Move over, heirs and heiresses: Baby boomers are flocking to sign prenuptial agreements, too..
Then he popped another: "Will you sign a prenuptial agreement?"
He had been through a divorce, had a college-age son and several real-estate investments. She, a publicist and also 52, had never married.
"When he first mentioned it," Ms. Jackson, now Ms. Jackson-Zaremba, says, "I thought, 'Oh, my God.' It definitely took a little bit of the romance out."
Baby boomers looking to protect their assets are increasingly turning to prenuptial agreements—legal contracts drawn up before a marriage that dictate what happens to assets in the event a couple should part ways, either by divorce or death.
"They used to be for the rich and famous," says Marlene Eskind Moses, president of the American Academy of Matrimonial Lawyers and a lawyer in Nashville, Tenn. "It's become more commonplace in the market as an estate-planning opportunity for boomers."
Even before the financial crisis hit, prenuptial agreements were on the rise: Some 80% of matrimonial lawyers said they had seen an increase in couples signing them in recent years, according to a 2006 survey sponsored by the matrimonial lawyers group.
The financial crisis—which hit boomers, those born between 1946 and 1964, especially hard—accelerated the trend. Many of them, just on the cusp of retirement, saw their investment portfolios pounded, as the Dow Jones Industrial Average fell 53% from Oct. 9, 2007, to March 6, 2009. Home values, which represented significant chunks of boomer net worth, were down almost 31% as of March 31 from their peak in mid-2006, according to the S&P/Case-Shiller national index.
As a result, boomers have become more anxious to hold on to whatever they have left, says Gabriel Cheong, a divorce attorney with Infinity Law Group LLC in Quincy, Mass. Today, the majority of inquiries come from boomers "concerned about protecting their assets," he says. "Not just with the markets, but with protecting their spouses and children." And they often enter a marriage with substantial assets—and children from an earlier union.
Baby boomers are more likely to get married multiple times than younger or older couples because they also are more likely to have gotten divorced. Almost 40% of boomers who have been married have gone through at least one divorce, according to 2004 Census data, the most recent available, while only about 30% of all people who have been married have been divorced. By their 50th birthday, 27% of boomers have moved on to their second or third marriage.
None of this, of course, makes discussing a prenup with one's betrothed any easier. Ms. Jackson-Zaremba and Mr. Zaremba "put the elephant on the table," he says, and disclosed everything to each other before their lawyers drafted the agreement. Though his net worth was significantly higher than hers, she had retirement savings and an annual salary she wanted to keep separate. He owned a string of properties in several states and several lighthouses he was in the process of restoring that he, too, wanted to keep separate.
Under the terms of the prenup, one investment property on Long Island's North Fork that the couple purchased would be owned 75% by Mr. Zaremba and 25% by Ms. Jackson-Zaremba. A second property on Long Island would have the same split, but after five years ownership would change to 50-50. Assets filed on a joint tax return wouldn't be considered joint assets, the agreement states, and Mr. Zaremba's name would be added to the lease on Ms. Jackson-Zaremba's New York apartment. Neither party would take on each other's debts. Ms. Jackson-Zaremba also would receive a life-insurance policy, a provision added in the drafting.
Lawyers usually recommend that couples with substantial assets—or those who expect to inherit such assets later on—consider a prenup. Without one, they are at the mercy of a smorgasbord of state laws in the event of a divorce or death. In "community property" states, such as California, marital assets are typically split 50-50. In "equitable distribution" states, judges generally look at what is "fair," so all marital property is considered before it is divided.
Such uncertainty has helped prenups gain favor as estate-planning tools. Yet they are anything but simple to execute, and prospective couples need to make sure they avoid some common traps.
Bulletproofing a Prenup
There still isn't any guarantee that the agreement would be bulletproof from future challenges by a former spouse, says Gary Skoloff, a family lawyer with Skoloff & Wolfe in Livingston, N.J. "A lawyer can no more guarantee that a prenup is enforced than a doctor can guarantee the result of a surgery," he says. Having each party represented by a lawyer generally decreases the likelihood that a judge might deem a prenup unfit, experts say.
Still, there are some general rules that experts say will help the document hold up in court. When drafting a prenup, lawyers generally divide goods into two major pools: assets created before the marriage and assets created during the marriage. In addition to assets, responsibility for paying off debts incurred both before and during the marriage can be divided in a prenup.
Some older prenups cited fixed-dollar amounts. That made it easier to contest them, as inflation eroded the value of many assets or, conversely, as some assets, such as real estate, saw their value sharply increase. Lawyers now prefer to disclose the ownership stake—and, when possible, the value—of all assets for transparency, but also to address how appreciation of assets or new contributions will be divided.
One of the biggest mistakes you can make is trying to hide assets. "The worst thing you can do is play games," Mr. Skoloff says, "because then you've lost credibility with your spouse. And a judge."
Another rule of thumb: A prenup can't contain anything that violates a state's laws or public policy. In Florida, for example, any kind of debt incurred before a marriage—regardless of what a prenup says—is considered a nonmarital debt, so it wouldn't transfer over to a spouse, says Mitchell Karpf, a marital and family lawyer with Young, Berman, Karpf & Gonzalez in North Miami Beach, Fla. Some couples do choose to insert sunset provisions, so that the prenup expires after a certain number of years of marriage.
Doctors, lawyers, members of a family business or others who have a shared practice may suggest their peers draft prenups to ensure a spouse can't take income from the business. Conversely, a spouse who contributes to a business might want to ensure that their work is compensated.
The Next Generation
In recent years, as more couples have drafted prenups, the documents have expanded to spell out terms of the marriage itself, addressing issues such as adultery, intimacy or weight gain, Ms. Moses says. Some prenups also determine things like what religion children will be raised as, or where they will attend school. However, child-support and custody agreements typically aren't included in prenups because those are to be determined separately by the courts.
Because prenups are general legal contracts, same-sex couples may be able to draft financial agreements, even if their state doesn't legally recognize the union, she says. "People are free to contract," Ms. Moses says.
Some baby boomers, anxious about how their assets will be passed on, are even requiring their children to consider prenups, says Daniel E. Clement, a divorce lawyer in New York. Typically, younger couples just starting out with equal assets wouldn't need one. But if a spouse has wealth such as a trust or inheritance they either intend to give or receive, a prenup might make sense.
"When they hand that money down, they want to make sure it's not lost on an heir's spouse when they want to give it to the heir," Mr. Clement says. "I think people are more cognizant that money can be there today, gone tomorrow in a flash."
Another concern for many couples: how inheritances are spent. A spouse's inheritance may belong only to that spouse, but if it is spent toward a home that both live in, it could be considered joint property. Couples can use a prenup to clearly spell out ownership stakes.
Melissa Brides and her husband Aaron Ockman of Santa Monica, Calif., decided that a prenup wasn't in order, even after his parents suggested one. Although taken aback, Ms. Brides—herself a child of divorce—says she "understood why they were asking." The two 34-year-olds have roughly the same net worth, but Mr. Ockman co-owns an apartment building with his parents.
Even though the couple finally decided against getting a prenup, having the discussion was beneficial. Mr. Ockman's parents drafted a separate agreement among the three family members stipulating what share of the property Mr. Ockman owns in the event the building is sold.
As for the Jackson-Zarembas, their prenuptial agreement was written to sunset after 15 years. It was signed on July 11, 2008. The couple was wed the next day and have been happily married ever since.
"Sometimes," Mr. Zaremba says, "the best contracts are the ones you don't have to use."
I Do's and I Dont's
Some pointers on what and what not to do when considering a prenuptial agreement:
- Have each party represented by a lawyer
- Start talking about and drafting the agreement several months before the wedding
- Consider enlisting the help of a marriage counselor, financial planner or accountant.
- Research whether an additional waiver is needed for a workplace retirement plan.
- Hide any assets from a future spouse.
- Forget to assign responsibility for joint and separate debts, if applicable.
- Include things that could violate state laws, such as child-support payments.
- Use a prenup as a substitute for a will or estate plan.
Write to Mary Pilon at firstname.lastname@example.org