Donald and Ivana Trump had three postnuptial agreements. Lorna Jorgenson Wendt, shafted ex-wife of GE Capital Services CEO Gary Wendt, lacked one. But after getting less than one-half of her request in the divorce settlement-a piddling $20 million-she has advocated that women get them.
Now postnups are the rage, and some say they may be on the way to becoming one of the most prevalent marital contracts-eventually surpassing prenups.
"Prenups are fraught with difficulty," says John Fiske, Cambridge, Mass., lawyer and family mediator. "Most of the couples who come to me say one of the reasons we're getting divorced is because of that stupid prenup. With a postnup, if an agreement is entered into in plenty of time, each person has their own counsel and there's total disclosure of finances between parties-that postnup is going to be fine."
Like a prenuptial agreement, a postnuptial agreement generally is a contract to determine how a married couple will run the finances. Generally, its purpose is to override state laws.
But unlike a prenup, which is signed before a marriage, postnuptial agreements are signed after the wedding. Over the last five years, 49% of matrimonial lawyers cited a rise in postnuptial contracts.
Postnuptial agreements are being considered by more spouses, the American Academy of Matrimonial Lawyers in Chicago has reported, and they are being requested by both parties rather than just husbands or wives individually. They are more common in second marriages. And 57% of lawyers reported they're typically between persons in the 40- to 60-year-old age bracket.
Postnups, like prenups, can help cover property distribution in the event of divorce or death and set reasonable limits on alimony or spousal support. However, they cannot change child support or determine child custody.
No longer are these agreements limited to situations in which a marriage is on the brink of collapse. Today, postnups are widely used in community property states where assets acquired by either spouse during a marriage are considered owned by both spouses. They are demanded by businesses, since there is concern that a partner's divorce could jeopardize assets. Hedge funds and private equity investors have been among those demanding postnups from partners.
The contract may also be used if financial circumstances in a marriage change, such as when one spouse suddenly obtains vast wealth. They're useful if a prenup needs modification. Plus, they're helpful for asset protection, inheritances and estate planning.
Parents may not wish to leave all their hard-earned money to a child, knowing that if the child divorces, his or her spouse could clean up with it, says Joshua Rubenstein, national head of the New York trust and estates practice at Katten Muchin Rosenman LLC. Sometimes a child is ordered either to do a postnup or keep their parents' money tied up forever in trusts.
Fiske credits postnups with saving one in ten marriages for couples that come to him for mediation. "There are three things couples can do," he says. "Get divorced, separate temporarily, or say, 'Let's stay married and change the terms of the marriage.'" A postnup, for which he typically charges $400 to $1,600 depending on the complexity, is an attractive way to change the terms of a marriage, he says.
Often, he adds, the woman has less money than the man, and she becomes concerned about security in her old age because the family fortune is in his IRA. In one case, a postnup was arranged for half of a man's TIAA-CREF pension to be transferred to his wife if there were a separation. The result, according to Fiske: They're still married.
Carl M. Palatnik, a Mineola, N.Y., fee-only CFP licensee and the founding president of the Association of Divorce Financial Planners, says it's definitely better for clients to come to an agreement while spouses are still talking with each other. "It can be extremely expensive to hash them out in court." Financial advisors need to be involved in creating postnups because clients need to consider the long-term financial repercussions of the deal, he says. Also essential: an attorney.
Nevertheless, there is at least one significant problem with postnuptial agreements. The newest wave of postnups has not been tested in court. Postnuptial agreements are a relatively new body of law being developed, says Sean H. Williams, research fellow at Harvard Law School. Williams, who recently perused appellate court decisions on postnups nationally, says state laws can vary greatly.
"We only know about a postnup once it's litigated," he says. "Potentially, there are thousands of postnups that get negotiated where couples don't get divorced."
Williams, whose analysis of postnups, to be published in the December Wisconsin Law Review, says that so far, one of the most popular reasons to get a postnup is adultery. "What people sometimes do is put in the agreement something like, 'If you commit adultery again, you pay me $25 million,'" he says. "This may be enforced in some states and not in others." Meanwhile, any conclusions about how a court will react in a postnup challenge are based on a very biased sample and could ultimately play out very differently than expected in court.
As it stands, Williams says, about one-third of the states have enforced postnups the same way they have prenups. Some 17 states impose even more rules for postnups than they do for its sister contract.
Tennessee and Arkansas require "consideration," or something of value in conjunction with a postnup, he says. Simply remaining in a marriage is not enough. Say one spouse asked the other for a postnup that reduces the amount he or she would get in a divorce. That postnup would not be enforceable because the spouse did not receive anything of value in return, Williams says.
Other states, by contrast, have held that a spouse's promise to remain in the marriage is "consideration" enough. California, he says, presumes that there is "coercion" for postnuptial agreements, but not for prenups. Ohio bans postnuptial agreements.
And New Jersey, one of the toughest states when it comes to getting a postnup enforced, he says, mandates that the agreement meet standards of "substantive fairness." It applies these standards both at the time the contract was signed and at the time it is enforced. It has no such standard for prenups. In New Jersey, those with postnups need to be concerned that ten years later the court will reform the agreement, Williams warns. The alternative: Move to another state.
More than half of the states, he says, have clarified rules for postnuptial agreements. Tennessee and New Jersey are among those states where the rules, though stricter for postnups than prenups, are clear.
On the other hand, many experts say postnups may be easier to uphold than prenups because they're not signed with a gun to anybody's head. "I've seen that requesting prenups break up engagements," Rubenstein said. "But I have not seen the negotiation of a postnup break up a marriage."
So what should you know if your client wants to do a postnuptial agreement? Williams suggests that you make certain your client's agreement at the very least follows the "Uniform Premarital Agreement Act," which emphasizes complete disclosure. That act, drafted by the National Conference of Commissioners on Uniform State Laws, Chicago, in 1983, has already been adopted by 27 states at this writing.
It has been introduced in the legislatures of four others. To find it, visit the organization's Web site at http://www.nccusl.org, and search under "Final Acts & Legislation." However, provisions of that act may still vary by state, and the NCCUSL says there are no immediate plans to draft a similar model rule for postnups.
Both spouses need an opportunity to have attorneys of their own, Williams says. "Be cognizant that courts may be concerned about the actual distribution that (your client) makes." Be sure your client doesn't get too greedy and demand an unfair amount, he suggests. Plus, "be a little more sensitive to the fact that your state may come out like New Jersey, which polices a lot of the fairness of the underlying bargain."
Harry Barth, financial advisor and attorney with Barth Berus and Calderon LLP, Orange, Calif., stresses that in community property states, a chief reason couples obtain postnups typically is asset protection. Without a marital agreement, property acquired during the course of a marriage is considered equally owned by both spouses-regardless of whose name is on it. So a postnup is particularly critical for clients whose property may be vulnerable to creditors.
But creators of postnups for asset protection too often overlook a major tax trap. Community property states provide married couples with a major tax advantage: a double step-up in a property's cost basis. Say one spouse dies and the other immediately sells the family home. The cost basis for capital gains tax purposes jumps to the property's value at the date of death. The result: no capital gains tax for the surviving spouse. Putting the asset in the name of just one spouse can jeopardize this tax break.
To remedy this, Barth says he recharacterizes the property in a postnup as "50/50 sole and separate." This way, at least half of the property gains protection from creditors, but it also retains one-half of that double step-up in basis.
Rubenstein says that spouses faced with a postnup because of a business opportunity offered to the other spouse might wish to consider crafting a postnup very narrowly. Refer in the agreement only to that particular opportunity or situation.
Also, Rubenstein suggests, it could pay for professional women who marry to seriously consider a postnup. Many, he says, are shocked to find out that if they die ahead of their husbands, the husband gets one-third of everything they made.
Fiske says that financial advisors should be more mindful of postnups as a way to both educate people about finances and help them stay married. "Staying married," he says, "has a huge financial planning component."