Prenuptials: Key Terms and Their Underlying Complexity

“Separate Property” in a Prenuptial Agreement: A Self-Explanatory Term or a Box of Goodies from Pandora?

A prenuptial agreement defines critical terms of matrimonial law, aiming to broaden or narrow how these terms are defined in the relevant statutory and case law.? Two such terms are “Marital” or “Joint Property” and “Separate Property.”? Though these terms may seem self-evident, when we consider the intricacies and overlaps of marital finances and efforts, when we look at real-life examples, the complexities reveal themselves.

Now, consider this hypothetical (deliberately simplified to illustrate only a couple of points in this complex matter):?

A woman enters her marriage owning a restaurant for which she paid $100,000 ? Prior to the wedding, the parties enter a prenuptial agreement, stating, in pertinent part:

1. The restaurant is the separate property of the Wife; and
2. Income earned by the parties is the separate property of the earning party.?

During the marriage, the Wife works exclusively in the restaurant and funnels all earnings back into the restaurant, renovating the kitchen, paying down the mortgage on the building, beautifying the dining room, advertising and promoting the space, and expanding staff.??

While building the business, the Wife works long days, usually well into the evenings, and most of the weekends.? When she is home, she is too wiped out to do much in the way of housework and is generally too spent to engage socially, even a little, with the Husband and their friends.? The couple’s ritual of weekend hikes, which they previously spent time planning and mapping as a shared activity, dwindled to once a month and then only occasional occurrences.? All the Wife’s time in the restaurant requires huge sacrifice on her part, but also taxes the marriage (quality time, shared interests) and requires that the Husband shoulder additional responsibilities as well.? The Husband admires his Wife’s drive and vision; he supports her ambition wholeheartedly, reassuring himself that things will settle out after the first few years.

Meanwhile, the Wife’s energies are consumed with developing her vision, creating what is becoming known as a new “culinary jewel” on the scene. The Husband has upped his game at home, taking responsibility for all household tasks, minor maintenance, cooking, and cleaning.? His income (though “separate property” under the prenup) is used to fund the marital lifestyle — everything from paying the home mortgage, insurance, and taxes, to household utilities, groceries, and joint credit cards.? To free up more liquid cash, the Husband stops contributing to his 401(k), reasoning that the restaurant will ultimately be an income source, and he can make up for lost savings down the road.

Lastly, the Husband provides hands-on help at the restaurant.? He’s a pinch hitter of sorts, racing in at the last minute to act as host and even emergency server at least two days each month, when the restaurant is short-staffed.? The Husband, of course, refuses any wages for his services.? The Husband is good-humored and friendly, and helps to develop a customer following.?

Ten years later, the parties divorce.?

The restaurant is now valued at $1.8 million.? Under the prenup, the restaurant belongs exclusively to the Wife.? None of the Husband’s direct contributions to building the restaurant nor indirect contributions by maintaining the marital environment (covering all expenses, maintaining the home) factor into an equitable distribution analysis, granting the Husband any interest in the value of the restaurant whatsoever.??

Though a logical argument could certainly be made that the husband’s various contributions — some to his own financial detriment — contributed significantly to the increased value of the restaurant, based on the prenuptial agreement, he would likely be entitled to $0.??

Under the prenup, the Husband’s failure to squirrel away income, insist on monetary contributions from his Wife to run the household, and forgo optimizing his retirement opportunities? (i.e. not contributing to his 401(k)) would likely be excluded from the analysis.

Under our hypothetical fact pattern and prenup, the Husband stands to receive no part of what he helped build regarding the restaurant.?The outcome for the Husband looks shockingly unfair — even contradictory to public policy that seeks to treat dissolving marriages at least like disbanding business partnerships, where partners get their fair share.??

Had the Husband kept the prenup in front of his mind throughout his marriage, he may have operated from a more self-interested and self-protective place.?He may have checked himself when he had the impulse to support his Wife’s dream, and instead continuously put his own long-term financial security ahead of [what he considered] joint goals.?But, then, what sort of marriage would that have nurtured??If marriage is to be a partnership of separates choosing to build something together, how separate and autonomous should spouses be encouraged to consider themselves??Is that not anathema to the very benefit and joy of marriage? Of building something to protect and elevate both parties in a marriage?? Not only is this notion unromantic, it threatens to undermine the tenants of trust, mutuality, caring, and security that marriage aspires to provide.

Absent a prenup, or, alternatively, under a more complex, prescient prenup, the marital dissolution would likely result in a more equitable resolution, one in which the Husband’s contributions to the increased value in the restaurant would be recognized, and he would likely be apportioned some share of the increased value.

When considering “separate property” in a prenuptial agreement, it's vital to think through how the nature of a separate asset can change due to innumerable factors during the life of a marriage. There is no simple fix, but by thinking through likely scenarios, prenuptial language can be crafted to represent the intentions of the parties, including the parties’ expectations of both collaborating and maintaining separateness in their marital finances.?

RACHEL ALEXANDER

Alexander Mediation Group

Schedule a free initial consultation.