As an Arizona State Bar Certified Specialist in family law matters in Arizona, I have been involved in preparing many prenuptial agreements. The first question that I ask potential clients seeking a prenuptial agreement is why they believe they need a prenuptial agreement. While many people do benefit from prenuptial agreements, many other people may simply not need a prenuptial agreement.
Arizona laws (and other state’s laws) have been written by the state legislature with the intent that a fair outcome would be the result in a divorce situation. However, the problem with a state wide law is that it is not individually tailored to the parties’ unique situation, but rather tailored to a more cookie-cutter or typical or traditional marriage.
If two young people, each without any substantial assets, neither owning a house, each without any substantial debts, neither having children from prior marriages or relationships, neither likely to inherit large amounts of money, and neither likely to enter into risky businesses (and let’s face it, owning any business is risky), neither party has yet embarked on a substantial career, the two people likely do not need a prenuptial agreement.
Years later, the above couple would be subject to Arizona community property laws, which would generally equally divide up the assets and debts that they have worked together during the marriage to build. Very few people would say that the result under Arizona community property laws would result in an unjust or unfair division of their accumulated assets and debts.
However, the one-size-fits-all divorce laws in Arizona (and other states) may often lead to very unfair results when the marriage is not the ‘traditional’ marriage envisioned by the state legislature.
A PRENUPTIAL AGREEMENT PROVIDES SUBSTANTIAL BENEFITS WHEN ONE OR BOTH PARTIES HAVE SUBSTANTIAL ASSETS:
Arizona law (without a prenuptial agreement) recognizes that assets owned prior to the marriage remain the sole and separate property of the spouse bringing such assets into the marriage, so long as they are not comingled, or the title transferred into joint ownership, or other issues which could cause the transmutation of sole and separate property into joint or community property.
Nonetheless, a prenuptial agreement will help first by clearly identifying what each party brought into the marriage. Often in a medium to long term marriage, one party claims that he or she had certain assets at the time of the marriage, but because of the passage of time, is unable to provide documentation to substantiate the existence of premarital property. For example, a Husband may claim that prior to the marriage he had already invested $50,000 into his 401(k) at work. Under Arizona law (without a prenuptial agreement), that $50,000 (together with the growth, interest, or appreciation of those assets) would remain Husband’s sole and separate property. However, the burden of proof would be on Husband to prove what he had at the time of the marriage. Because 15 years have passed, and because the bank that he works for has been bought out and merged multiple times during the 15 years, and because the bank has changed 401(k) plan administrators multiple times, despite many phone calls Husband is unable to obtain any documents proving what he had at the date of the marriage. However, a simple prenuptial agreement should have listed out what assets and debts each party is bringing into the marriage, and would therefore have an approximate value for Husband’s 401(k) as of the date of the marriage. In such a case, having a prenuptial agreement would save Husband from paying half of his $50,000 from before the marriage to his divorcing Wife, and as that $50,000 may have grown to be $100,000 or $200,000 since the marriage, Husband will receive a substantial benefit from simply having a prenuptial agreement to help him protect his assts.
Additionally, as explained in the business section below, having a prenuptial agreement in place can help distinguish between growth of a business as a result of appreciation of assets, from grown of a business as a result of the labors of one of the spouses.
A PRENUPTIAL AGREEMENT PROVIDES SUBSTANTIAL BENEFITS WHEN ONE OR BOTH PARTIES OWN BUSINESSES:
Under Arizona law (without a prenuptial agreement) the grown of a sole and separate asset continues to be the sole and separate property of the spouse bringing such asset into the marriage. However, the labors of either spouse during the marriage are considered to belong to the marital community, such that either party working and earning income is for the benefit of both parties.
Imagine “John” who owned 200 shares of IBM stock prior to the marriage, and has a job working at McDonalds for minimum wage. Upon his marriage, the stocks remain his sole and separate property, and his income from working at McDonalds from the date of the marriage forward is considered to be community property. In a divorce situation, John would walk away with all 200 shares of IBM stock, even if they have doubled or tripled in value during the marriage. The parties would equally divide any income that John brought home from his paycheck working at McDonalds. Very few people would argue that this would be unfair.
However, what if John sells his IBM stock, and quits his job at McDonalds. He buys a hot dog cart, and works hard all week selling hot dogs. Since he bought the hot dog cart with the money from the IBM stock he sold, the hot dog cart would be his sole and separate property. Over the next few years, John works hard and turns his one hot dog cart into a fleet of Food Trailers that travel all over the city selling lunches and special events.
What portion of the business’s growth is the equivalent of IBM stock going up in value over time (so this would be his sole and separate property)? What portion of the business’s growth is the result of John being a very hard worker (remember his hard work is for the marital community)? There are no easy answers to this question, and the problem is that a judge with very little or no business background, and no financial background, and no skills in valuing a business, and no skills in hot dogs or the food industry, that ignorant judge (not ignorant as to the law, but ignorant as to everything else related to this situation) will be asked to make the necessary determination. The result is very likely to feel unfair to one, or to both spouses.
With a prenuptial agreement, the parties can either elect to exempt themselves from community property, or they can contractually agree upon some other mechanism for dividing the business in the event of a future divorce.
A PRENUPTIAL AGREEMENT PROVIDES SUBSTANTIAL BENEFITS WHEN ONE OR BOTH PARTIES BRING IN SUBSTANTIAL DEBT:
Debt acquired during the marriage is generally divided equally under Arizona law (without a prenuptial agreement). However, when one party comes into the marriage with substantial debts, it may cause an unfair result if a substantial amount of the income from one or both spouses is diverted to pay the pre-existing sole and separate debts of one of the spouses.
For example, if Husband’s entire income is going to pay his sole and separate pre-marital debts for the first five years of the marriage, and all of Wife’s income is then considered to be community property, if Husband then files for divorce after his debts have been paid, Husband will walk away in the divorce with half of Wife’s savings or investments during the five years, in addition to having lived off of Wife’s kindness during the five years. Husband leaves the marriage with all his debts now paid off. He also leaves the marriage with half of Wife’s savings over the last five years, while he had all of his living expenses paid by Wife over the five year marriage. Husband may feel that this was fair to him, but very few would find that Wife in this scenario has been fairly treated. This may not be too large of an injustice if one party has a few thousand dollars in debts, but this may very much be the case if one party has tens or hundreds of thousands of dollars in student loans, medial debts, or other debts acquired prior to the marriage.
Having a prenuptial agreement in place allows the parties to contractually decide on what a fairer outcome would be in the event of a divorce.
Additionally, having a prenuptial agreement allows the parties to opt out of Arizona’s community property (and community debt) laws, which may protect Wife (in the scenario above) from attempts by Husband’s creditors to come after her income (or at least Husband’s community half of Wife’s income).
A PRENUPTIAL AGREEMENT PROVIDES SUBSTANTIAL BENEFITS WHEN ONE OR BOTH PARTIES BRING OWN A HOUSE:
Under Arizona Law (without a prenuptial agreement in place) a residence owned prior to the marriage will remain the sole and separate property of such spouse, unless the title is transferred to both spouses.
However, the non-ownership spouse may have an ‘equitable’ claim in a divorce for nearly half of the house anyway, based upon either an enhanced value theory or a payoff of principle theory.
Assume that Husband owns a house prior to the marriage, which is worth $200,000.00, and paid off completely. The parties are married without a prenuptial agreement, and then use another $200,000.00 which is earned during the marriage to build a substantial addition. The $200,000 house is now worth $300,000.00 (my math is not wrong, but sometimes improvements do not bring a dollar for dollar return). In such case, Wife would have the ability to claim $50,000 or 50% of the increase in value of the house from the work done during the marriage and paid for by the community. While this may seem fair in some cases, imagine if you are Husband, and you have your house paid off, and in the divorce Wife is now claiming that the house went up in value based upon a painter having painted the outside, and some new curtains Wife put in. Because you have been married for many years, the house has gone up (appreciated) in value, not so much from the paint or ugly curtains, but because real estate does that over time. You must now pay tens of thousands of dollars to defend against such claims. The entire time, you are wishing that someone would listen to the fact that you allowed Wife to live rent free in your own house throughout the marriage without charging her, or the marital community any rent. This can seem like a very unfair result. Having a prenuptial agreement in place with provisions to address real-estate can avoid unfairness in such situations.
Similarly, imagine if Husband buys a house with a minimal down payment, just days before the marriage, putting the house on a mortgage for 30 years. After the marriage the title is never changed, but the parties live in the house together and pay off the mortgage over the next 30 years entirely with money earned during the marriage. In such case, the house would still be Husband’s sole and separate property, though Wife will have an ‘equitable’ claim for nearly 50% of the value of the house, as the marriage has paid off the majority of the mortgage. Both spouses will be required to pay tens of thousands of dollars to attorneys to litigate this claim, and both spouses will struggle to try and find necessary documents that are now 30 years old to substantiate the claim. Instead, the parties can agree through a prenuptial agreement how they will divide any real-estate, including a marital residence.
A PRENUPTIAL AGREEMENT PROVIDES SUBSTANTIAL BENEFITS WHEN ONE OR BOTH PARTIES HAVE CHILDREN FROM PRIOR MARRIAGES OR RELATIONSHIPS:
When the only children that the couple has are children common to both spouses, leaving an inheritance to the children would not usually be considered an unfair or unjust outcome.
However, imagine Husband and Wife, each with their own children from prior marriages, and they have recently married in their later life to travel the world and enjoy retirement together. Both spouses have substantial assets and substantial retirement accounts, but they fail to get a prenuptial agreement and they fail to get appropriate estate planning put in place.
The two are traveling in the same airplane on their first vacation together, and unfortunately their plane goes down. Husband dies instantly, and Wife is seriously injured and dies a week later. Upon Husband’s instantaneous death, all of his assets go to Wife. Upon her death a week later, all of her assets (now including Husband’s) go to her children. Husband’s children receive nothing, and Wife’s children receive everything.
Imagine the same plane crash, but this time Wife dies instantly, and Husband is seriously injured and dies a week later. Upon Wife’s instantaneous death, all of her assets go to Husband. Upon his death a week later, all of his assets (now including Wife’s) go to his children. Wife’s children receive nothing, and Husband’s children receive everything.
Very few people would argue that either of these scenarios would be a fair or just result. However, without a prenuptial agreement an without proper estate planning put in place, Arizona law may fail to protect children from prior marriages with the one-size-fits-all laws in place.
A PRENUPTIAL AGREEMENT PROVIDES SUBSTANTIAL BENEFITS WHEN ONE OR BOTH PARTIES ANTICIPATE INHERITING LARGE SUMS OF MONEY:
Under Arizona Law (without a prenuptial agreement in place) assets and money received as a gift or inheritance will be the sole and separate property of the spouse receiving such gift or inheritance. Accordingly, on the face, a prenuptial agreement may not be needed.
Nonetheless, a prenuptial agreement can be used to provide further protections, to make it more difficult to inadvertently comingle inheritances, and can put in place other contractual agreements to further protect inheritances.
A PRENUPTIAL AGREEMENT PROVIDES SUBSTANTIAL BENEFITS WHEN THE PARTIES ARE MARRIED LATER IN LIFE AND SPOUSAL SUPPORT MAY BE INAPPROPRIATE:
Spousal maintenance is one of the biggest risks in divorce cases in Arizona, largely because each judge will see spousal support very differently. The Court of Appeals and Arizona Supreme Court give wide discretion and latitude to the trial judge to decide how much spousal support, and for how long. It can be very difficult to overturn a spousal support judgment. However, when we have lined up five or six judges on a panel at a Continuing Legal Education Seminar, and each judge is given an identical scenario, the Judges will come out with five or six very different outcomes for spousal support. The uncertainty as to both amount and duration is a substantial risk in any divorce case.
When two spousal are married later in life, each having had their career, each being in retirement or close to retirement, they may wish to agree that in the event of a divorce, that neither party would seek or receive spousal support from the other spouse.
Similarly, if there are two younger parties, both with current careers, they both may wish to waive any claim for spousal support against their spouses, in return for a reciprocal waiver.
In other cases, such as when one spouse plans to leave the career world to be a stay-at-home parent, the parties may wish to agree upon a specific structure for spousal support, such that the spouse exiting his or her career to benefit the parties younger children will not need to worry about a judge awarding less or a shorter duration than needed, and the other spouse will not need to worry about an award of much more or a much longer duration than needed being awarded.
By contract through a prenuptial agreement, the parties can waive spousal support, or agree upon an amount or formula that both parties feel would be fair.
If you or your friends or family members are engaged or close to getting engaged, and if you have determined that you need experienced legal representation, please call 480 733-6800 and ask to speak with Douglas C. Gardner, or visit our website at www.yourarizonadivorcelawyer.com.