Bill was poised for a big promotion and a substantial increase in income. With the new promotion, Bill had the potential to earn bonuses over the next three years that would net him approximately $1,000,000 after taxes, provided he reached certain goals. Bill had married Ellen in the summer of 1990; they had 3 children who were now in high school and college. Their marriage was troubled and had been that way for years. After 20 years of marriage, Bill contemplated divorce and what that would mean on all fronts, including financially. He did not want to continue contributing to investments and retirement accounts, only to lose one-half of his assets if he and Ellen divorced. Now that his future included a substantial increase in income, the timing of his decision to stay or go would have a significant financial impact.
“Should I stay or should I go now?” is a question many spouses face when they believe divorce is not a question of “if,” but “when.” When couples divorce, all assets acquired by the couple from the date of marriage through the date of separation are valued, and all debts acquired during this same time period are subtracted, resulting in the net value of the marital estate. In North Carolina, it is presumed that the marital estate will be divided equally.
For a spouse who believes that the likelihood of divorce is more probable than not, continuing to increase the value of the marital estate by investing in retirement and pension plans, building value in companies in which the spouse has an ownership interest and purchasing real estate only increases the assets that will be transferred upon separation. Spouses who have concerns about the stability of their marriage may want to consider entering into a postnuptial agreement.
In the case of Bill and Ellen, entering into a postnuptial agreement may give Bill an incentive to continue working on his marriage without feeling the pressure and concern of the value clock ticking in the background. It is important to note that a postnuptial agreement cannot provide for the waiver of or the provision for alimony or spousal support, since such a provision is against public policy in North Carolina. Consequently, it is important to have a family law attorney who knows what the law will allow and what the law prohibits to prepare the postnuptial agreement.
Before marriage, parties can enter into a premarital agreement that will provide for the distribution of property and, unlike postnuptial agreements, terms regarding spousal support. This is often recommended when one party brings more wealth to the marriage than the other or when one spouse is an owner in a family business or other closely held entity where such interest is intended to stay within the immediate family or the existing shareholders.
Paula and Jim were engaged to be married. Jim works for his family’s business, and Paula will be entering medical school. Because Jim has wealth that he received from his family, he is going to pay Paula’s tuition, and he will pay for their expenses while she is in school.
Jim is just starting out in the family business and has been gifted shares of stock in a number of closely held companies owned by various family members. He receives periodic distributions for purposes of paying taxes owed on income earned from his shares and infrequent distributions for his own personal use. The shareholder agreements for the various entities provide that the shares cannot be owned by any person outside of the immediate family. Spouses of family members may not hold shares.
Jim and Paula are among the ranks of many couples today who are entering into a premarital agreement to determine the distribution of their assets in the event of divorce. This requires the couple to discuss how they want to handle their income and assets in the future – at a time when they are in love. All couples should discuss the future distribution of assets before getting married to make sure their future plans are compatible. For example, if Jim incurs expenses of $100,000 to put Paula through medical school, he may expect to be reimbursed if Paula graduates and ends the marriage within the first ten years of marriage. In the alternative, if Paula earns $300,000 a year as a physician after enduring medical school, a residency and long hours in her practice, she may want an agreement that she will not have to pay alimony to Jim should he choose to work part time for the family business and live off of distributions he receives from his ownership.
Contracting with one’s spouse or intended spouse may feel awkward, wrong or as if one is not committed to the marriage. When spouses divorce, outside of issues related to children, all of the remaining issues are related to money and the distribution of assets. If such decisions can be made before people are at their worst, the outcome will likely be more equitable.
Ultimately, premarital and postnuptial agreements allow spouses to contract with each other regarding the matters most important to their financial future. These alternatives may provide the security needed to help a marriage survive troubled times.
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