Special considerations exist for women navigating through a divorce. Often, these considerations are connected to your female clients’ estate planning. Let’s consider some divorce planning tips for women to implement before and during marriage.
Communication is Key
Marriage is to a large extent a financial partnership and imposes certain rights and obligations. Although discussing finances may still be largely taboo, it’s beneficial to have candid conversations about money before marriage. As part of these discussions, a couple should share their employment, income and asset information.
In addition, your clients shouldn’t shy away from asking about or disclosing debts. It can be jolting to first learn after marriage about hefty debts such as student loans, tax bills or credit card debt. Financial transparency from the outset helps manage expectations and lays the groundwork for healthy discussions about money during marriage.
Benefits of Prenups
In recent years, prenuptial agreements (prenups) have grown in popularity. The stereotype of a one-sided prenup proposed by wealthy men to their prospective spouses is largely a thing of the past. Rather, more and more women are requesting prenups to protect their pre-marital assets, businesses, career prospects or future inheritances.
A prenup allows parties to opt out of default statutes and establish their own preferred terms that will govern on divorce and death. Generally, prenups are held to a high standard and largely upheld by courts. Only limited grounds exist to set aside a prenup, such as fraud, overreaching, duress and unconscionability.
Notably, a prenup won’t be set aside as unconscionable merely because it was unfavorable in hindsight. Moreover, simply because a prenup doesn’t comport with a party’s definition of “fairness” doesn’t mean it rises to the level of unconscionability. Consequently, your client should carefully consider whether the prenup will be acceptable both in the short term and in a marriage of long duration.
There isn’t a standard form for a prenup. The document can cover a narrow issue or address a wider spectrum of topics. It can address financial issues in the event of divorce, such as property division, spousal maintenance and payment of counsel fees. It can also detail estate rights on death, which can be especially important in cases involving children from a prior relationship.
A common misconception is that a prenup is unnecessary in cases involving family wealth wrapped up in trusts. However, trust assets aren’t necessarily ironclad in the event of divorce. For example, depending on state law and case circumstances, trust income may be included for purposes of calculating support. Likewise, if funds are distributed from a trust and commingled with marital assets, they may be divisible on divorce. Therefore, for optimum protection, it’s preferable to have a prenup and avoid these pitfalls.
To bolster a prenup’s validity, each party should retain separate and independent counsel in connection with its preparation and negotiation. Separate counsel is critical because prenups have far-reaching implications, and each party should enter into the agreement fully informed of each party’s rights. I also strongly recommend to begin negotiating the prenup as far in advance of the wedding date as possible, preferably 30 to 60 days, to provide sufficient time for negotiation.
Prenup Administration
For best results, a client’s advisors, including accountants, money managers and attorneys, should work together in the preparation of a prenup. The client should disclose pre-existing obligations she has to a former spouse or children from a prior relationship. Estate-planning attorneys should be involved in reviewing and providing feedback of prenups if trusts or family wealth are involved. Financial advisors can assist in the preparation of asset schedules that will be included as part of the prenup.
It’s prudent for practitioners like estate-planning attorneys and financial advisors to keep a final copy of the prenup and review it periodically to achieve maximum benefits. A prenup may impose different outcomes if assets are titled jointly rather than individually. Likewise, different terms may apply after a certain number of years or on the birth of children. Therefore, particularly on major purchases or life changes, it’s important for practitioners to review the client’s prenup.
Postnups
A postnuptial agreement (postnup) is similar to a prenup, but it’s entered into after marriage. While prenups are generally preferable, due to their high level of enforceability and set deadline (the wedding date), clients opt for postnups for various reasons. For example, a postnup may be an attractive alternative when the parties didn’t have sufficient time to enter into a prenup or circumstances have changed. Thus, postnups should be weighed as an option in appropriate situations.
Finances During Marriage
Clients should stay attuned to finances during the marriage. It’s preferable for both spouses to play a role in the management of finances. Both parties should attend meetings with financial advisors and stay in the loop. They shouldn’t be afraid to participate and ask questions during those meetings. Many financial firms are establishing initiatives for women to be more involved in their money management, and it may be worthwhile for your female clients to participate in these programs.
Additionally, there’s value in keeping an eye out for what’s happening at home. There are a variety of financial indiscretions that may transpire during marriage. For example, unbeknownst to one spouse, the family may be living well beyond their means and relying on credit cards to make ends meet. Gambling addictions can be devastating. Sports betting, online gambling or casino habits can come at a great expense to a family’s finances and have a crippling impact. Bad business deals can result in callbacks on personal guarantees and the accrual of debts. Periodic financial check-ins between spouses can help promote forthrightness and avoid surprises.
Clients Contemplating Divorce
Ideally, when marital difficulties arise (even prior to separation), it’s prudent for your clients to consult with a divorce lawyer. There’s not a one-size-fits-all approach to divorce. As a result, it’s helpful for a lawyer to explain how the divorce process works and the various mechanisms that are available. Possible options that exist include mediation, collaboration, negotiated settlements and litigation. It can also be empowering for your clients to learn about financial rights and obligations, including property division, spousal support and child support.
Financial Disclosure
There’s broad financial disclosure in matrimonial cases. Couples differ on how they manage their assets. Some couples keep their assets in separate accounts, whereas others maintain all joint accounts. Other couples prefer a hybrid approach, in which they maintain both separate and jointly titled assets.
In many households, spouses are unaware of the entirety of the marital assets. An informative discovery tool is a statement of net worth, which is frequently exchanged at the start of a divorce case. In a statement of net worth, each party sets forth her expenses, assets and liabilities.
Document demands also help to determine the full scope of the marital assets. A Notice for Discovery and Inspection may request financial documents, such as tax returns, bank statements, credit card statements and business documents. As an additional discovery tool, depositions can occur to shed more light on the family’s finances.
Typically, to reach a settlement, the parties must determine property values. Forensic accountants are routinely retained in divorce cases to value businesses and other assets. Real estate appraisers are involved to value properties. Art or jewelry appraisers may be retained to value high price tagged tangible property.
Property Division
In most states, such as New York and New Jersey, there’s an equitable distribution system of dividing property on divorce. However, “equitable” doesn’t always mean equal. Equitable distribution states make a distinction between marital and separate property. Typically, marital property includes property acquired during the marriage from employment. The definition of “separate property” varies by state, but may include pre-marital assets, gifts to one party during the marriage, inheritances and personal injury settlements.
Other states, such as California and Texas, have community property. In community property states, each spouse has a one-half interest in property acquired during the marriage.
Significantly, title isn’t determinative in rendering a division of property. Likewise, the fact that a spouse earned the money doesn’t make it her property on divorce. This eliminates the severe result that would exist in households where one spouse works outside of the home and the other is a homemaker.
Marital Residence
Individuals often become emotionally attached to their homes, especially if they’ve lived in the house for a long time and raised their children there. In cases in which the individuals have sufficient assets, one spouse may buy out the other spouse’s interest in the marital residence or other properties. In other cases, real estate may be sold and the proceeds divided as agreed on by the parties.
To prevent future disagreements, parties can decide in a prenup who’ll have the first right of refusal to buy out the other party’s interest in the home in the event of divorce. They can also specify who’ll have the right to continue to reside in the property during and after a divorce, which can be a major issue of contention.
Custody and Child Support
Divorce laws have become gender neutral over time. Women are no longer given priority regarding custody. Rather, there’s a presumption of joint custody in many states.
Child support is dictated by state law and typically based on a statutory calculation. Child support usually consists of the payment of a weekly or monthly amount of support, as well items of additional child support. Items of additional child support include health, education, camp and child care expenses. Payment of these additional child support expenses may be allocated between the parties pro rata based on income.
Generally, income for child support purposes is broadly defined. A party’s child support obligation isn’t limited to a party’s account of her income. Rather, it may be based on her demonstrated income or earning capacity. This can produce a harsh result for a stay-at-home mother who’s been out of the workplace, as she may not be able to return to her prior earning capacity or may have to return to the workforce sooner than anticipated.
Furthermore, in high income cases, typically child support isn’t based on a couple’s total combined income. Instead, it’s usually based on a capped amount of income. Therefore, this can result in a lower standard of living for the support recipient post-divorce.
Spousal Support Considerations
The rules governing spousal support vary by state and are largely fact specific. Spousal support may be payable to either party regardless of gender. Generally, there’s a statutory formula to calculate the presumptive amount of spousal support during and after a divorce proceeding. In addition, legislation typically specifies factors to consider in determining whether to deviate from the presumptive amount of spousal support. Usually, there are also suggested guidelines for the duration of the spousal support payments.
There’s a shift from permanent spousal support awards to durational awards. Durational awards are meant to enable a spouse to become self-supporting within a set timeframe. However, in practice, this may adversely impact a spouse who’s been out of the workplace for many years or never worked.
A prenup may address spousal support. It can set forth a specific amount and duration of spousal support. It can also establish limitations on the spousal support payments, such as by instituting caps on the amount and duration. In many states, including New York, couples can choose to fully waive spousal support in a prenup or waive taking a party’s separate property into account in calculating support.
Insurance
Life insurance plays an important role in securing obligations under a divorce agreement. A divorce agreement may provide that a party is required to maintain life insurance to secure child support and spousal support obligations. In the event of a property payout over time, life insurance may also be integral. To help ensure compliance, it’s advisable for the divorce agreement to obligate a party to provide proof of insurance to the other party at set intervals or on request.
With respect to health insurance, one spouse may be reliant on the other post-divorce. A divorce agreement may include terms governing the maintenance and payment of health coverage after divorce. An individual is eligible to receive Consolidated Omnibus Budget Reconciliation Act benefits for three years following a divorce.
Estate Planning and Divorce
Divorce can be a lengthy process. While provisions in favor of a former spouse under a will are automatically revoked under state law if there’s a final divorce decree, revocation doesn’t occur on the commencement of a divorce proceeding. To implement changes during a divorce proceeding, your client needs to execute a new will.
In the event that a will is modified, a surviving spouse retains the right to claim the elective share during the pendency of a divorce proceeding unless she’s otherwise disqualified as a surviving spouse under state law. If there’s no will in place, it’s important for your client to sign a will to avoid intestacy during the pendency of a divorce. A client going through a divorce may also want to remove her soon-to-be ex-spouse as her health care agent and power of attorney.
Absent extenuating circumstances, a child’s surviving parent would be the physical guardian. However, an individual may prefer to name someone else as guardian of the child’s property. Another mechanism to keep the child’s property away from an ex-spouse is to create a trust for the child and name someone other than the ex-spouse as the trustee.