Laurie Itkin, CDFA
You are Not Selfish or Greedy by Requesting a Pre-Nup or Post-Nup
Divorcing parties in California often spend thousands of dollars on certified divorce financial analysts like me or even more on forensic accountants to determine the value of community property vs. separate property.
In California, each spouse owns one-half of the community property which means each spouse owns one-half of the community's assets and is also responsible for one-half of the community's debt. Generally, community property includes all assets and debts acquired during marriage, even if the debt was incurred by only one spouse or if a credit card was in the name of just one spouse. An inheritance is considered separate property but if it has been co-mingled with community property the inheritor may have to spend time and money to prove the amount that is separate property by tracing it to its origin.
Since separate property does not have to be split with a spouse upon divorce, there is a strong motivation for parties to prove they have separate property and value it as high as possible. I often advise clients on how to determine the separate property portions of their retirement accounts and real estate -- in some cases I perform the financial analysis. While I do not perform business valuations, there are differing methods for valuing businesses and determining the separate and community property portions.
How Does Comingling of Separate Property Happen?
If you own a house or condo before marriage, you may assume it is your separate property. It begins that way but once you are married, earnings of either you or you spouse used to pay down the mortgage creates a community interest in what was formerly your separate property.
A similar issue occurs with a 401k or other type of employer-provided retirement account. It starts off as separate property before marriage, then employee contributions and the employer's match (and the investment growth on those) are community property, and then after the date of marital separation the contributions and employer match (and the investment growth on those) are separate property. If you divorce, how much does your spouse receive? You may not know the answer to that question but I can help you figure that out.
What if you received restricted stock unit (RSU) or stock option grants before marriage? Did you know that if they vest during marriage some of your wealth becomes community property? In some cases we are talking about hundreds of thousands of dollars and even into the millions.
How to Avoid Spending Tens of Thousands of Dollars on Legal and Financial Experts
With a well-crafted pre-nuptial or post-nuptial agreement, parties can mutually define what is separate property thereby savings thousands and potentially tens of thousands of dollars that otherwise would be spent on legal and financial experts whose mission would be to unravel commingled property.
I was interviewed by reporter Gabrielle Olya for her "Financially Savvy Female" column on why there is no shame in asking for a pre-nup. If either party has children from a previous marriage or relationship it is imperative for the couple to negotiate a pre-nup. If either or both parties have a savings account, brokerage account, cryptocurrency account, retirement account, or real estate, it's a no-brainer to get a prenup as trying to figure out how to prove one's separate property 10 or 20 years down the road will necessitate spending thousands of dollars on a financial expert as I explained previously. Click here to read the other reasons.
My husband and I have a pre-nup (we've been married almost 14 years) and if we divorced he would walk away with his business (both its assets and liabilities) and neither of us would have to pay the other spousal support. Both before and during our marriage I socked away hundreds of thousands of dollars in retirement accounts and I would walk away with it all intact. We agreed that the house would be split 50/50. A pre-nup allowed us to define what would be important to both of us if we divorced.
Too Late for a Pre-Nup But Not Too Late for a Post-Nup
If you and your spouse did not negotiate a pre-nup, not to worry! You can negotiate a post-nup after you are married. With a post-nup, you and your spouse will likely need to disclose all community and separate property assets and debts. (A CDFA can help you gather and organize the required documents.) With a post-nup, you have the ability to clarify or recharacterize the nature of each asset and debt. You may also want to address spousal support. In many households, one parent sacrifices his or her career to stay home with the children. Or one spouse takes a lower-paying job so the other spouse can move for a promotion or better opportunity. This means the lower-paid spouse may end up with a smaller social security benefit than the higher paid spouse and less retirement savings in his or her own name. But what is most dangerous is that a 50-something spouse who has been out of the workforce for two decades will more than likely have a lower future earning potential than the other spouse. After divorce, one spouse could continue to earn and save while the other spouse barely gets by. This may be a large factor in the determination of spousal support upon divorce. With a post-nup, parties can set parameters together rather than leave it up to a judge to weigh the Family Code 4320 factors.
In this blog post, Los Angeles attorney and mediator Jill Cohen does a great job explaining why spouses would want to negotiate a post-nup. If you have concerns about things like your spouse starting a business or taking out loans and how that may impact your future financial security, a post-nup is a good idea. Same goes if there is a major career or life change for one of you.
First Steps in Negotiating a Post-Nup
It may seem awkward to raise the subject of a post-nup with your spouse. This article written by Emma Pattee for Marie Claire may give you some ideas on how to approach your spouse. Your next step is to gather information about you and your spouse's assets, debts and income and work with a CDFA to model what the growth of separate and community property assets might look like over time with and without a post-nup. You'll also want to work with a lawyer like Jill who has experience drafting and negotiating post-nuptial agreements.
Laurie Itkin (a.k.a. "The Options Lady") is a financial advisor, wealth manager, and certified divorce financial analyst (CDFA). She serves on the national board of directors for the Association of Divorce Financial Planners. She is also the author of the Amazon best-seller, Every Woman Should Know Her Options: Invest Your Way to Financial Empowerment. Investopedia named Ms. Itkin one of the top 100 most influential financial advisors in the country for two years in a row. As a wealth manager at Coastwise Capital Group, which has received the annual Five Star award for "Best in Client Satisfaction" for 10 years, Ms. Itkin manages the investments of clients' brokerage, trust and retirement accounts. Through her financial consulting company, The Options Lady, she provides divorce-related financial planning and analysis to individuals and couples throughout all stages of the divorce process and has worked on over 250 divorce cases either as a financial neutral or advocate to one spouse. She also speaks at seminars for divorce attorneys and mediators on how to divide equity compensation, including restricted stock units and non-qualified and incentive stock options. Ms. Itkin has appeared as a guest expert on investing and financial aspects of divorce on television, radio and podcasts. She has been quoted in numerous publications including the New York Times, Wall Street Journal, San Diego Union Tribune, Chicago Tribune, Christian Science Monitor, U.S. News and World Reports, Parade, Redbook, and Forbes. Ms. Itkin volunteers as a pro-bono financial planner for the San Diego Financial Literacy Center and Savvy Ladies. She earned her B.S. in economics with a concentration in finance from the Wharton School of the University of Pennsylvania.