Michael Lodge, NCPM, CRTP - Certified Business Mediator - Business Tax Advisory Services - www.lodge-co.com - Ph/Text 818.252.5682
Mediation is used in arriving at a prenuptial agreement to a marriage. In fact, it is very important to mediate this subject. I found his article very filled with information on mediating a prenuptial agreement. Learning is the best practice always.
by Laurie Israel
Any lawyer who has dealt with prenuptial agreements knows what a stressful and upsetting task it can be for the client. Usually, only one party wants one. The other less-moneyed party does not, and that party is extremely hurt by the fact that the other is asking for one.
Often the request for a prenup comes after a very long relationship, including cohabitation. The parties are already committed to each other and planning a life together. It often comes up after the parties have become engaged. One party’s vision of a marriage is sharing everything – including the financial. The other may be starting to have second thoughts about sharing the financial part, although he still loves her and wants her to be his life partner. Or, as is often the case, the parents of one party, self-made wealthy people, are putting great pressure on their son or daughter to have a prenup.
What happens after the idea of a prenup is broached by one of the parties? Almost invariably, everything becomes ugly. The loving relationship between the couple becomes bitter and damaged. Some relationships never recover, even after the marriage. Tears are always shed by the less financially advantaged spouse-to-be. The other spouse may be adamant, but feels brutish. Not a good way to start a marriage.
Starting with mediation one can reduce or eliminate damage to the relationship when a prenup is certain or likely to happen. The process lets the parties (not their lawyers) decide the terms for themselves. Mediators can help level the playing field and help the couple come together with a mutual solution that is acceptable to both.
Mediating prenups is an excellent way to start the prenup process, and in my opinion, often the best way.
Here’s how it works:
- Mediation is the message.
People are searching for non-conflictual ways to negotiate prenups. About ten years ago I wrote an article entitled “Ten Things I Hate About Prenuptial Agreements,” and it’s more or less become viral. As a result of that article and others I have posted during the years, I have transitioned a substantial part of my mediation practice and my law practice to working in the area of prenuptial agreements and postnuptial agreements.
2. Start with the parties, not with a prenup draft.
Encourage the parties not to have one of their attorneys work on a first draft. That first draft, if received, is usually a very harsh and unwelcome way to start the process. It can make the negotiations turn bitter very quickly. If a party has received a draft from his or her attorney, suggest to that party that it should be put in the shredder. It’s important to start anew and fresh. If a party has received one, advise him or her not to read it and not to share it with the other party. Often the couple may see you after experiencing a very negative negotiation process led by their two attorneys. You need to open the door and create an entirely new chapter by means of the mediation.
When you are communicating with the parties before the first mediation session, try to find out as little as possible about their goals (which may be conflicting). Also, ask the clients not to share the facts of their situation (except for financial documents, see below) before the first session. Everyone should come to the first mediation session with a fresh mind and no preconceptions. Having a “Zen mind, beginners mind” will help the dynamics of the mediation, as well as help you as the mediator to stay neutral and unbiased. The surprise element of the first session nourishes the vitality of the mediation process.
The idea of mediation is for the parties to think about and mutually set the terms of their prenuptial agreement. They are getting married, so the terms should reflect love and caring. The process shouldn’t be contaminated by the thoughts of their previous lawyers or their parents who are often the “shadow parties” behind a prenup.
3. Fact finding is important.
It is helpful to have some of the parties’ financial information prior to the first meeting. They don’t necessarily have to all be provided prior to the first meeting. These are some of the documents I request:
W2s, paystubs, a detailed list of debts and liabilities, a list of assets, latest statements of any financial accounts, including retirement accounts. And any information regarding life insurance.
Personal income tax returns are also important to review. Have the parties provide the past two years of returns. You will learn a lot about the clients’ finances after reviewing these. Social security earnings statements showing historical earned income are also helpful. The mediation clients can obtain these online from the Social Security Administration site, www.ssa.gov .
At the first meeting, the mediator should become familiar with each of the parties’ factual situations. How long have they been together? What is their sense of the marriage? Is it a first marriage or is it a second one with children from the first marriage? This latter fact pattern raises other issues. Are either of their sets of parents divorced? If the clients have been divorced, what was their experience? Have they been struggling over the prenup? Have they had a bad experience with attorneys that have represented them in connection with the prenup?
If a party has an ongoing business, it is very important to clearly understand its financial aspects. This will take some time and require review of additional documents. Some questions that you should consider would be: How is the income the business generates characterized – as salary or business income? Who controls the earnings that might remain in the business? What is the fair market value of the business? If there is a recent financial statement of the business (such as in connection with a loan application) have that as part of the package to review. Look at the past 2 years of business income tax returns. A full understanding of the business by the mediator and by the parties (including the non-owning party) is crucial to formulating a sound prenup plan.
Often the idea of a prenup comes from the moneyed parents of one of the future spouses. In the case of parental wealth, a spouse may be asked to waive all rights of the other to gifted and inherited money coming from a spouse’s parent forever. That party needs to know what he or she is waiving. Accordingly, in some reasonable manner, the assets of those parents need to be revealed in order to ensure waiver by the non-moneyed future spouse.
All the information that is provided should be shared between the parties so they have full disclosure and understanding of each other’s assets and income. The understanding of each of their finances and the reasons for the prenup should be probing and precise.
The other part of fact finding is to find out what the mediation clients’ plans are. Do they expect to have children? At what point? Do they expect to have more than one? Do they expect the mother to leave the job market? If so, for how long? If it’s a second marriage, how do they plan to provide for the children of the first marriage? How do they envision providing for their own and their spouse’s needs as they age? These goals should be accommodated in a “grey” prenup.
4. Make sure the parties understand what state law says about divorce and inheritance.
Prenuptial agreements vary according to state law. That’s why it’s important that each of the parties knows what the applicable state laws of divorce and inheritance are in their state. That way they know what they are waiving. Waiver is a very important aspect of prenuptial agreements. In certain aspects, a prenup may even enlarge the rights a spouse would have under state law. There’s nothing wrong with that, especially if that person is giving up other rights.
Sometimes, after receiving this information, the parties decide that they want the state law to apply and abandon the idea of a prenup. Be open to that possibility as a mediator. If they have made that decision after an understanding of state law, it can be a reasonable choice. Never assume the mediation will end with a prenup, especially when it’s a first marriage of relatively young people.
The laws of divorce (property division, alimony, and children) should be presented in a clear way. Are premarital assets and inherited assets excluded from martial property subject to division in your state? (They are, in many states.) How are active businesses treated in a divorce? There will be case law on all these topics in your state and sometimes statutes (which will be fleshed out and interpreted by case law). This information should be shared with your mediation clients.
What about the laws of inheritance? What would happen if a mediation client inherited his parents’ estate during a marriage? What are the baseline requirements of inheritance from the estate of a spouse in an ongoing marriage? Knowing what these rules are will assist in defining differences that may be part of your clients’ mediated prenup. Too many prenups address support, but leave out provisions that would apply in the case that the marriage ends because of the death of one of the spouses.
The laws of “Community Property” states like California and Texas and many equitable division states, provide that prenuptial property and inherited property is separate property and not marital property. If you live in one of those states, and this is your concern, then you’ll want to figure out the reasons to still enter into a prenup.
Remember, mediators are allowed to provide legal information (but not legal advice). So you can and should provide this information to your mediation clients. And you should do this sooner rather than later. Prenuptial agreements should not be created in a vacuum. Understanding of the law is required. To assist in this, I hand out a state law summary of my state’s divorce and inheritance law and discuss it with the clients.
5. What are their aims and concerns?
It is important to know exactly what concerns your mediation clients have. What their sense of the marital partnership and its financial aspects are. It’s also important to find out their respective views on prenups, which might be quite divergent. Part of leveling the playing field is hearing from the person that doesn’t really want a prenup. That person often is concerned or fearful about expressing their concerns.
It’s also important to have the clients air their views on all of the substantive issues that would be in the prenup. If someone is concerned about receiving a potential inheritance, fully discuss it. It should be viewed through the filter of all the other financial information that you have obtained, and foreseeable (and unforeseeable) future financial circumstances. What if the other party will receive no inheritance? How old are the parents of the party with the expectancy? What if the marriage is long-lasting? Does it still make sense to forever isolate the inheritance as separate property?
6. Think outside of the box.
Remember that prenups don’t need to be an “all or nothing” thing. Any issue can be sliced and diced. For instance, gains from, and income derived from separate property can be always considered separate property, or not. Income from separate property can be shared as marital property, and even gains from separate property. Or the sharing can be staged in percentages. The sharing percentages don’t have to be fixed – they can start at some point after the wedding and even accelerate as the marriage grows longer and proves itself as durable.
Remember, a prenup can seek to address every financial issue, although public policy considerations make child-related provisions and spousal support subject to court jurisdiction. A prenup can also be as bare bones as one that leaves all issues to be decided by the parties, and if they cannot decide, require arbitration, and not litigation.
Often a prenup leaves spousal support to be decided by state law, or puts reasonable limits on it, drafting it so that it would likely not be overturned by a court. Clients can also consider and adopt “sunset clauses” by which the prenup self-destructs after a certain anniversary of the marriage.
Sometimes, after meeting with mediation clients and explaining the law of divorce and inheritance, the couple opts not to have a prenup. This option should be left open as a choice. Too often the prenuptial agreement takes on a force of its own aided and abetted by the mediator or the attorneys, without considering the alternative.
7. Make the prenup as generous as possible.
It is understandable that a person coming into a marriage with great wealth would want to protect him or herself from loss through divorce and from litigation. And yet, being overly protective about their money may diminish the strength of the marriage. One must ask themselves, “What’s more important, money or the marriage?” and “How much money is enough?” It’s good for the marriage if a balance is struck.
Marriage thrives on generosity. Make sure the less-moneyed spouse has a stake in the financial success of the other spouse. Make sure the marriage builds up marital assets and security for the less-moneyed spouse. Make sure that provisions about a spouse’s ongoing business are fair. Otherwise, the result could be an imbalance between the efforts of the business spouse that redound for him- or herself, and the efforts of the other spouse, which may be 100% towards supporting the marriage. This is a recipe for marital disaster.
Think about, and make plans in the prenup, for mutual inheritance terms to apply if a spouse dies when the marriage is ongoing. Many prenups totally omit this important protection that signals love and caring for a spouse.
Also remember, the more generous the prenup is, aside from having intangible benefits supporting the marriage, the more enforceable it will be. And a spouse will have little desire to litigate a generous prenup that provides reasonable security if there is a divorce. Courts tend not to overturn prenups that have reasonable terms providing adequate security for the less moneyed spouse.
8. What to do about shadow parties.
Often a prenup is initiated by the parents of one of the parties. These parents have inherited or self-made wealth, and are very protective of it. They want to be able to transfer wealth to their children by gift or inheritance without it being subject to the claims of a child’s spouse in a divorce. Not surprisingly, this can easily poison the relationship with the parents and their child’s spouse-to-be.
Third parties who are exercising control are termed “shadow parties” by lawyers and mediators. They put their child in a very bad position: you can please your parents and comply with their demands and hurt your spouse to be, or you can please your fiancé, and alienate you parents. Many times, worsening the situation, the future spouse is represented by an attorney chosen by the parents. That “family” attorney follows the marching orders of the parents, otherwise that attorney would lose their client (the parents). This is not rocket science. It happens.
If possible, the more-moneyed future spouse should retain an attorney independent of his or her parents. The mediator should let both parties air concerns about the impossibility of pleasing both the less-moneyed spouse and the other party’s parents. That party is truly between a rock and a hard place.
Work with the clients to build equity and generosity into the prenup. These can be structured in tandem with the parents’ desire to protect their wealth from a child’s divorce. A good term to think about which balances these two aims is to have income and perhaps some principal coming from the parents to their child become marital rather than separate property upon receipt.
9. Start with a term sheet.
Many prenups start with a draft document from one of the attorneys, generally the attorney for the more-moneyed future spouse. The terms of the prenup are imbedded in this draft. This sets up a negative dynamic. The first draft draws a line in the sand. It is an uphill battle to change the terms of it, even with the consent of the more-moneyed party. The memory of those very negative initial terms damages the relationship.
This is why mediation is such a good way to start the process. The parties can discuss various prenup terms and mutually decide on how they would like each issue handled. I write this up as a “term sheet” and send it to my mediation clients to review and provide further input. When the terms are set, then it’s time to write up the agreement.
10. Writing the agreement.
If the mediator is an attorney who is admitted in the state where the couple lives, it is often preferable for the first draft to be written up by the mediator. It should reflect the terms agreed to by the mediation clients clearly and accurately, but also reflect their situations and their aims. I don’t believe in having a prenuptial agreement that is in “legalese” and difficult for clients to understand, even though, to attorneys, the language might seem elegant.
I always start the prenup with a fully developed “Statement of Facts” section, which states information about the parties, their backgrounds, families, and careers. It includes information such as whether either of their parents’ marriages ended in divorce, and whether it is a first or subsequent marriage of the parties. It also includes their aims in entering into the prenup. These aims serve to project the love and caring they feel for each other. After all, they are getting married, and this is not just a financial business contract between two unrelated people.
In having their situations and aims reflected up front and center in the prenup, they will both feel more connected to the terms, which they have mutually created during the mediation process. When written this way, the agreement seems softer, more loving, and not harsh, like the impersonal template often used by attorneys.
When the draft is approved by both of the parties, then it can be sent to their respective attorneys for review and input.
If the mediator is not an attorney, it would probably be best to refer it to an attorney to write it up, based on the term sheet. (Each of the parties needs to be separately represented.) It’s probably best to have the parties agree that the attorney for the less-moneyed spouse should write up the first version. That will help level the playing field.
11. How to handle reviewing attorneys.
Feedback from attorneys can be very useful. They can make the document better, and find places where the drafting needs to be clarified. Reviewing attorneys can also find issues that were not adequately addressed or were omitted. They will provide independent advice to their client, which is very important. The clients, of course, can choose their attorneys at the outset, and consult with him or her during the mediation process.
The best way to get helpful feedback from attorneys is for the couple to choose mediation-friendly, knowledgeable lawyers. The mediator can and should provide the couple with a list of recommended review attorneys. My list includes attorneys who are very experienced in divorce law and prenuptial agreements, and who have a similar philosophy as mine in making prenups as generous as possible in order to support the marriage. My list also “screens” to make sure the reviewing attorneys are also either practicing mediators or collaborative lawyers (or both, as is often the case).
I refer couples to lawyers with a divorce law background, rather than an estate planning or business law background. Divorce lawyers tend to have more sensitivity to the role of money and marriage. Much of the prenup contract deals with the terms of a possible future divorce. Divorce attorneys have the requisite experience in divorce law and can better think about and draft these provisions.
It’s the clients’ choice as to whether they want the mediator to be copied on the drafts as they are generated by the reviewing attorneys. The mediator is sometimes in a good position to pick up on what the parties intended as the attorney drafts come through. Sometimes the reviewing attorneys need to consult with the mediator on an issue and sometimes an issue may find its way back into mediation to be resolved.
Marriages can be damaged by a destructive prenup or by a harsh prenup negotiation process. Mediation can provide an excellent method for couples embarking on this difficult (and at times, treacherous) undertaking. It’s important for mediators with suitable backgrounds and skill sets to enter into this field, and to make the public aware that this type of mediation service is within reach.