Prenuptial agreements and the forensic accountant

Prenuptial Agreements (prenups) are used between two people prior to marriage to address certain financial aspects of their marriage. For those entering a second or third marriage, it can help define what assets will be available to the future spouse and what will be set aside for the children. A prenuptial agreement can make the splitting of assets in the event of a divorce go much smoother as a “blueprint” per se has already been created.

So, if it is so easy, why would a forensic accountant be involved? Unfortunately, sometimes what are thought to be clear instructions on how to divide the assets, are about as clear as mud.

Recently several prenuptial agreements have come across my desk. In each case, the parties are now divorcing and in disagreement as to what the terms of the prenup means. Prenups in the state of Arizona are often used to preserve the sole and separate nature of assets brought into the marriage. They also sometimes are used to change the nature of income earned during the marriage from community to sole and separate. Pursuant to Arizona law, wages earned during the marriage are community in nature and all assets purchased during the marriage with those wages are subsequently community assets. A prenup can state that the wages will be the sole and separate property of the wage earner and that all subsequent assets purchased with those wages are then sole and separate assets to be retained by the wage earner.

An example is a party who comes into the marriage owning a successful business from which he or she takes a salary. The business would be considered the sole and separate property of the owner as it was owned prior to marriage. Without a prenup, any salary taken from the business would be community. A prenup could indicate that all or a portion of the salary be considered sole and separate. But what happens if the prenup is not clear? What if the prenup refers to the “income” of the business not the salary to the owner? Or what if the prenup says “salary” but does not define whether that includes bonuses? This lack of clarity can lead to more fighting at the end of the marriage than was intended.

Another example is the business owner who agrees to put a percentage of his/her “income” into a joint account to be available for division in event of divorce. Again, if “income” is not well defined, a forensic accountant will be called in to help the court determine how much should be in the account based on the interpretations of “income”.

Of course, there is always the spouse who thinks they can get by with not following the terms of the prenup. Were the terms of the prenup adhered to throughout the marriage? This will also lead to a call to a forensic accountant to help determine what should have happened versus what did happen.