Prenups and High Net Worth Divorces: Do They Solve Everything?
“Prenups” are not able to solve every problem that arises in a divorce, even when the terms are clearly spelled out and agreed upon beforehand.
July 26, 2019 at 02:10 PM
5 minute read
While any high net worth individual might consider a prenuptial agreement to be an ironclad contract, New York state law might not agree. New York is one of the few states which hasn't adopted the Uniform Prenuptial Agreement Act (UPAA). New York has its own set of rules and laws for these types of agreements.
A prenuptial agreement is designed to help avoid chaos, strife and acrimony should a divorce occur in that marriage. However, as evidenced by the recent attention-grabbing stories involving Robert De Niro, “prenups” are not able to solve every problem that arises in a divorce, even when the terms are clearly spelled out and agreed upon beforehand.
In De Niro's case, the divorce attorney his wife hired has issued six subpoenas for his financial records even though De Niro's attorney claims the prenup makes it extremely clear what she is entitled to from their 2004 agreement. The public has learned that De Niro's total wealth may be upwards of $500 million. When the stakes are that high, one can be sure attorneys on both sides will be working hard for their clients.
Agreeing to a prenup is only the first challenging step: Executing the agreement should a divorce occur is an entirely different matter. When a couple marries, they combine assets, they share friends and sometimes business relationships and they often have children. Each of those is treated differently by the law, and as life moves forward and becomes entwined for the two individuals who are married, finding common ground in a divorce becomes increasingly difficult.
For those couples who both enter into a marriage with significant assets, even the best written prenups can create headaches. Most business contracts are written by two or more parties with little or no emotion involved. Prenups are also essentially business contracts, but emotion, history, religion, self-worth, psychology and more come into play in the relationship, meaning that the dollars and cents often take a back seat. If a married couple sat across from each other before a marriage took place and negotiated every detail as if they were two businesses merging, then a divorce might be easier to negotiate. However, that rarely (if ever) happens. Love birds often refuse to see their marriage as a contract, and prenups can have huge, unforeseen holes in them.
For example, New York law states that any prenuptial agreement must be “fair.” Such a vague and subjective term can turn an attorney's hair gray, especially when the definition of fair changes over time. Making matters more complicated, circumstances dictate fairness. What was considered fair when the couple married 20 years ago may not be considered fair today. For example, celebrities who marry before they've hit stardom or Wall Street bankers who marry before they've made it to the executive level will surely have issues with any prenuptial agreement later in life. In New York, a potential spouse is under no obligation to disclose his/her finances before the signing of a prenuptial agreement. However, if the individual does disclose assets and misrepresents the value of those assets, the resulting prenup may be overturned in court.
Premarital assets or what is known as “separate property” are off limits; however, those assets become extremely difficult to distinguish over the course of one's life and career. In New York, there are countless people who have built businesses, invested smartly and now would be considered high net worth individuals. Assets owned before a marriage are usually off-limits in a divorce if there is a prenup, but any increase in the value of those assets due to contributions of a spouse can change matters significantly. Let's say a man has a financial firm for five years before he gets married. Then, once he's married, his spouse can prove she's helped the value of that firm increase through her actions, whether it be working in the office, helping with a marketing campaign, introducing him to new clients, or taking care of the home so he can go to work. A judge may rule against the man if the spouse's attorney can show that the spouse's efforts made a significant difference in the value of the business.
The role a prenup can play in custody is often extremely limited. Unlike many states, New York prenups can resolve some issues regarding education, support and care of children. However, in most cases a judge will make the final decision on custody and support to ensure any agreement is in the best interests of the child/children. When it comes to what religion a child is raised in, custody, visitation and such, that's a matter that is only handled during divorce proceedings.
Steven J. Mandel is founder of The Mandel Law Firm.
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