Every crisis contains a lesson, and advisers could learn a thing or two from Chris Rock's impending divorce from his wife of 18 years: Review your clients' prenuptial agreements.
Gossip sites have been buzzing with the news of the comedian's pending divorce from his wife, Malaak Compton-Rock. TMZ reportedly has the divorce documents (filed in New Jersey), in which Mr. Rock allegedly seeks shared custody of the couple's two daughters.
What's notable is that while acknowledging that the couple had a prenup when they married in 1996, he says the agreement has expired because of how long the two have been together, according to the documents obtained by TMZ.
Enter the use of sunset provisions or expirations in prenuptial agreements — a planning tool that isn't necessarily common but is an essential part of clients' financial picture, especially if one spouse is significantly wealthier than the other.
You will typically encounter sunset provisions in a prenup when clients come to the marriage with large amounts of assets. Such provisions might entitle one spouse to a set amount of assets if the marriage remains intact for a certain length of time, thereby protecting the assets of the richer spouse. In other scenarios, depending on the terms of the prenuptial agreement, the entire agreement can expire.
These provisions also can address alimony, according to Justin Reckers, managing director of Pacific Divorce Management and director of financial planning at Pacific Wealth Management.
“For instance, if you're married for five years, you get 20% of your spouse's retirement account assets, or if you have a baby, you get 50% of real estate holdings,” Mr. Reckers said. “If they're in a second marriage and want to protect assets for the children of a first marriage, it's also common to do some form of sunset provision.”
PROS AND CONS OF SUNSET PROVISIONS
Just as they do with trusts and other planning documents, advisers need to make a point of periodically revisiting client prenuptial agreements to ensure that provisions still apply. Remember that even boomer couples who have been together for decades split up.
You might remember the bitter divorce between tycoon Jack Welch and his second wife, Jane, in 2002. Though the marriage lasted 13 years, the prenup expired after 10 years, leaving more of Mr. Welch's fortune up for grabs.
“Many times, it's assumed that these agreements never expire, but that's not necessarily the case,” said Avani Ramnani, director of financial planning and investment management at Francis Financial Inc. “We encourage clients to revisit them every four or five years. Refresh your memory and make sure you're following the stipulations that are in the prenup.”
POSTNUPTIAL AGREEMENTS AND PRENUP CHANGES
Things change during a marriage and, in a short time, one spouse can accumulate more wealth than the other. Mr. Reckers has a client worth $15 million who comes from a wealthy family. The prenup aimed to ensure that all the money he received from his family came to him as separate property. But the client has also moved some assets, potentially commingling his separate property with community property. Because the prenup didn't cover that, it was due for an update.
“He runs the risk that if they get divorced, all those assets get thrown into the community property pot and he has to prove that it's his,” Mr. Reckers said. “We helped him figure out what's what, and we brought in an attorney to draft the agreement and update the prenup.”
Clients can also make missteps attempting to separate what's his or hers from what is certainly his-and-hers. For instance, they may use separate property trusts to split out assets that aren't shared, but those trusts can be contested in divorce.
“Putting assets in a separate property trust doesn't mean that the spouse confirms it belongs to only you,” Mr. Reckers said. “There has to be a written document that says the spouse relinquishes the rights to the asset. Otherwise it won't be enforceable.”
Reevaluating a prenup and its expiration or sunset clauses likely will require a team effort, so be ready to bring in legal expertise to assess its validity.
“It's crucial to make sure that the prenup is part of the list of documents you request as an adviser, since there are several things in the agreement that can influence how assets moving to you need to be titled,” Ms. Ramnani said.
“It's good to do a quick review, but you should seek legal help to evaluate that prenup and make sure that it's valid, followed and taken into account while planning,” she added.