When I first started practicing in the late 1990s, prenuptial agreements — prenups — were taboo. Part of this was likely because I was practicing in a very conservative part of the country, but I think it was largely based on the misconception that if you wanted a prenup, you must not have been serious about getting married. As a young attorney, I justified prenups as insurance policies in case the commitment level was not as strong as “till death do us part.” Having car insurance does not mean you plan on getting in an accident, nor is it a license to drive recklessly. In the same manner, prenups did not mean that the party asking for the protection was not serious about his or her commitment level but simply they appreciated the financial risks involved in getting married and wanted some protection against those risks. Even so, it was rare for me to do more than two or three prenups in any given year.
Fast forward 20 years, and now I am doing two or three prenups every month. I do have a larger client base, and they tend to have a much higher net worth, but I believe the increase is caused primarily by the fact that prenups are now mainstream. A lot of my older clients have been through a divorce or two and understand the nightmare of a separation process. They have both earned wealth and family wealth and children that they want to protect. For my younger clients, they are often focused on protecting family wealth, typically at the gentle nudging of their parents. Regardless of the motivation, the fiancé is typically very accepting of the process, assuming their partner does not get too greedy.
The growing popularity of prenups has a lot to do with the nuances of Colorado law. First, in the context of a divorce, separate property is not completely protected without a prenup. Colorado treats any property brought into the marriage, or received by gift or inheritance during the marriage, as separate property. However, to the extent such separate property increases in value during the marriage, the appreciation is considered marital property. This can cause a lot of heartburn in a separation process and result in substantial legal and expert fees in fighting over the ultimate amount of appreciation in the separate property. This is particularly true in the case of property that parents may have placed in trust for the benefit of their child many years prior to the marriage, but now based on the terms of such trust, the divorcing child may have greater access or rights to such trust funds. The difference between having very limited rights to a trust at the time a person first gets married, versus having complete or very liberal access at the time of a divorce, could arguably be treated as “appreciation,” and subject to division between the divorcing spouses. The lack of statutory authority on what is considered “appreciation,” and some very unfortunate (depending upon one’s perspective) case law, can make this a very contentious issue in a divorce.
Another nuance of Colorado law is how it attempts to protect a spouse from being disinherited, i.e. enforcing the obligation of a deceased spouse to provide for his or her surviving spouse. Colorado provides this protection by the “elective share” rights of a surviving spouse. The elective share rights provide an opportunity for a surviving spouse to receive a distribution from their deceased spouse’s estate in excess of what was entitled pursuant to the terms of the spouse’s will or trust. The value of the elective share is based on the length of the marriage, starting at 5% after one year of marriage and topping off at 50% after 10 years of marriage. The calculation of the elective share is based on the “augmented estate,” which basically includes all the property of both the deceased and surviving spouse. But here is the rub – the augmented estate does not make any distinction between separate and marital property. Which means that separate property that may have been protected in the event of a divorce, even without a prenup, is now potentially subject to the surviving spouse’s elective share rights.
These two nuances of Colorado law can easily be managed by a prenup, and are often the limited scope of prenups that I draft. Most fiancés understand their partners wanting to protect their separate property, as long as they feel like they are being protected as well. The key is not to get too greedy – the old saying that “pigs get fat, but hogs get slaughtered” is very true in negotiating prenups. If you get too greedy, the negotiations could become contentious and taint the engagement. In this respect, there are two main points to consider:
First, carefully consider whether or not the prenup should include a waiver of maintenance (alimony). Sometimes a complete waiver will be well received by the other party, but other times it can cause uncomfortable conversations and negotiations. As an attorney, I am used to this level of discourse, but my clients often are not. The issue is that the client may spend a lot of financial and emotional resources in negotiating a complete waiver, or perhaps a schedule of maintenance based on term of marriage, but I cannot guarantee them that the waiver or schedule will be enforceable. This is because in Colorado, any waiver or agreed upon maintenance can be disregarded at the time of a divorce if the judge determines that its terms are “unconscionable.” This determination could be made based on many different factors, the details of which are beyond the scope of this article. The key point is that having spent significant resources in obtaining a complete or negotiated waiver, the client may not have ultimately accomplished her objective. Some consideration should be given to not addressing maintenance in the prenup and leaving it as an open issue.
Second, I encourage my clients to be generous in their commitment to provide for their spouses upon their death. There could be limiting factors, including obligations to children and keeping family wealth in bloodlines,but generally we can restructure the client’s estate plan to provide sufficient resources that allow the surviving spouse to maintain their standard of living after the death of a spouse. Often I suggest insuring this obligation by purchasing life insurance, which can provide financial resources without tapping into family resources.
— Bruce Fowler is the Denver office managing partner of Fairfield & Woods.