A marital agreement (prenup or postnup) changes the focus in negotiation and trial from dividing the community estate to whether a deviation will be made from the agreement.
Without A Marital Agreement
Without a marital agreement, a lot can be spent determining community and separate property. Under Texas law, in a divorce all property is initially presumed to be community, which is what gets divided. Separate property is what was owned before marriage and still exists or can be clearly and convincingly traced to an existing asset. Separate property can also be acquired during marriage by inheritance, gift, or to compensate for part of a personal injury. Separate property must be proven by clear and convincing evidence. This is a high bar and can require substantial time and money.
A couple in their 60s who married in their 30s might have retirement or other assets acquired before marriage. Dividends and interest paid by a separate investment account are community property, even if the underlying investments remain separate. A forensic accountant must trace the dividends and interest over thirty years to prove the separate portion by clear and convincing evidence. Separate property that changed form is still separate if it can be clearly and convincingly traced, e.g. a house owned before marriage is separate. If it was sold during marriage and the money was used to buy a boat, the boat might be separate property. If the boat was sold and the money invested in the stock market it is still separate if it can be traced. Remember, the interest and dividends are community. Proving separate property can be a costly undertaking. If it is not proven, the property is community and will be divided. With a marital agreement this is usually unnecessary.
Once the community property is compiled it must be divided. Without a prenup or postnup the negotiation and trial is about which spouse gets more than half, and how much more.
With A Marital Agreement
Most marital agreements characterize everything as the separate property of the individual owner. Even joint assets can comprise separate interests, e.g. each spouse may own a separate interest in real estate or a joint account. It’s the same as if two unmarried people bought real property or opened an account together. Usually a prenup or postnup eliminates the cost, time and stress of proving separate property.
Marital agreements usually stipulate that each spouse keeps their own separate property. Some have obligations by one spouse to the other. Those are sometimes clear and require no litigation. Others are vague or subject to interpretation and must be resolved in the divorce, either by negotiation or a Judge.
Texas Enforces Marital Agreements
There’s a lot of material on this site about the enforceability of prenups and postnups in Texas. The law favors those agreements and a properly written one is hard to defeat. To overcome a marital agreement it must have been signed involuntarily or was unconscionable when signed and the person challenging it was not provided a fair and reasonable disclosure of the other’s finances, did not waive such disclosure, and could not have known of the other’s finances. Those are big obstacles and usually cannot be defeated if the agreement is written correctly and the right procedure was used in signing it.
The Process Must be Followed
A marital agreement puts no case on a priority list at the courthouse. A valid marital agreement, like a valid contract, can be challenged. Even if the challenge is likely to fail, the challenging party can make the other litigate the case. Discovery may be undertaken, motions may be filed, depositions may be taken, etc. An analogy is business litigation where a seller ships product and does not receive payment. The seller has a contract, sues, and becomes frustrated at everything involved in litigation. Often the buyer claims a defect in the product. A Judge may not assume this is a ruse. Each party must be given time to develop its case, explore the other’s evidence, and provide its own evidence.
The same applies with a valid marital agreement. If a spouse challenges it, the process must be followed. Written discovery requests may be issued, sometimes requiring substantial expense to answer, depositions may be taken, motions can be filed, mediation will be required, and if there’s no agreement a trial can be conducted. Summary judgment is an opportunity to avoid a trial, but there’s cost in requesting a summary judgment and it’s often denied. A marital agreement requiring arbitration might shorten or eliminate steps, but the arbitrator must be paid and will allow each party to develop their case and see the other’s evidence before trial.
The Real Benefit of a Marital Agreement
Without a prenup or postnup the negotiation and trial are about how much more than half a spouse will receive. With a marital agreement, the spouses can negotiate whether one will receive more than the agreement provides and, if so, how much. The trial is about whether the agreement is valid. To save time and resources a spouse may offer the other more than required by the agreement, but not close to half of what the community estate would be. Like litigation between a seller and buyer, even though the seller believes the product had no defect, she might accept a discounted payment to bring the litigation to an end. Some call this “nuisance value.” Likewise, the spouse with more wealth or higher income might pay the other more than required by the agreement.
With a substantial estate this can be a huge difference. Depending on the length of the marriage, retirement, savings, investments, real estate, etc. might have grown substantially and the potential community estate could be several hundred thousand dollars or millions. Instead of arguing about hundreds of thousands or millions, the negotiation is about a few thousand dollars of nuisance value.
The party challenging the agreement has great risk it will be enforced, and he will receive only what the agreement provides. Without a prenup or postnup, that spouse’s worst day at court is half the community estate. Minimally, he will receive half without a written agreement. The likelihood of receiving only what the agreement provides makes any offer worthy of consideration, even if much less than the spouse thinks is fair and not close to half of what the community estate would have been.
The real benefit of a marital agreement is it changes the negotiation and the worst-case scenario for each party. It provides no fast-pass to the front of the line at court. A lawyer may not simply explain to the Judge there’s a prenup or postnup so the process should be skipped and a judgment signed awarding the client all she requests. A marital agreement might not save attorney’s fees if a spouse is determined to challenge it, but it changes the payout at the end.
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