property investing. It's called you'd First Rental Property. It is open until February 21st. To find out more, go to affordanything.com enroll. That's affordanything.com enroll open now through February 21st. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast and I'll meet you in the next episode.