← The Practical Planner
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- [00:00]
Ann
Foreign.
- [00:11]
Dave
What is up? And welcome back, everyone, to another episode of the Practical Planner podcast that is now known as one of the best podcasts in the financial industry or financial space. Don't know if everybody knew, but we. I want to give a shout out to and Dave, and I'll give one to myself, I guess, for us having one of the best podcasts according to Michael Kitces, and the only one in the estate planning space. So, guys, congrats on it. I've had a ton of fun building this podcast with you, and, you know, just today we've been starting to build out this year, and I think it's going to be really, really great. I mean, we've talked about a lot of topics, but I think this year we're finally going to be able to really get into some of the more deeper, meatier topics and helping people think through estate planning for this, you know, wealthy crowd. Um, but today's episode, opposite of that, we're talking about how not to give up all of your money in a divorce. So we're going to think about prenups. And Ann, this was her topic. This is one that she knows a whole lot about compared to Dave and I, I would say. But, Ann, let's just talk about the world of prenups. And, you know, why is it so important going into a marriage to have a prenup and maybe talk a little bit about what happens if you don't?
- [01:21]
Ann
Yeah, I mean, I think part of the reason why I know a little bit about prenups is because, you know, as an EST planner, I think oftentimes folks realize that anytime that you have a transfer of property, whether by death or marriage or divorce, that, you know it, you need to kind of. You have specialists in this area who think through what those and plan for those transfers so that you have more of a say than just, you know, being a pebble in a river and all of a sudden something happens to you and boom, like, you don't know where your stuff ended up. Right. And so, and particularly I think here in California, you know, there are a couple of things that have made prenups much more sort of interesting as a topic to folks. Number one, I think, is that we are in a traditionally community property state. And so all of a sudden, you know, this idea that, like, this overarching community, like your marriage, you know, starts owning things as you earn them in your marriage, becomes hugely important. You know, titling is a little less important in a community property state. So people are particularly attuned to needing a prenup in a state like California. But I also think it's because, you know, I practiced at a law firm where we did the estate planning and the prenups and things for the Golden State Warriors. We're all fans of basketball on this show, and so I've worked on some of those. And so I figured, you know, I get a lot of questions about prenups from my friends as well, and so why not do an episode about that?
- [02:56]
Dave
Yeah. And soon Golden State might have Kevin Durant, according to news today. So way to good to bring him up.
- [03:02]
Thomas
What does Steph Curry's prenup look like?
- [03:04]
Ann
Yeah, I don't think anything can shock me as much as Luka Doncic. And.
- [03:11]
Dave
That was crazy.
- [03:12]
Thomas
I was like, spit out what you're drinking type thing when I read that.
- [03:17]
Dave
Crazy, crazy. We'll move past basketball. But, like, I think it might even be helpful for, you know, maybe the average advisor who doesn't do, like, super deep planning. Just, you went in the difference between community property and not, like, can you just walk through that a little bit more for people in the difference of how those assets are owned?
- [03:36]
Ann
Yeah, we have had episodes in the past that I'll refer you to that talk a little bit more also about community property and states that are not community property. But the baseline is that, you know, when you're in a community property state, the marriage, once you get married, basically becomes like, almost this, like, third person that starts earning things, you know, on behalf of the couple, almost. And so I think of it conceptually as that. And each of you, if you're, you know, married, starts owning a 50% interest in this undivided interest. So the idea is that, for example, I'm here@wealth.com I earn stock options and I earn a salary from the company, and my husband actually has an interest in what it is that I'm earning. And in fact, he has a 50% interest. So, you know, honey, if you're listening to this episode, please start turning it off because we're going to talk about divorce now. But the idea is that even though his name is not on my, you know, stock option or the bank account where maybe I'm squirreling away my wages from wealth, that he has an actual interest in those things. So if I'm exercising my stock options or whatever else, that somehow he has a say in that. And if, especially if I'm using community property so, you know, his earnings from his job to exercise my wealth.com options, now that starts really commingling that kind of idea of like, you know, is that wealth.com in my own name, really just mine alone, it is not, it is not considered to be that. And so if it were to get divorced or if I passed away, right. He actually potentially has a say over what happens to my assets. And so that that stock could get split 50, 50 between, you know, him and, and what I get to say, you know, happens to that asset. And in a, in a divorce proceeding, you know, the judge of course would have the ability to kind of shuffle things around to be 50, 50. But unlike, you know, a non community property state, you kind of start out just like everyone owns 50% of everything. And so if you are, if you remember when Jeff Bezos and McKinsey Scott got divorced, you know, one of the huge issues and as a shareholder, you know, of a company you might have cared about the fact that they live in Washington state, which is also a community property state. And so when they got divorced, well, McKinsey Scott got 50%. That's the default 50% of all of the Amazon stock that they had.
- [06:15]
Dave
What are the assets that you've built before you get married?
- [06:18]
Ann
So that's a place where the prenup come in. So if you step into your marriage with some pretty significant assets or, you know, things that you want to protect from divorce or because, you know there's significant debt, also sometimes you actually want to delineate, you know, what is your separate property or separate debt so that it doesn't start get commingled. Right. Because as you, you know, if you get married, generally couples start mingling, commingling their assets, meaning mixing it together and paying for expenses together. And they might, you know, start putting their wages that they earn during marriage into a separate account. So that starts losing its kind of like separate feel and the character, that character as separate property. And so what you can do there is have a prenup in place that really delineates for a court, you know, how you meant to divide your assets and what you consider to be separate. But you actually also can get around that issue sometimes by just freezing, quote, unquote, freezing separate assets or separate accounts and then starting from scratch with new accounts. So oftentimes I have friends who come to me and say, hey, I really don't have that much going on. But you know, in case of divorce, I really do consider this bank account to be mine. What can I do to preserve that? And my best advice is if you don't want to put a prenup in place and we can get into the, you know, why you would do it and how to do it, but if you don't want to have one, actually kind of a pretty effective method is to just stop putting your paycheck after marriage into that separate account, kind of freeze its use and start a new account with your spouse or actually a new account in your own name. But just start putting everything that you earn into that account so you can better get invested.
- [08:15]
Dave
Don't lose purchase power to make sure you don't lose any divorce.
- [08:18]
Ann
Hire Thomas so that he can invest what you've frozen. Freezing doesn't actually mean stop earning things on it.
- [08:25]
Dave
Exactly.
- [08:27]
Thomas
And coming from like, you know, the other perspective, coming from the non community property state in a state like Massachusetts, which the rules are very different, but I think the concept is the same in the, how important premarital planning is, prenups can be because, you know, in a, in a common law state, like I am in Massachusetts, you know, you find that in community property states there's these defined rules. You know, separate property before you were married is separate inheritances are usually off the table. In a common law state, it's really, really just up to the judge. And the judge has a lot of discretion to determine what's yours and what's theirs. And you know, a lot of times in short term marriages, people have a divorce and the judge just kind of lets them go their separate ways with their separate assets. A lot of times with inheritances, if one person inherits property, there's a divorce, the judge will still say, okay, that's an inheritance. But you know, the example I bring up a lot that people don't realize is yeah, you may think that if you get an inheritance, it's yours. But what if, let's say five years prior your spouse got an inheritance and then they kind of integrated into the fabric of the marriage and then they call back to that, the judge is going to say, oh well, that's not fair. You know, so maybe with this inheritance we should divide it up. So, you know, when you have a contract like a prenup and you have something that really defines things as far as whose is whose is whose, and you know, what happens if I get an inheritance and all these different details, it can be really powerful rather than just like leaving it up to someone to decide who gets what.
- [10:07]
Dave
Yeah.
- [10:07]
Ann
And so when you do get into the preparation of one of these prenups, what's really important is to know what you can contract around and agree in advance with your student to be spouse and what you can't. So to lay down the foundation there, generally speaking, and the details will vary by state, but generally speaking, number one, you can't contract around child support and child custody because that's just, you know, the court at the end of the day wants to weigh in on what's in the best interest of the child. And so you two together cannot contract around that as the parents or. Yeah. And then the second thing is that it's really important also to make sure that you are both represented by counsel, that there's full disclosures. There's a lot of procedure that goes into potentially having a preference prenup. And that procedure, you know, the, the more thorough that procedure is, supposedly that's. That's the goal, is that the more, the more that prenup is likely to stick. It's not that you absolutely are required to have two councils, right, like one representing each of you. It depends on the state. Again, it's not necessarily that you're required to absolutely, you know, attach every bank statement etc to the prenup to make it, but the more thorough the process was, the more defendable that becomes at the point in time where that prenup becomes an issue that is upon divorce, that's when you know that procedure will get called into question. And the more thorough you are on the front end, the more likely the prenup is to stick.
- [11:50]
Dave
It's interesting, I had a client who their parents, well, the dad was getting divorced from not the mom, but remarriage. And part of what they were contesting is that actually she, she deserved more. And they went back from this prenup in like the 1980s and basically same lawyer were for both people and they're like, hey, well, this obviously wasn't fair. She didn't have money. And they're like, well, no, it says in here that we'll give her $5,000. In the beginning she should have hired a lawyer. And they were all basically stuck in this whole part of like, was she actually a person that could have afforded this? Do they warrant it? Or was this an unfair contract and now he was going to owe 50% of everything versus it was said like 50k upon a divorce.
- [12:31]
Ann
Exactly. And one of the things that's so interesting and where I got pulled in a lot as an estate planner to work on prenups is, you know, there are a couple of things that do touch on estate planning in a prenup. Number one is, you know, to the point of disclosure, right. And how good your disclosure Was. And were you represented by an attorney so that it's not unfair, fair for you to have signed this if one of the spouses is a beneficiary of trusts set up by other people, that actually needs to come in potentially into the disclosures. Right. So perhaps you have no rights whatsoever over this trust to cause distributions. But the fact that you're a beneficiary and could get something, you know, go ahead and disclose that, because at least you've put it in.
- [13:18]
Michael
Right.
- [13:19]
Ann
It's worse to say, like, oh, I had no idea that I was a beneficiary of a trust, even however remote, because then when that prenup gets called into question, you know, and there's a divorce, that person can attack the very fact that you didn't disclose at all. Right. So it's harder to disclose something even if you have very little rights over it and have never received a distribution as a beneficiary.
- [13:42]
Dave
Yeah. So what are the main things. What are the main things that are in a prenup that everybody should consider? Like, three to five key things to talk about. Because I think it is helpful to talk before you go in and meet with attorneys as well, because, like, obviously, attorneys have seen the good and the bad. Most people are going into this like, we're in a good relationship. We just want to think this through and not maybe they can have a little bit more emotion involved in attorney will.
- [14:05]
Ann
Yeah. I think it's always awkward to, like, open the conversation about wanting a prenup. There are some families actually, usually clients, where they just expect their kids to have prenups, and they say, blame me, blame the bad guy. You know, like, blame a parent. But it's. So anyway, so you go into the prenup, and you want to first have complete understanding, a complete understanding of what it is that you own so that you can disclose it correctly. So that's number one. Number two is what do you consider to be, you know, your separate property both today but also in the future? Right. So you want to delineate that. You also want to think about spousal support. So this is alimony. You can contract around that. And that was actually one of the, you know, the primary topic for the prenups that I worked on is what do you expect? You know, if there were a divorce here? There can be some pretty creative things that people do. But, you know, so it's, you know, infidelity clauses and, you know, how many years of marriage and you earn, you know, more alimony the longer that you've been living together what is considered to be, you know, reasonable living expenses, you know, in your accustomed lifestyle as a couple. And so there are all sorts of issues there and it can get quite creative in this area. But I will say that another thing that prenups look unkindly upon or the law looks unkindly upon are clauses that are against public policy so that encourage divorce or encourage bad behavior on the part of the spouses. Right. So just something for you to note there and then. So, you know, of course, children. One thing that's interesting to note about children, and I was going to get into that is from an estate planning perspective, it's contractual rights around not just the children, children you might have together in the future with your soon to be spouse, but actually children you may have from a previous relationship as well. So prenups can be incredibly important for protecting those, you know, the, those rights, the rights of your previous children. And so that estate planning component gets pulled in there as well. And sometimes people might set up like eyelets, so insurance, life insurance, trust to guarantee that children from a previous marriage get something upon death. And so there can be some negotiations around things like that. And then that's really it.
- [16:31]
Dave
What's going to have businesses? How do you think about businesses? Right, because the hard part here is like houses, equity and houses are a hard thing because then if you get divorced and you have to give up equity, it's like, okay, that might be a refinance. And I've seen people have to go through that from a 3% to now. They're like, now I can't afford my house because I have to give up the equity and refinance. Obviously retirement accounts are hard. There are some rules around how to deal with that. But like, what about a business? Obviously a big thing is like most people don't want their spouse to have to be given 50% ownership or 50% of their ownership. And their partners don't really want that. Typically either.
- [17:06]
Ann
Yeah, that one becomes hard, right? Because imagine like Jeff Bezos, probably if he had a way to contract around his business, he would have done it or tried to. Businesses can be such a significant part of the net worth of the couple that the first question is even like, can you find other assets, something else that you can contract around so that it's still equitable to the spouse who's not involved in the business and not usually, you know, the shareholder on record. And so that's. That becomes, becomes really, really tough. I think that usually how you can contract around it, especially if the business is significant, worth a lot is first is to say that, you know, the earnings or value of the business up until marriage is considered to be, you know, kind of separate property of the spouse who's involved in the business and then have some sort of contractual provision around what happens going forward once the spouses are married. And that will really vary. It will be so fact specific, you know, does the business pay dividends? Can the spouse, could the spouse survive off of income, you know, generated by the business? And so you can, you know, sort of force distributions perhaps and things like that. But that becomes really tough.
- [18:29]
Dave
That makes sense. What about. What do you do if you don't. You didn't get one. Now you're in a marriage and you're like, oh, shoot. Um, you know, not that you're necessarily getting divorced, but you're like, we should have thought about this, this ahead of time. We didn't. Maybe a lot of people didn't have the money, they just never thought about it. Like, what do you do in that situation?
- [18:47]
Thomas
I think in a lot of circumstances that's really going to depend on your state law. You know, a lot of times, you know, there are a lot of states, you really do have to do it before the marriage commences. But you know, there are states where I believe it would call it an anti nuptial agreement.
- [19:03]
Dave
Where is that different than a postnup?
- [19:06]
Ann
It's a postnup.
- [19:07]
Thomas
A postnup. Did I say, is it not anti.
- [19:10]
Dave
I have no idea. I was, I was curious. Yeah. So do those operate the same way though? Kind of where like you can still go into that and set agreed upon rules, it's just a little bit later. And so assets that have been co. Mingled maybe have a little bit less optionality.
- [19:23]
Thomas
Yeah. And usually I would think, you know, in those scenarios, sometimes it's a, it's a, it's a place where you want to get it blessed by the court. I mean, with any of these things you're really in a scenario where you don't know what. It's just like estate planning, you don't know what's going to happen until the time comes, someone has to enforce it later on. And you know, if the marriage has already occurred, you've already commingled all the assets, it might be a scenario where if you get a court to bless it, then you're going to feel a lot better about the enforceability about it.
- [19:54]
Ann
I'm kind of happy that you asked.
- [19:56]
Michael
Actually about after marriage, because in community poverty states There is something called a transmutation agreement. It is a property agreement between spouses, and it's used extensively when you do estate planning because you need to be able to set up, you know, perhaps like a slot, like a one spouse sets up assets or trusts for the other spouse or needs to clearly delineate for the irs, you know, whose property was used in the transaction. And those transmutation agreements where you take community property or something that's like quasi community property, something really messy, and you say, hey, let's just now, you and me, two spouses, like, say, who's whose stuff it is that is used extensively in estate planning and community property estates.
- [20:44]
Ann
So glad you asked the question.
- [20:45]
Dave
Good. Add on. Well, that was everything that I think we wanted to go over here today. I mean, prenups, one of those things that, like, you just got to think about it, right? Like, you know, I think this is something that if you get married a little bit later, it's probably more common than people getting married in their early or mid-20s. There's obviously a cost to it. But, you know, I think when I grew up, I thought of prenups in the way of, like, that is a. Don't do that. You have one marriage. Marriage is important. Don't think about the exit. And I don't think that's true. Right. Like, even as a business owner, I start my business, we think about what happens if I'm not here, what happens if something happens with my partner. Like, just because you don't want to think about it doesn't mean you shouldn't think about it and plan around it and make sure it's a smooth process, because if you don't, then it just follows the. The state laws. So I think as advisors, definitely something that we want to make sure we bring up with clients. And if not, then postnups are probably something to look at. But.
- [21:37]
Michael
And. And one last practical pointer here, because this is the Practical Planner podcast, is.
- [21:43]
Ann
If you are a client who's.
- [21:44]
Michael
Sorry, if you're an advisor who's working with a client, who's concerned about their.
- [21:49]
Ann
Own children, what they're doing with asset.
- [21:52]
Michael
Protection, et cetera, from spouses, you can ask your client to become the bad guy in their family and ask that child, you know, to put in a prenup in place. So that. That is actually a very effective point of negotiation for a parent to ask their children to think about.
- [22:09]
Dave
Smart. Smart. I've actually seen it done this way most times, and now I'm sure it was actually a recommendation from their lawyer makes so much sense. But, everybody, we appreciate you listening. Please do not forget to rate and subscribe, and we will see you back here in a couple.