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Reed: “Why do I need to have a premarital agreement?”

January 9, 2019

By James Reed

reed-james-mug Reed

“He will think I don’t love him, or trust him …”

“He says he doesn’t want any of my family’s money ...”

“He would never try to get any of my family’s money if we divorced …”

“I just can’t ask him to sign a premarital agreement. It is like getting divorced before we even get married …”

“It is not fair that you are making me have a premarital agreement ...”

For those who are legal counselors to families, you have heard these comments many times when the parents have told their adult daughter (or son) that they need to have a premarital agreement. The child is in love. She has found the person with whom she will spend the rest of her life. The person with whom she will raise a family. There is no possible way they would ever divorce, so why does she need a premarital agreement? The simple answer — she needs one!

Indiana law does not have the concept of “separate property.” In most states, upon divorce, the parties divide the “marital property,” but each retains his or her “separate property.” The definition of “separate property” varies from state to state, but typically it would include property brought into the marriage, gifts received from third parties, and inherited property. Surprisingly, many of my divorce clients (a.k.a. “relationship transition clients”) walk into my initial consultation believing the property he or she inherited, brought into the marriage, or received by gift during the marriage, is not part of the marital estate. The idea of separate property is common in movies, television shows, and social media. Where else do people get legal advice? The internet!

Since Indiana adopted its current framework for divorce property division in the early 1970s, the law is very clear — all property of the spouses is marital, regardless of how property is titled or was acquired. Indiana absolutely is a “one-pot theory” state. Moreover, the divorce court deciding the division of property must presume that an equal division of the all-encompassing one pot is “just and reasonable.” The burden of convincing the court that an unequal division is appropriate rests on the parties. Yes, the divorce court can look at the source of the marital property when considering an unequal division in favor of the inheriting spouse, but there is not a requirement that inherited property must be excluded from the division, or that there must be a property division adjustment in favor of the inheriting spouse.

Let’s get back to the daughter who does not understand why she needs a premarital agreement. Her parents built a successful business. The children all have minority ownership interests. One of the other children works in the business. The parents have been diligent in their wealth and business succession planning to provide a path that allows the business to grow and prosper, even after their deaths. The parents’ planning assures full ownership of the business is eventually transferred to the children in a way that allows the continuation without significant financial burden that otherwise could cause the business to fail or be required to be sold. If the daughter marries without a premarital agreement, her ownership interest is now “marital property,” as well as any additional ownership interests she may receive during the marriage. In the event of the daughter’s divorce, her ownership interest is subject to the presumptive equal division mandated by the property division statute. Her ownership interest will be valued. The financial information will be shared with her husband’s lawyer and business evaluator. Whatever sensitive competitive commercial attributes the business may have could become public. The value of her interest could be such that it would cause the daughter to receive little else of the marital property. Or, to buy out the husband’s marital interest in the business, the daughter pressures the family to make distributions to the shareholders that would put the business in serious financial circumstances. All this causes family discord, potentially endangers the livelihood of the family members working in the business, and places the business succession plan and the parents’ estate planning in jeopardy. Most, if not all, of these adverse consequences could have been avoided if the daughter had entered into a premarital agreement that kept the family business interest out of the marital estate. Yes, she needed a premarital!

The discussion about a premarital agreement is likely to be challenging and potentially difficult no matter what the circumstances. Absolutely you are making the family’s adult child deal with the potential of a divorce when all she really wants to think about are wedding plans, how much she loves her fiancé, how bright their future together will be. When I work with a family that is struggling with having that discussion, I encourage them to let me get involved in the process as early on as possible. For example, in the family business scenario that I just discussed, I would encourage the parents to talk with their children before any child was in a serious relationship. The discussion would focus on the parents’ goals and plans. And how a premarital agreement functions to allow them to accomplish those goals.

If the parents are uncomfortable talking about the negatives, that is a perfect opportunity to involve the attorney. The attorney can provide the necessary expertise, but more importantly, can keep the discussion at a level that is non-emotional yet sensitive to the children’s perspective. I approach these discussions more as an educational opportunity — the legal aspects of premarital agreements and reinforcing the family’s values and goals. My role includes providing factual information and dispelling misunderstandings and incorrect assumptions. It is amazing how often the adult child comes to the discussion with completely false information and wrong beliefs about premarital agreements. In some matters, I encourage the family to involve a therapist who can assist them in communicating and discussing the underlying concerns and emotions about the parents insisting on premarital agreements and the adult children reacting to parents’ intrusion into their lives and relationships. Having quality communications about the premarital agreement is critical.

An often critical part of the educational process about the premarital agreement is to help the child talk with her fiancé about the premarital agreement. She needs to be equipped with why her parents’ request for the premarital is reasonable and fair. The separate property vs. marital property is critical. In addition, understanding that neither the adult child nor her prospective husband had anything to do with the accumulation and acquisition of the assets that are the proposed subject of the premarital agreement. Typically, that understanding helps with the fairness issue and opens the door for an informed discussion about the need and the terms.

My experience with individuals and families regarding premarital agreements over the years has taught me an important lesson — factual, clear and open communication is the basis of the successful development and preparation of a premarital agreement. Being a “relationship transition attorney” has its benefits. You come to understand clients’ emotions, motivations, fears and misunderstandings without backing away from the challenging aspects of representing clients in negotiating premarital agreements.•

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James Reed is a partner and team leader in Bingham Greenebaum Doll’s litigation department, where his focus is on wealth management and family law. Opinions expressed are those of the author.
 

 

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