Guide to California Premarital Agreements
Guide to California Premarital Agreements Table of Contents 2 3 Introduction 4 Ch. 1 -How to Approach the Prenup Conversation Gracefully 7 Ch. 2 - Good Prenups Take Time. Period. 9 Ch. 3 - Three Common Clauses in California Premarital Agreements 12 Ch. 4 - Prenup Enforcement Essentials 15 Ch. 5 - Is a Simple Prenuptial Agreement Enough in California? 17 Ch. 6 - Business Interests and Stock Options 22 Ch. 7 - What Could Happen to Your Twitter Account and Why It Matters 24 Ch. 8 - California Postnuptial Agreements 27 Ch. 9 - Cohabitation Agreements for Unmarried Couples 29 Ch. 10 - How to Choose a California Prenuptial Agreement Attorney 31 About Heath-Newton Guide to California Premarital Agreements Introduction When discussing a premarital agreement, you can turn to this guide that we have prepared as an overview of the most important issues that couples should consider. We have not covered everything of course, but the essentials are all here. The most important consideration to keep in mind is how this agreement will affect your marriage. We believe a premarital agreement should be used to strengthen a marriage. Approaching marriage this way is not easy—it takes more time, and it takes more work than the traditional approach. That said, the results are far better. We suggest that you review this guide believing it will strengthen your marriage. Share the process with your fiancé. Be transparent. Treat your partner as a partner, and take on this task as the first of many challenging but fulfilling projects you’ll accomplish together. You won’t regret it. Congratulations on your engagement! We hope you enjoy the guide. 3 Guide to California Premarital Agreements 1 How to Approach the Prenup Conversation Gracefully When approached gracefully, a premarital agreement strengthens a relationship. The challenge, of course, is that most people have no earthly idea as to how to approach a prenup conversation at all, much less how to do so gracefully. Too often, one party drops the idea of a prenup in the other party’s lap unexpectedly and at the last minute or—God forbid—has a lawyer call instead. Another undesirable scenario finds the recipient bursting into tears at the mere mention of the idea, with no idea as to what the prenup actually says. None of these scenarios build trust. So how exactly does one approach a prenup gracefully? Good question. We have four tips for you. 1. Start with the premise that everyone has a prenup already. Whether you want one or not, you already have a prenup. The default rules of your state or country dictate what happens to your assets before, during, and after any marriage. That is nothing more and nothing less than a prenup. So the question here isn’t whether you want a prenup, it’s whether you want the default prenup provided by the state. 4 To put it another way, does the default state prenup support your personal views of marriage? If not, you might want an agreement that better captures what you and your future spouse believe about marriage. Guide to California Premarital Agreements 2. Use the conversation to strengthen your marriage. Approach the prenup conversation from the perspective that you to want to make your coming marriage stronger by discussing difficult subjects in advance. Trust us—sooner or later, disagreements about money will come up and they won’t go away. The more you discuss finances in advance, the less strain you experience later. It’s that simple. Talk about the difficult issues now. Approach the prenup conversation from the perspective that you to want to make your coming marriage stronger by discussing difficult subjects in advance. 3. Put yourself in your fiancé’s shoes before you bring up the idea of a prenup. This isn’t easy, but it’s vital to do this before you begin. You’ve got to imagine the needs and concerns your future partner has with regards to money. For better or worse, once you become married, you become financially responsible for your spouse. You really need to understand what that means, and For better or worse, what challenges your spouse is facing before you can envision a once you become good prenup that works for both married, you become you. An experienced family lawyer financially responsible for can help you understand the financial considerations the other your spouse. party is facing and how to address those without sacrificing your own interests. 4. Consider alternative approaches to drafting the agreement, such as mediation and collaborative drafting. More and more couples are mediating prenups these days: The couple first hires a neutral lawyer to help them devise the agreement, then they each hire separate lawyers to review the agreement. The cost is a bit higher, but the result is often a much stronger agreement. 5 Guide to California Premarital Agreements If the mediated approach seems too expensive, then the collaborative approach might work for you: In this process, all lawyers and both parties meet at the same time to negotiate the terms together. With the collaborative approach, you need only two lawyers instead of three. 5. Be transparent. Involve your fiancé in each step of the process to come up with the terms of the agreement. Your fiancé is your partner and should be treated as such. (To be clear, we’re not suggesting you bring your fiancé to office meetings with your attorney; those meetings should remain private.) If you follow these five steps, your process should not only be palatable, it should also be useful for your marriage. 6 Guide to California Premarital Agreements 2 Good Prenups Take Time. Period. Generally the first question people ask about premarital agreements is “When should we start planning?” I’m sure you can guess the answer: Start planning as early as possible. Start planning as early as possible. There are two main reasons to start negotiating early. First, if the prenup ever has to be enforced, courts want to see that all the parties involved had plenty of time to consider what they were agreeing to and that they agreed to it voluntarily. That means no signing on your wedding day. When California courts invalidate prenups, they often do so because one party either didn’t know what they were getting into (for instance, they didn’t have a lawyer), or they signed the agreement under unfair pressure (for example, they didn’t have enough time to fully consider the agreement). Give your fiancé enough time to fully discuss the agreement with his lawyer, and you avoid both of these problems. Second, allowing for plenty of time is the more graceful approach to a difficult topic. A prenup can make your marriage stronger if you approach it gently, which means not dumping the idea on your fiancé two weeks before the wedding. There is no better way to terrify your fiancé than demanding he sign an agreement after the invitations have already gone out. Imagine: Grandma has already booked her ticket, the cake is mostly baked, and the dress is just back from the tailor. You come home one night and drop a prenup in his lap. What do you imagine is going to happen? It’s not pretty. You don’t want to put that kind of pressure on your future partner. Trust us—give your fiancé plenty of time. Bring the topic 7 Guide to California Premarital Agreements up slowly. Discuss it in terms of what’s fair and explain how it supports your relationship. You’re entering a lifelong partnership here. Treat it respectfully. A good lawyer understands both the legal and the emotional context of the prenup process and can guide you through these issues. Some lawyers can even draft a document in just a couple of days, but that’s not your ideal situation. The longer you wait to get started, the weaker your agreement will likely be. Take the time and do it right. 8 Guide to California Premarital Agreements Some lawyers can even draft a document in just a couple of days, but that’s not your ideal situation. The longer you wait to get started, the weaker your agreement will likely be. 3 Three Common Clauses in California Premarital Agreements As you may know, California is a community property state. This means that assets acquired by either party prior to marriage are generally considered separate property so long as they aren’t commingled with community property. However, assets acquired by personal effort during marriage are considered community property –this includes income and most retirement savings. If there is ever a divorce, separate property remains separate, and community property is divided evenly between the parties. The upshot is that typically, one spouse is advancing their career and saving money while the other is not. This works just fine so long as the family unit remains intact Spousal support (often called “alimony” in other states) is paid in California by the higherearning spouse to the lower-earning spouse after separation. The amount and duration of support varies widely and depends on a long list of factors. Also, survivor spouses are entitled to certain default inheritance rights in a deceased spouse’s separate property. There are, of course, many more laws in the California family code. However, these three are the most commonly addressed issues in California premarital agreements. 9 Guide to California Premarital Agreements Community Property Most couples come to us because they want When that personal some clarity regarding the community property issue. It turns out that the default effort is contributed to rule regarding community and separate a business, the business property works quite well for most people. becomes community Problems arise, though, when it comes to the exceptions. In California, it is rather easy property in part. to “commingle” community and separate property, thereby “transmuting” the separate property into community property. Most people want to eliminate the possibility of commingling property in order to protect their existing separate property. This can be done with a valid premarital agreement. Some couples also want their prenup to address the issue of income earned during marriage. By default, income earned during marriage is considered community property. With a prenup, couples can alter that rule in any way that serves them. The community property discussion becomes far more complicated if business interests are involved. Once married, the personal effort of either party is considered community property. When that personal effort is contributed to a business, the business becomes community property in part. These issues are discussed at length later in this guide – for now, know that a valid prenup can bring clarity to this issue. 10 Guide to California Premarital Agreements Spousal Support Spousal support is also an area of discussion The fact that the for most couples. The fact that the determination of support is so complicated determination of support and uncertain causes stress for some people. is so complicated and A premarital agreement can be used to bring uncertain causes stress certainty to the issue. A premarital agreement can limit the duration of support for instance, for some people. or set a minimum or maximum payment amount. A premarital agreement might also set up lump-sum payments in lieu of support or waive support entirely. The options are endless and depend largely on what makes the most sense to the couple. An experienced family lawyer can help guide the conversation to the most important and relevant issues and can then draft the appropriate language. Inheritance Rights The final big-ticket item is that of inheritance rights. In California, surviving spouses are typically entitled to inherit some portion of a deceased spouse’s separate property. The calculation of the inheritable portion is beyond the scope of this article, but suffice it to say, it can be somewhat complicated. Many couples choose to waive these inheritance rights in order to make estate planning easier. We suggest that couples not waive these rights unless there is a very good reason to do so—such as children from a former marriage—as the results can be draconian. There are an extraordinary number of other clauses that can be included in a premarital agreement. A good family lawyer will help you to understand all of these options and narrow your agreement to the clauses that serve you best. 11 Guide to California Premarital Agreements 4 Prenup Enforcement Essentials If you are going to spend the time and money to draft a premarital agreement, you want an effective one. In other words, you need an agreement that has a good chance of being enforced by a court if it ever comes to that. Courts make rulings on many factors that nobody can predict; for that reason, no premarital agreement is foolproof. That said, to increase your odds of enforceability, you should at least cover the basics. To that end, we present the following four fundamentals of premarital agreement drafting in California: 1. Make a Full Disclosure of Your Assets and Debts It is imperative that you disclose all of your debts and assets to your fiancé. This is typically managed by including an addendum to your premarital agreement, and by providing supporting documentation to your fiancé via your attorneys. The more robust the paper trail showing a full disclosure, the better. Your agreement is more likely to be overturned in the future if you fail to disclose your assets and debts. Failing to disclose debts and assets weakens your prenuptial agreement. In other words, your agreement is more likely to be overturned in the future if you fail to disclose your assets and debts. The reasoning is that parties cannot make rational agreements if they do not understand what they’re agreeing upon. 12 Guide to California Premarital Agreements If you do not know whether something should be disclosed, err on the side of caution and disclose it. Your attorney can also help you sort this out. We cannot emphasize enough how important full disclosure is when drafting a prenup. 2. Understand Your Legal Rights and the Consequences of Waiving Them Your family law attorney should explain California community property law to you. It is very important that you have a baseline understanding of the default family laws in California to understand how your prenup affects your rights. Take the contents of your prenuptial agreement seriously—your financial future may depend upon them. If you are having trouble deciding which issues matter and which do not, ask your family law attorney—that’s why you hired us. We’ve seen these issues before, and we can help you prioritize. 3. Engage Separate Family Law Attorneys California law requires that you each have the opportunity to consult with separate counsel and that you each understand the agreement you’re signing. If there is ever a dispute, the only way to prove that each of you has met these standards is for you to each have separate attorneys when negotiating the agreement. If you want an enforceable agreement in California, you need separate counsel. The bottom line is that if you want an enforceable agreement in California, you need separate counsel. Don’t skimp on this one. 13 Guide to California Premarital Agreements 4. Don’t Rush – Follow the Seven-Day Rule As we noted previously in this guide, the earlier you begin the prenup process the better. The only legal requirement regarding timing in California states that seven days must pass between the time you are presented with a premarital agreement and the time you sign it. This is rather cleverly called the “Seven-Day Rule.” You may have noticed that the seven-day rule is anything but crystal clear. Some lawyers believe the rule means that seven days must pass between the time you deliver the final draft of your agreement and the time you sign that draft. Other lawyers believe the provision means you must wait seven days between the first time you discuss the prenup with your fiancé and the time you sign the final draft. To further confuse the issue, a recent supreme court case in California suggests that the seven-day rule does not apply to parties who are represented at the time the prenup is first presented. Most family lawyers do not place much stock in this case and believe it will eventually be overturned. Because the issue is murky, our advice is to take the most conservative approach: Wait seven days between delivering the final draft of your agreement to your fiancé and signing the agreement. Don’t rush this process. There are, of course, other factors that affect enforcement of premarital agreements, but those are beyond the scope of this guide. Your family law attorney can discuss these in more depth with you as well as answer any questions you might have about the enforcement of prenups. 14 Guide to California Premarital Agreements 5 Is a Simple Prenuptial Agreement Enough in California? We are asked this question all the time, and unfortunately, we have to tell you that it depends. Whether a simple prenuptial agreement will meet your needs depends upon your objectives, your assets, your family situation, and of course, California family law. Regardless of how simple or complex you want your agreement to be, we strongly encourage you to consult with a qualified California family law attorney about your circumstances because no two situations are exactly alike. What is a Simple Prenuptial Agreement? A simple prenuptial agreement typically addresses only one of the various issues that a more standard agreement would handle. For instance, a simple prenuptial agreement might waive spousal support and discuss nothing else. Or a simple agreement might address the issue of real estate owned prior to marriage and stop there. It may surprise you to learn that even a “simple” California prenup often runs 15 to 20 pages. Regardless, simplicity usually stems from limiting the number of options you address. 15 Guide to California Premarital Agreements A simple prenuptial agreement typically addresses only one of the various issues that a more standard agreement would handle. Regardless of length, the key to a successful prenuptial agreement is that it is customized to meet your personal objectives. Don’t exchange your priorities for simplicity. The Simple Prenuptial Agreement Balancing Act Don’t exchange your priorities for simplicity. In every case, your prenuptial agreement needs to be simple enough that you and your soon-to-be spouse understand the terms of your agreement. On the other hand, your agreement must be comprehensive enough to accomplish all of your objectives. This is our constant balancing act. Be sure to discuss which issues should be included in any premarital agreement with your family law attorney. 16 Guide to California Premarital Agreements 6 Business Interests and Stock Options When most people hear the words “community property,” they think about their employment income or their future spouse’s income. Community property, however, encompasses far more than income alone. California community property is defined as all property (real estate or personal property), wherever it’s owned, acquired by a married person while he/she is living in California. This also includes all debts that are incurred during marriage. Community property, however, encompasses far more than income alone. While this may seem like a simple concept, in reality, determining the exact nature and extent of community property can be extremely complex as it relates to particular assets, such as business interests or stock options. We focus here on how business interests and stock options are treated when it comes to community property, as well as ways to address these types of assets when drafting your premarital agreement. Business Interests Example: Let’s say that John owned a café for five years before he married Jane. After John and Jane marry, John continues to run the café, which is his primary job. After 10 years of marriage, John and Jane decide to part ways and are now divorcing. Is John’s café community property, separate property, or both? Furthermore, if the café is community property, or if it is comprised of both separate and community property, how does the café get divided in the divorce? 17 Guide to California Premarital Agreements Because John personally worked in the café and applied his own skills and efforts to running it during the marriage, the answer is that the café is both community property and separate property. In California, the fruits of a spouse’s time, talent, and labor during marriage are community, while any intrinsic increase in separate property is separate property. Had John’s business been completely passive income, and had he not put any of his own time or energy into the business, it likely would have remained entirely his separate property. The next tricky issue is determining exactly how much of John’s café is community and how much is separate property. In California, the courts typically apply one of two formulas in the above example to determine community vs. separate property interests—either the Pereira approach or the Van Camp approach, depending on the facts of each individual case. Usually deciding which of these two mathematic formulas to use is a legal question addressed by the divorce attorneys involved. Lastly, once all the calculations regarding which party owns which portion of the business are complete, each party needs to be paid out, so to speak, with his/ her respective share. This could be as simple as one party buying out the other’s interest, but it could also be as complex as having to sell the business if neither party is financially able to buy out the other. If this default process of dividing business interests after marriage sounds like something you’d like to avoid completely, the good news is you can, with a carefully drafted premarital agreement. Addressing Business Interests in a Premarital Agreement As with most provisions of a premarital agreement, the exact terms of an agreement about business interests during marriage can be as creative as the parties would like. It is very common to include clauses about how a business will be owned during marriage (separate property, community property, or both), as well as how that business would be divided should a divorce ever occur. Couples may also choose to address businesses owned before marriage as well as any future businesses that have yet to be formed. Addressing this issue in a premarital agreement allows a couple to be clear about their expectations during marriage and can offer peace of mind to both parties. 18 Guide to California Premarital Agreements Are Unvested Stock Options Marital Property? Stock options granted and vested during marriage are community property and, upon divorce, each spouse is entitled to 50 percent of all community property. Stock options granted during marriage and vested after the marital date of separation are often not entirely community property or separate property. Generally, the farther into the future the vesting date, the smaller the community interest in the stock options. Inversely, the sooner the vesting, the greater the community interest in the stock options. For more complex assets such as stock options and unvested RSUs, determining character and value isn’t quite so easy. The characterization of stock options and unvested RSUs during divorce is based upon several factors such as the granting date, the vesting date, the exercising date, and the purpose of the granting in the first place. Essentially, the various formulas used to determine character approximate how much of the stock was “earned” during the marriage. That portion is then considered community property and gets split evenly. But that’s just the first step. More complicated is the valuation of those future stock interests. Thankfully, valuation isn’t always necessary, so before examining the valuation process of stock options in divorce, let’s explore when it’s actually necessary. When Is it Necessary to Value Stock Options and Unvested RSUs? The distribution of stock options upon divorce generally occurs in one of two ways. The first is a buy-out. In that scenario, the employee spouse who was granted the future stock interests would “buy out” the nonemployee spouse’s interest in the options or unvested RSUs for cash. In order for this to happen, a value for the future stock interests needs to be determined so that the price of the buy-out can be appropriately calculated. 19 Guide to California Premarital Agreements The other common approach is to distribute each party’s interest in kind. For instance, if characterization determined that 10,000 shares of XYZ stock options are community property, then each spouse would take 5,000 options and call it a day. From that date forward, each spouse could dispose of those options however he or she saw fit. In this scenario no valuation is necessary because division is even. Now let’s assume a buy-out is necessary and turn to the actual valuation methods. Valuation Methods As with all complex assets, valuation of stock options and unvested RSUs is more art than science. That said, there are three fairly well-known methods that experts typically use to determine present value of stock options: the Intrinsic Value method, the Black-Scholes method, and the Binomial method. The Intrinsic Value method is the easiest method to apply. It values the stock interest based on the difference between the stock’s fair market value and its grant price. For that to work, however, you need a market price— and that might not be available. The valuation and characterization of stock options and unvested RSUs is a complex area of the law. The Black-Scholes method—well known and dreaded by MBA students the world over— attempts to determine value with a complex formula looking at the stock’s current price, dividend rate, price volatility, and time value. The Black-Scholes method has recently come under fire for not being as reliable as once believed. The Binomial method uses a formula similar to Black-Scholes, but unlike BlackScholes, the Binomial method takes into consideration the potential for early exercise of the stock options. Each of the three methods has advantages and disadvantages, and none of them are precise because current valuation is at best a guess of future value. 20 Guide to California Premarital Agreements As a practical matter, because of the cost of hiring an expert to conduct a valuation, it is unlikely that more than one formula will ever be applied. In fact, in many cases, none of the three formulas are used. Instead, the parties negotiate and agree to a value for the buy-out price based on their own beliefs as to value. In these cases, negotiation is the true art at play. The valuation and characterization of stock options and unvested RSUs is a complex area of the law. Couples considering dividing stock options using a premarital agreement should consult with an experienced family law attorney. Just like with business interests, it is common to include special provisions in a premarital agreement about stock, stock options, or RSUs. Being clear with your future spouse about how these assets will be owned during marriage and how they would be divided in the event of a dissolution offers peace of mind and can bring a helpful level of certainty and predictability to the table for both parties. 21 Guide to California Premarital Agreements 7 What Could Happen to Your Twitter Account and Why It Matters Social media accounts like Twitter and Facebook are beginning to take their place in the pantheon of highly contested properties for divorcing couples in California. As we all know, couples dissolving their marriages already divide a wide range of assets— everything from cars and homes to stock options, businesses, and artwork. The unavoidable fact is that social media accounts are property, and as the value of such property increases, so too will the litigation surrounding them. Social media accounts are property, and as the value of such property increases, so too will the litigation surrounding them. We mention this in a guide about California prenups to illustrate how many diverse kinds of assets are implicated in marriage planning. Intellectual property assets are extremely valuable, and our modern reality is that couples should discuss how these assets will be treated during and possibly after marriage. As a review of how these assets would be treated absent a prenup in California, any asset acquired during marriage is considered community property and must be divided evenly between divorcing spouses. Any property acquired before marriage, after the date of separation, or through gift or bequest (meaning inheritance) is considered separate property and immune from division. There are, of course, exceptions to these rules, but that’s a good overview. 22 Guide to California Premarital Agreements By this definition, social media accounts created during marriage will almost certainly be characterized as community property. Accounts created prior to marriage may also be defined as community property in part, depending on whether the value increased during the marriage and whether the personal effort of either spouse contributed to that increase (which, of course, it would have). Asset division and valuation provide real challenges for couples and should not be taken lightly. The terms of service of the various social media companies also play a role in defining whether an account is considered property and subject to division. Twitter, for example, defines the content that users create as the property of the user. Twitter sees the content as separate from the account services themselves that Twitter provides. Arguably, the right to access the account and manipulate the content is a kind of property as well. The content within the accounts and the right to access the accounts both have economic value, and couples understandably want to account for all value in a divorce. The big hurdle, of course, is determining that value. Valuation has always been more of an art than a science. This is even more the case when it comes to untested intellectual property assets like social media accounts. Some parties look to the actual business flowing from the accounts as a benchmark for determining value. Others are more inclined to take a multiple of earnings—the challenge being that earnings are just beginning to manifest for these assets. This area of property division is new, but it’s heating up. Asset division and valuation provide real challenges for couples and should not be taken lightly. A valid premarital agreement can address and settle these issues in advance of marriage, relieving stress on the couple during marriage. 23 Guide to California Premarital Agreements 8 California Postnuptial Agreements We now want to address your rights post-marriage. Issues sometimes pop up after marriage that should not alarm you, but that you do need to address. For instance, you may wonder if, in fact, you want to have community property. Or you may wonder what to expect regarding spousal support or property division in the (unlikely) event your marriage doesn’t work. You may have received an inheritance or significant gift that you wish to shelter from the community interest. Or perhaps you signed a prenuptial agreement, and now you want to reinforce its validity after marriage. In California, postnuptial agreements can resolve these and many more issues. Postnuptial agreements are valid in California, but there are five things you absolutely must know if you want your agreement to be effective. 1. You Now Have a Fiduciary Duty Once you are married, you have a fiduciary duty to your spouse which carries with it a burden that is much higher than before you were married. This means that you must always act in your spouse’s highest and best interests, and your postnup must reflect that, or it is likely to be overturned later. Along these lines, it is imperative that you disclose all assets and debts as a sign of good faith and fairness. 24 Guide to California Premarital Agreements You must always act in your spouse’s highest and best interests, and your postnup must reflect that. 2. Your Postnup Must Be in Writing As you probably know, most legal agreements need to be in writing and properly executed to be enforceable. This is true even between spouses. There is nothing more expensive than an argument about verbal promises. Get it on paper so that you both remember the details of your agreement. 3. You Need Separate Lawyers Having separate lawyers is not a legal requirement for California post-marital agreements, but it is a requirement for premarital agreements. This is relevant because postnups can be extremely difficult to enforce, so most California family lawyers apply the more stringent standards of prenup drafting to the postnup drafting process. This is what we advise you do. Having both sides represented also ensures that both spouses understand what they are giving up by signing the postnuptial agreement. To increase the likelihood of enforcement, you both need lawyers. Having both sides represented also ensures that both spouses understand what they are giving up by signing the postnuptial agreement. 4. Take Your Time A postnuptial agreement need not take months to negotiate and execute, but it should not be rushed. A 24-hour turnaround (or the like) is not prudent and may lead to bad decisions or an incomplete agreement that may later be overturned. Under California law, prenuptial agreements require a seven-day waiting period. There is no such waiting period for postnuptial agreements, but it’s a good idea to follow this rule anyway, so as to increase the effectiveness of your agreement. A waiting period gives both spouses time to cool off and to fully consider what they’re signing. 25 Guide to California Premarital Agreements 5. Understand What You’re Signing It’s imperative to your future and the success of both your marriage and your postnuptial agreement that both you and your spouse understand what you’re signing. Among other powers, a postnuptial agreement can in some circumstances eliminate all of your community property rights acquired during the marriage. Because of this, you must enter this agreement with open eyes. If you do not understand your agreement, hire an attorney who can explain it to you. Postmarital agreements are enforceable in California, but they face greater scrutiny. Be sure to cover all your bases if you ever draft one to increase your odds of enforceability. 26 Guide to California Premarital Agreements 9 Cohabitation Agreements for Unmarried Couples As the concept of family evolves, so does our perception of marriage. Some couples are not permitted by law to marry. Some mistakenly believe that California is a common law state. Others decide to live together and never get around to marrying. Others simply have no desire to marry. People oftentimes come into a relationship with assets and debts. During the time that you live together, however, things happen—debts are paid, properties are purchased or previously owned properties are improved, a decision is made for one partner to stay at home, etc. But what happens if and when your relationship ends? What are each party’s rights and responsibilities under the law? The truth can be unexpected and sometimes brutal. Absent an agreement, generally known as a Cohabitation Agreement, you have no rights to your former partner’s property and assets, they have no obligation to you, and vice versa. A Cohabitation Agreement is an enforceable contract that seeks to address things which might happen during the time the couple live together and what happens if they break up. Enter the “Cohabitation Agreement.” A Cohabitation Agreement is an enforceable contract that seeks to address things which might happen during the time the couple live together and what happens if they break up. A Cohabitation Agreement governs the parties’ 27 Guide to California Premarital Agreements present and future personal financial arrangements and property transactions and can create or waive support provisions (commonly known as “palimony” and sometimes referred to as “Marvin claims”). What are the requirements for a Cohabitation Agreement? Cohabitation Agreements are not governed by California’s family code, but instead by contract law. As such, contract principles are applied. This requires, generally, that the Agreement clearly identifies the parties and the nature of their rights and obligations to one another. The Agreement must also be signed by both parties, and it is good practice to notarize the signatures. While there is no requirement that the parties be represented by counsel, given the nature of a Cohabitation Agreement it is highly advisable that each party be represented by his or her own attorney. This will allow for the couple to fully understand the nature of their Agreement and the rights and obligations negotiated therein, ensuring that it conforms to the laws of the state. Independent counsel will also help ensure that your Agreement is enforceable in the future by reducing the possibility of later claims of unfairness or duress. Given the nature of a Cohabitation Agreement it is highly advisable that each party be represented by his or her own attorney. An additional consideration to keep in mind is the timeframe in which a claim must be brought for a breach of the Cohabitation Agreement. As Cohabitation Agreements are considered contracts, a claim must be brought within a specific period after you and your partner cease living together. Consulting with an attorney soon after the end of your live-in relationship is important to preserve any and all rights you may have. If you do not act promptly, you may be barred from asserting your rights later. 28 Guide to California Premarital Agreements 10 How to Choose a California Prenuptial Agreement Attorney Choosing the right lawyer is important: You’re going to be working very closely with this person, and she’s drafting an agreement for you that will have a big impact on your future. When you interview potential lawyers, we suggest you look for the following qualities: Focuses on Family Law Be sure your attorney focuses his or her legal practice on family law and has extensive experience negotiating and drafting prenuptial agreements. New attorneys and attorneys in unrelated legal fields sometimes tackle premarital agreements without knowing what they’re getting themselves into. The law is tricky, and the emotions are complex—an unpracticed attorney can do much more harm than good. You’re better off finding someone who handles these issues every day. Understands Your Personal Objectives Be sure your prenuptial agreement attorney really listens to and understands your personal objectives. Premarital agreements are not one-size-fits-all—they can be as creative as you want. Overly aggressive attorneys sometimes create overly aggressive agreements, and that can result in an angry fiancé. Be sure your attorney includes only what you want to include in your agreement, and knows how to guide you to think of clauses you might not have otherwise considered. A good family lawyer listens to what you want and asks you questions to direct your thinking; he or she doesn’t try to make you fit in a box. 29 Guide to California Premarital Agreements Works Collaboratively The best prenup lawyers will work collaboratively with your fiancé’s attorney. Designing a premarital agreement works best when the parties work together, not as adversaries. This applies to the attorneys as well. A good family lawyer listens to what you want and asks you questions to direct your thinking. Think of this process as a way for you and your fiancé to discuss difficult issues that will eventually arise. Your attorney should be able to help you consider these issues from every angle, and remind you of issues you had not considered. Understands Both the Legal and the Emotional Context It goes without saying that your attorney must know the law. A good prenup attorney also understands how difficult these conversations can be for a new couple and approaches topics delicately. Find an attorney that works well with your personality. The attorneys in our office are passionate about premarital agreements. We love working on them, and we enjoy talking about them. If you have any questions that are not covered in this guide, please feel free to give us a call. We’ll set up a consult and get you on the right path. 30 Guide to California Premarital Agreements A good prenup attorney also understands how difficult these conversations can be for a new couple and approaches topics delicately. About Heath-Newton, LLP Heath-Newton, LLP is a boutique San Francisco family law firm focused exclusively on family law and asset protection. Our firm’s leaders are some of the most respected names in our fields of specialty. And every California family lawyer in our firm shares our leadership’s commitment to handling cases properly, with respect for both the process and all parties involved. To learn more about our firm, visit us at www.heathnewton.com. Do you need someone to guide you through your divorce? We’re here to help. Call: 415.398.1290 31 Guide to California Premarital Agreements Child Custody in California: A Guide for Parents Copyright © 2013 Published by Heath-Newton, LLP 240 Stockton Street, Suite 300 San Francisco, CA 94108 All rights reserved. Except as permitted under U.S. Copyright Act of 1976, no part of this publication may be reproduced, distributed, or transmitted in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. Design by Hinge - www.hingemarketing.com 32 Guide to California Premarital Agreements
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