1. You may have to pay considerable spousal support
One of the policy goals for spousal support in California is to maintain the marital standard of living for as long as it takes the recipient to become self supporting. It ends on the death of either party or the remarriage of the supported party. Generally, for marriages of less than ten years, it lasts for half the length of the marriage.
The amount of spousal support depends on a number of factors enumerated in Family Code section 4320 such as the earning capacity of each party, the duration of the marriage, obligations and assets and the age and health of the parties. How these factors translate into a dollar amount often depends on the discretion of the Judge. In other words, by not entering into a prenuptial agreement with either a waiver or a limitation on the amount of spousal support, you are to a large degree relinquishing your future financial status to a court.
To give you some idea of how much you might have to pay, consider the following example using the Dissomaster program. The Courts use Dissomaster software to calculate permanent child support and temporary spousal support. Although they are not allowed to use Dissomaster to calculate permanent spousal support and must consider all the 4320 factors, for our purposes it is a good starting point.
Example: Husband earns $300,000 per year and Wife earns $14,400 per year. They have two children and have a custody agreement where Husband has the kids 40% of the time. He pays $6,000 a year in property taxes and $12,000 a year in mortgage interest. In 2009, Husband’s obligation to pay child and temporary spousal support would be $8,550 a month of which $6,501 would be spousal support. Many family law practitioners negotiating permanent support apply a rule of thumb that permanent support is 30% less than the temporary spousal support.
Is this fair? This is a legal as well as an ethical question. If you divorced in Texas, the maximum spousal support you would get is for 3 years and no more than the greater of $2,500 per month or 20% of gross income. What if one of the spouses is a millionaire who built up a business and marries someone who has worked in a number of minimum wage jobs. They divorce after three years because the latter had an affair. They never had children. Is it fair that the millionaire must pay support so that the former spouse can live at the former marital standard of living? Many people would regard this as a windfall.
California law allows you to waive or limit spousal support as long as the provision is not deemed unconscionable. Unfortunately, as yet there is no case law defining the word "unconscionable." If there is a significant disparity in the amount of wealth between the parties, instead of waiving spousal support, the prenuptial agreement may place limits on the amount and duration of support. The amount and duration can be based on a formula which takes account of the income of the parties and the duration of the marriage.
2. Why you may need a premarital Agreement even if you bring separate assets into the marriage.
You may own a home or own a business prior to marriage. Generally, assets acquired prior to the date of marriage are separate property. So why would you need a premarital agreement? The problem is that there are many ways, in the absence of a premarital agreement, the community can acquire an interest in separate property assets by virtue of community efforts and investments during the marriage.
Consider real property brought into the marriage. During the marriage title remains in one spouse’s name but the outstanding mortgage is paid with community earnings. Those could be earnings of either spouse. The spouse who is not on title may acquire a community property interest by virtue of the mortgage payments made with community earnings. This is commonly referred to as a “Moore-Marsden” interest based on the two cases that establish the formula for calculating the community interest. When a couple have been married a long time and substantial amounts of community earnings have paid off an existing mortgage, making improvements or the parties have re-financed, this “Moore-Marsden” interest can be substantial.
A similar situation arises where one spouse owns a business prior to marriage. In the absence of a premarital agreement keeping the business as separate and all personal efforts and contributions as separate, the community would acquire an interest in the business if the owner spouse continues to work in the business. In a divorce you would probably need a forensic accountant to calculate the separate and community portion of the business.
3. The problem of goodwill.
Accountants recognize the existence of goodwill created in businesses and professional practices. Goodwill is an intangible asset which measures the expectation of continued patronage. Different states measure goodwill differently but in California the case law has accepted a number of valuation methodologies that value goodwill greater than the fair market value measured by what a willing buyer would be willing to pay for the business as a going concern. This can be a big problem where the business is the most significant marital asset and the owner is forced to buy out the community share of the business which consists mainly of goodwill.
read more on Prenuptial Agreements on our website www.californiaprenuptial.com
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