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A Potential Alternative to Divorce

A Potential Alternative to Divorce

The utility of postnuptial agreements

What should you do when a client comes to you looking for an alternative to divorce?  Consider recommending a postnuptial agreement. Postnuptial agreements are contracts signed after a couple is married which spell out the parties’ financial rights and obligations in the event of a divorce or death. By getting these financial questions settled, couples have more freedom to address the messier issues that are undermining the marriage. Such agreements are entered into when both parties actually have rights; unlike prenuptial agreements, which are contracts executed prior to the marriage when parties have no financial obligations to one another.

The issue of postnuptial agreements most often arises when an unfortunate event occurs that rocks the foundation of a marriage. Such crises may include incidents of infidelity, addiction, mental illness and financial troubles.  When such issues arise, one party will seek certain protective measures which can be afforded by the postnuptial agreement as an alternative to a divorce.  It’s fair and reasonable for an aggrieved spouse to seek financial protection through the distribution of assets and support before being asked to forgive and forget.  Moreover, it’s also rational for a party to want to insulate children and property from a spouse suffering from some sort of addiction or mental illness, especially if she wants to give her spouse the opportunity to get the help he/she needs without fear of jeopardizing assets and children’s safety if there isn’t a happy ending.  In these instances, a postnuptial agreement allows the family to focus on repairing the damage to the marital relationship without having to worry about distribution of assets, support and/or custody and parental access.

Sometimes the impetus for a postnuptial agreement is due to more positive circumstances, like an inheritance, entering a family business or other privately held business or acquiring an interest in a hedge fund or private equity firm.  Families who want to ensure that their wealth remains within the bloodline may require that a spouse waive any and all interests in the assets before bestowing such riches on the blood relative. Closely held businesses may have to turn over business records to forensic evaluators to determine their values due to the divorce of an owner. Most don’t want to endure such scrutiny if they can help it, especially if the valuation isn’t in sync with financial projections made to banks or investors.  Accordingly, such businesses may require an owner to enter into a postnuptial agreement with any non-owner spouse waiving any interest in the newly acquired business interest to ensure that the business isn’t into someone else’s drama.  As to individuals with a newly minted hedge fund or private equity interest, where valuations of such interests in a divorce can look a lot like telephone numbers, it makes financial sense to seek a postnuptial agreement limiting anticipated exposure. 

In order to be enforceable, postnuptial agreements, must:

  • Be entered into voluntarily;
  • Not be one-sided and completely unfair;
  • Be the product of full and accurate disclosure by both spouses as to the assets, liabilities and income of both parties; and
  • Be the product of a negotiation in which each spouse was represented by an attorney of their choosing.

Postnuptial agreements also provide clarity for situations which may not have been discussed before the marriage. In light of the recent ruling in Obergefell v. Hodges, couples who may have raced to the alter overwhelmed with the excitement of finally being given the right to marry, without, perhaps, having given serious consideration to their respective financial situations, may, after the honeymoon is over, recognize that they should have discussed certain issues beforehand.

Ultimately, postnuptial agreements encourage couples to maintain continual dialogues about their finances, so that everyone knows what they have and what they can expect. By alleviating some of the stresses that can accompany financial uncertainty, such agreements can be extremely useful tools to help save a marriage.

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