Better to have a prenup than regrets

There is a right way and a wrong way to approach prenuptial and other marital agreements. “Bill,” a 45-year-old asset manager for a large international wealth management group, learned the hard way that hiring someone to handle a prenup correctly isn’t so easy.

In college, Bill’s hobby of analyzing, buying and selling stocks grew into a very lucrative career. Married to a beautiful woman for 20 years, with two children, Bill seems like the picture postcard of success. Behind the scenes, however, Bill’s marriage is a train wreck. It has taken the toll on his workaholic personality and contributed to progressive alcohol addiction.

Adding to the drama, the Texas wealth manager suffers a reversal of his financial success, with his net worth cut in half, down to $ 3.5 million. Then his wife files for divorce. Financially, Bill is still a lucky man, having inherited $3.0 million from his hard working grandfather some 10 years back. The inheritance allows him to combine investments with his six-figure salary to create a large income base for many years, and provide a very nice lifestyle for himself and his children.

Having lost the marriage, Bill wants to make sure he can keep his inheritance as his separate property. Under Texas family law, the general rule is that property you inherit as a beneficiary is your sole and separate property. However, in a Texas divorce, your separate property must be proven by “clear and convincing evidence,” a standard much greater than the standard of “preponderance of evidence.”

If your separate property is commingled with your community property to the point that it cannot be “clearly” traced, then it may lose its separate property character. In Texas, these rules become even more difficult to follow because under the Texas Family Code the general rule is that income from separate property is community property. Therefore, it is quite easy to commingle separate property by merely keeping the community property income with the separate property principal. The good news is that Texas law allows individuals to “modify” or “change” the law in certain instances by contract. These contracts are often referred to as prenuptial or post-marital agreements. As you can well imagine, changing “the rules” in these circumstances requires careful analysis of facts and law, and diligent adherence to both case law and statutory law.

It may be too late for Bill in the above case. You can pretty much bet, however, that if Bill remarries he will hire an expert on these agreements to protect his assets. With careful planning, drafting and execution of an agreement prior to or upon receipt of an inheritance, and then strict maintenance to its terms, the donee has a much greater chance of protecting the separate property gift, which was certainly the intent of the donor.