Once you’re wed, it’s too late to sign a prenuptial agreement…but there is another contract that could serve a similar function.
A postnuptial agreement, or postnup for short, is a lot like its better-known cousin the prenup. Both documents describe how a married couple will divide their property and handle other matters in the event they later divorce. The key difference, as their names suggest, is when the document is signed—before the marriage for the prenup versus mid-marriage for the postnup. This seemingly simple difference has some important consequences.
Bottom Line Personal asked estate-planning attorney Martin M. Shenkman, CPA, JD what couples need to know if they’re considering signing a postnup.
Why Get a Postnup?
Postnups typically are put in place when married couples that lack prenups (or want to change their prenups) become concerned that divorce might be on the horizon, or other changes have occurred that require action (large inheritance by one spouse, for example). Creating a postnup allows a couple to come to agreements about how the marital assets and debts will be divided, who will get the dog and any other issues that seem likely to become divisive if there is a divorce. Such things are never easy to hash out, but it tends to be somewhat easier when spouses are still attempting to make the marriage work than once the relationship has completely fallen apart. Having financial matters settled in advance also can dial down the acrimony and financial uncertainty of divorce to a degree and often lower the legal bills in the process. Fees for divorce lawyers can climb quickly when couples are at odds about the division of assets.
But this isn’t the only scenario where a postnup can make sense. Five more situations when they’re worth considering…
One spouse has launched a business. Divorce has doomed many small businesses. These businesses often are considered marital property that must be divided in a divorce even if only one spouse plays an active role in the operation. A postnup can reduce this risk—the spouse who doesn’t operate the business could agree to give up any claim to it (aside from his/her right to a share of the income the business generates), perhaps in exchange for other assets. Helpful: If a business has multiple co-owners, each owner might agree to sign a postnup with his/her spouse to reduce the odds that any one owner’s divorce could create complications for the others.
One spouse puts a career on hold to care for the children or for an ailing spouse. When one spouse sacrifices his/her long-term earning potential for the sake of the family, it’s perfectly reasonable for that spouse to request the financial security that a postnup can provide.
One spouse has an addiction that’s causing financial problems. When a spouse has a problem with gambling, drugs, excessive shopping or some other issue that’s damaging the couple’s finances, a postnup can be a way to protect the other spouse from the resulting debts. Putting most or all of the couple’s assets in the name of the spouse who does not have the problem (or in a trust) can prevent the other spouse from burning through assets. A postnup also could reassure the spouse who no longer has assets in his name that he won’t be left with nothing in the event of divorce.
The couple has an out-of-date prenup. Couples who have prenups generally don’t need postnups. But sometimes couples agree that the prenup they signed long ago no longer seems fair, perhaps because the couple’s financial situation has dramatically changed in the ensuing years. If so, they might agree to amend the prenup. That isn’t precisely the same as having a postnup created from scratch, but the courts may treat a prenup that’s amended during a marriage much as they would a postnup.
The spouses have divergent plans for estate assets. A postnup can serve as an estate-planning tool, allowing spouses to agree to how assets will be divided among heirs. This tends to be especially important when spouses have children from earlier marriages and/or strongly differing opinions about which nonprofit causes to support.
Dodging Postnup Gotchas
There must be what is called “consideration” in a postnup—meaning that it must be fair and reasonable, providing benefit to both spouses. That’s true for legal reasons as well as moral ones. Spouses have a “fiduciary duty” to one another—that is, they have a legal responsibility to strive to act in each other’s best interests on financial matters. If a divorce court suspects that one spouse coerced the other into signing a postnup and/or that the terms of the postnup aren’t fair to the non-wealthy spouse, that court may consider it a breach of fiduciary duty and not enforce the postnup. A spouse who is having a postnup created must resist any urge to try to “win” the negotiation—coming out ahead only increases the odds that the agreement will be unenforceable and thus worthless. That’s especially true when one spouse has more wealth or financial acumen or some other form of leverage or advantage over the other—divorce courts pay particularly close attention to postnup fairness in these situations. Example: If a less-wealthy spouse agrees to give up his/her rights to certain assets in a postnup, the wealthier spouse might agree to increase the amount of life insurance he carries, with the less-wealthy spouse named as the policy’s beneficiary. That makes it clear that the less-wealthy spouse is receiving a concrete benefit from the agreement.
Prenups are less likely to be set aside by divorce courts because they’re signed by people who are not yet married—an engaged person does not have a fiduciary duty to his/her fiancé. But courts may still look to see that each spouse was represented by his/her own attorney and other factors.
Make Sure the Postnup Will Be Enforced
Work with an attorney based in your state. What constitutes a fair and reasonable postnup? That depends on where you live—state laws and court rulings vary dramatically, so a postnup that would be deemed fair and enforceable by a divorce court in one state may not pass muster in another, often for reasons that only local attorneys fully grasp.
Related: If you own a second home in another state…have a trust set up in another state…or have some other legal connection to another state, make your attorney aware of this—it could potentially affect the state laws that come into play with your postnup. Similarly, if you and your spouse later relocate to another state, have an attorney in the new state of residence review your postnup.
Work with two attorneys. Each spouse should have independent legal representation when creating a postnup. Moreover, each spouse should pay his/her own attorney—if one spouse signs the checks to both attorneys, that could create doubt about the independence of the other spouses’ attorney. The odds that a postnup will later be deemed unfair and unenforceable rise significantly when one or both spouses lack independent legal representation.
Warning: You might be told that a postnup is likely to be considered fair and enforceable as long as each spouse has the opportunity to hire an independent attorney, even if one or both choose not to take advantage. There are legal rulings that back that position, but it’s a foolish risk. Priority number one when creating a postnup should be maximizing the odds that that postnup will be enforced in the event of divorce, and one way to accomplish that is for each spouse to have separate legal representation.
Fully disclose all assets. Divorce courts generally consider financial transparency to be a component of fairness. If the court suspects that one spouse wasn’t aware of the existence or value of some of the couple’s assets when the postnup was signed, it’s less likely to enforce that postnup.
Ask your attorney to include a “recital clause” near the top of your postnup. This clause will briefly explain, in plain English, the reason why the postnup is being created. Recital clauses are not always included in postnups, but the presence of this plain-English explanation can help reassure a divorce court that both spouses did indeed understand what they were signing and that they had a solid, mutually beneficial reason for doing so.
Bottom Line Personal interviewed Martin M. Shenkman, CPA, MBA, JD, PFS, AEP, is an estate-planning attorney in New York and author of more than 40 books and 1,400 articles. ShenkmanLaw.com
