Prenuptial agreements are in the news these days. Within the last year, there have been feature articles in The New York Times, The Wall Street Journal and other weighty publications — not to mention the specialized journals for professions dealing with the property aspects of marriage and civil union. And with the projected transfer of trillions of dollars from the senior generation to their children and grandchildren, the question of who gets or does not get the money before, during or after a marriage, is of considerable concern to the parties involved.

Also, individuals are living much longer than they used to. Decades-long marriages are being dissolved more often. On the flip side,  marriages of couples over 65 are becoming increasingly common.

I have read that the highest increase in divorce rates occurs in the age cohort of 60 to 65. If they remarry (or marry after the death of a spouse), it is common that both spouses have children and even grandchildren that they will want to protect. A prenuptial agreement can assist the couple in keeping things straight and avoiding misunderstandings.

Turning to CPAs

As the legal work in the preparation of prenuptial agreements gets more sophisticated, CPAs are increasingly brought into the picture. An enforceable prenuptial agreement is what the parties are usually looking for — at least that is what the wealthier party (or the wealthier party's parents) is looking for — and full disclosure or a knowing waiver of full disclosure is required to make the agreement enforceable. The CPA has a critical role to play in making sure the disclosures are complete.

For example, see article on making the agreement enforceable: Stephanie B. Casteel, “Guidelines for Planning and Drafting Effective Premarital Agreements”, Estate Planning Journal, August 2006. Less is written on how the CPA can help in the post-honeymoon period, however. Assuming that the prenuptial agreement negotiation does not lead to a cancellation of the marriage, there is much to be done, on an ongoing basis, to be sure that the parties' interests are properly looked after. Here are a few concerns and pointers, which are by no means intended to be exhaustive. I am writing from the perspective of a California attorney. Other states have rules and cases and statutes dealing with these same issues, but each state puts its own special spin on these things.

Who Is Your Client?

It would be usual for the newly-married couple to use a single CPA to prepare their tax returns and generally provide CPA services. The CPA must be clear — and must make clear to the couple — who they are representing. Since there will probably be an established relationship with one of the parties, the CPA must make a special effort to recognize the legitimate property interests of the new spouse — or declare that they are not looking after the new spouse's interest. Since making such a declaration may lose the client, an even-handed approach that looks after both parties is almost always the better choice.

Reviewing the Agreement

When a prenuptial agreement has been entered into, I strongly encourage you to read it and study it. You may be surprised by its terms because it may have implications for the compliance and other planning and accounting work you will be doing for the clients.

Unintended Transmutation of Property

The inadvertent transmutation of separate property to community property is the source of most property settlement disputes at divorce — and sometimes at death, too, when the children of the deceased spouse dispute the property characterizations with the surviving spouse. Here are a few ways to keep those disputes to a minimum:

• Each spouse should keep their separate property — owned before marriage or acquired by gift after marriage — in accounts in their own name. And they should use their own Social Security number on those accounts. Make sure that no salary checks are automatically deposited into a separate property account, unless the prenuptial agreement makes those earnings separate property.
• If one spouse owned the couple's residence before marriage, and that spouse wants to keep the house as their separate property, be sure that the mortgage payment comes out of that spouse's separate account. In California, we refer to this issue as the Moore-Marsden problem.
• On a refinance of the house mortgage, both spouses will be required to sign the loan documents, and in California, the loan documents themselves may act to transmute a portion of the property from separate to community. This can be prevented by a quitclaim deed from one spouse to the other, but it is often overlooked.
• If a spouse is involved in a closely-held business, the community may acquire an interest in the business itself, if the spouse is not otherwise adequately compensated, always subject to the terms of the prenuptial agreement. This issue goes by the name of the Pereira-Van Camp doctrine.

Conclusion

A prenuptial agreement is a contract that will last the term of the marriage — and often beyond. It can affect a substantial part of the separate and community assets of the clients. People often say that they signed the agreement, then put it in a drawer and never looked at it again. Would you allow your business clients to act that way on a contract that could have a significant and adverse effect on the value of their business?

Fred Caspersen is a partner at Farella Braun + Martel LLP. He heads the firm’s St. Helena office and the Tax & Family Wealth Group. Fred’s practice focuses on the development and implementation of succession strategies for families and closely held businesses.