It has long been assumed that prenuptial agreements only apply to the super-wealthy; i.e. celebrities with brands and fortunes to protect, families who want generational wealth to stay within their bloodlines, or entrepreneurs seeking to keep their companies intact. Historically, family law attorneys estimate that only 5-10% of their clients have a prenuptial agreement. However, there are several reasons that could point to an uptick in the drafting of such agreements:
- People are getting married later in life once they have established careers;
- There are more second marriages, which quickly follow the first, where individuals are still feeling the effects of a prior divorce; and
- Many of those getting married for the second time have existing children for whom they want to provide, or the children themselves may be old enough to influence their parent in considering a prenuptial agreement.
While not guaranteed, prenuptial agreements can have the effect of reducing or even eliminating the existence of litigation in the event there is a divorce. These agreements typically address how the following financial aspects of a couple’s life will be handled in the event of a divorce:
- Specific assets that will remain with the individual party and not be subject to division;
- Marital assets that would ultimately be divided by the parties; and
- Alimony that might be paid by one party to another.
The final aspect, the amount and duration of alimony, is never an exact science. There are no formulas or laws that can be followed. Over time and experience, many “rules of thumb” have arisen that can vary depending on a variety of factors including location, age, and level of assets. In addition, the Tax Cuts and Jobs Act of 2017 changed the overall effect of alimony by removing the tax deduction for all payors and no longer classifying it as income to recipients. This has already changed the calculations being done during the divorce process as the payor arguably has less income available from which to pay alimony and the recipient will retain the full amount to apply towards expenses.
For prenuptial agreements currently in effect, the change to the tax law concerning alimony will have an impact if the parties decide to get a divorce in the future. At the time the prenuptial agreement was drafted, the calculations of the amount and duration of alimony were most likely based on the payor’s income at the present time, the anticipated growth of that income into the future, and the then existing tax deduction for paying alimony. The elimination of the alimony deduction means that the payor will ultimately be paying more than originally anticipated. However, this change alone should not automatically trigger a rush to change an existing prenuptial agreement because of several factors.
The first hesitation is the mere idea of suggesting an update to a prenuptial agreement (termed a postnuptial agreement) where divorce or a breakup of the marriage is not otherwise a consideration. The spouse suggesting such an amendment could face questions about the true motive or even need for such a change. However, while it is not common, there are several reasons why a couple could decide to enter into a postnuptial agreement that would rescind a prior agreement:
- An extreme change in circumstances that warrants the original agreement inoperable;
- A lengthy marriage that causes one party to feel that the agreement is no longer fair or an accurate representation; or
- A lack of financial security by one spouse who seeks greater reassurance through the agreement.
A significant change to the tax law effecting the agreement could simply be one more factor in considering a change rather than an unexpected catalyst.
Another reason individuals may be reluctant to change the existing agreement is the estimation and uncertainty that existed in formulating the original alimony amounts and still exists today. The parties were already trying to predict their income and needs well into the future. While the tax law has changed both sides of the equation, it may not affect either side to any great extent.
For example, an existing prenuptial agreement stipulates that if the parties are married for 10 years, the husband will pay to the wife alimony in the amount of $3,000 per month for a period of five years. At the time of the marriage, the husband’s income was $100,000 annually, and he anticipated it could grow to $200,000 in 10 years. At the time of the divorce, the parties have been married for 10 years and the husband’s income is $300,000 annually. Under the tax law as it existed at the time of the prenuptial agreement, and with the husband’s expected annual salary, he anticipated having a net monthly income of $9,000 after the payment of taxes and alimony.
Under the current tax law, and with the husband’s actual annual salary, he would have a net monthly income of $13,167 after the payment of taxes and alimony.
In this scenario the tax law alone would not necessitate a change in the existing agreement.
One important note is that individuals who were divorced prior to Dec. 31, 2018, are still operating under the prior tax law. This means that alimony being paid is eligible for a deduction and should be included in the income of the recipient. The alimony payments must have been required under a written divorce or separation agreement. Thus far there have been no challenges in this area; however, it would appear that a prenuptial agreement providing for the payment of alimony in the event of a future divorce would not satisfy the written agreement provision.
In considering the effects to individuals with existing prenuptial agreements, the best advice is to consult your tax advisor regarding how the alimony provision will affect both parties under the current tax law. Armed with this information, a decision can be made about whether a new agreement is necessary.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Robert “Bob” Boyd is a co-founder of Boyd Collar Nolen Tuggle & Roddenbery and a leader in family law who has received recognition from his colleagues across Georgia and the nation. He can be reached at email@example.com.
Beth Garrett is a partner in the Divorce Litigation Support Practice at Frazier & Deeter, primarily assisting high-net-worth individuals and corporate executives with divorce, tax, and accounting issues. She can be reached at firstname.lastname@example.org.