273 | Prenups, Postnups, and Talking About Finances in Marriage with Kara Foster

[INTRODUCTION]

Hilary Hendershott: Hey, Money Lover. You’ve heard me talk at length about the 7 Steps to Wealth framework here on the podcast. It’s the framework I used to dig myself out of debt and build long-lasting wealth, and it’s the one I’ve guided countless clients and podcast listeners through to do the same. The 7th and final step in that framework is Protect. And I talked about why Protect is so important and what you can do to protect your wealth in Episode 264 of the podcast. But up until now, I haven’t touched on a crucial part of Protect on the podcast, and that’s the importance of protecting your wealth when you’re in a relationship. Because the truth is, being educated on how to protect your wealth when you’re partnered can save you from a massive headache when there’s heartache involved.

That brings us to today’s guest, attorney Kara Foster. Kara is one of the two attorney partners at Foster Hsu LLP in San Jose, California. Lydia and Kara–Lydia is her partner–are experienced in all aspects of family law, particularly in divorce and legal separation, and what we’re here to talk about today, prenuptial and postnuptial agreements. Family law is, of course, specific to the state you live in, so you’re going to hear Kara talk specifically about California law. If you’re in California, great. You’ll hear her talk about California being a community property state. And if you live in California or another community property state, that means all income earned and businesses grown during the period of the marriage belong equally to both members of the community. That’s you and your spouse.

Other states have different rules. So, if this conversation is interesting to you and it applies to you, you’re going to need to contact a family lawyer in your state. Our conversation today is the first of a two-part series because up next, I’ll be interviewing Melanie Lockert, a personal finance writer who I’ll be talking with about how unmarried partners can protect their finances. Stay tuned for that episode because eschewing tradition should not mean eschewing responsibility in protecting your wealth. Without further ado, let’s dive into this chat with attorney Kara Foster.

[INTERVIEW]

Hilary Hendershott: Well, welcome to Love Your Money®, Kara.

Kara Foster: Thank you for having me. I’m excited to be here.

Hilary Hendershott: It’s nice to have you. Sorry your business partner couldn’t join, but maybe this is one of the benefits of having a partner, is you don’t both have to be here.

Kara Foster: This is the benefit of having a partner. We definitely use that benefit, not all the time, but when one of us isn’t available for something and the other one is, it makes it a lot easier than just having one person.

Hilary Hendershott: It’s nice to have someone to support you through things. Yeah.

Kara Foster: Absolutely.

Hilary Hendershott: Lovely. Well, I’m excited about our conversation because there are so many myths and mysteries about prenups and postnups and you have the real deal. So, let’s just start with definitions. What is a prenup?

Kara Foster: So, a prenup is an agreement between two individuals who intend to become spouses, and it typically revolves around money and property. There are certain things that cannot go into prenups like anything that violates public policy or anything having to do with unborn children. Those are things that cannot go in prenups.

Hilary Hendershott: Okay. So, you’re essentially pre-contracting for how your money and property will be separated in the event of a divorce? Disability, death–are those involved?

Kara Foster: So, in the event of a divorce, yes, but also during the marriage. So, this is a contract between both of you as how you want to deal with your money throughout your marriage, not necessarily just in your divorce.

What a prenup allows people to do is take California law, understand it, hopefully, by the time they’re done with the process, and make their own decisions about how they want to deal with their money. Because whether you realize it or not, California has given you a prenup. It’s just in the form of the Family Code. And they are telling you what is going to happen if you divorce but also during the marriage. There is a whole slew of laws about how people are supposed to act with each other during the marriage that most people don’t even realize.

Hilary Hendershott: No, I don’t think I did realize that. I have always thought of this as an exit plan. What are some of the ways the state says people should interact with their money while they’re married?

Kara Foster: So, the Family Code actually references the business and professions code with regard to fiduciary duties and how you are supposed to be open and honest with your spouse about all of the money throughout the entire marriage.

Hilary Hendershott: Okay. So let’s say both parties are coming to the marriage with assets but let’s say one party has $5 million and the other party has $500,000, and the one who has $5 million would like to protect that money. Does the prenup dictate how that $5 million lump sum gets interacted with during the marriage?

Kara Foster: So, in large part, everything that you come to the marriage with is your separate property. It continues to be your separate property throughout marriage, regardless of whether or not you have a prenup.

Hilary Hendershott: Okay.

Kara Foster: The prenup is important with regard to in what form those assets are. How are they coming in? Are they coming in as a checking account, as a brokerage account, as interest in a business, interest in real property? If they are in just accounts, normal accounts, you just keep those separate. They stay separate. If you don’t touch them throughout the marriage, in the event of a divorce, they’re still yours regardless of a prenup. Where it gets a little bit tricky is when you have things like businesses, real estate with mortgages, and things like that. Those are two items where if someone is coming into a marriage with either a business or real estate, they need to talk to a family law attorney.

They may choose not to do a prenup. Totally fine. That’s their choice. But they really should talk to someone and understand how those assets get dealt with in the event of a divorce because they can be very messy. It’s not as simple as, “Okay. I’m just going to show all my statements and none of the community property went into this account, so therefore it’s mine.” If, for instance, on mortgages, if community property is being used to pay down the mortgage, that gives the community a percentage interest in the house in the event of a divorce. And businesses are even more messy.

Hilary Hendershott: Yeah. So, obviously, things get complex quickly, but the things to think about are the assets that you already have, what form they’re in, and then do you do a prenup or not. And then how do you pay for those or service those or support or maintain those assets during the marriage? And if you’re paying from community assets, which are money you earned after you got married, that could mitigate the cleanliness; the boundaries around those separately held assets, correct?

Kara Foster: Yeah. So, if you start paying for things with community money, it starts to co-mingle things and it makes things complicated. One of the things the prenup allows you to do, though, is keep all of your money separate throughout the marriage.

Hilary Hendershott: Even the money you earn after you got married?

Kara Foster: Correct.

Hilary Hendershott: Okay. Why would you want to do that?

Kara Foster: So, this is one of those ways in which a prenup can dictate what is happening, not only in the event of a divorce but during your marriage – how you are defining your property rights and your money rights during the marriage. You can override California’s community property law to say everything acquired during the marriage is community. By doing a prenup and agreeing with your spouse, everything that we earn throughout the marriage is going to be separate. And your money’s your money. My money’s my money. A lot of people will have a joint account to where they’re paying community bills from, food, PG&E, things like that. But in large part, their money is going to be their money.

And more and more people are doing this. As they get married later in life, they have assets. They have 401(k)s. They have brokerage accounts, real estate. And when you already have all of those assets and you need to fund those assets, right, you have that mortgage you still have to pay, it makes it a lot cleaner if everything remains separate. And then you can pay that mortgage from separate money and there’s no co-mingling. The other person’s not getting an interest in that property. It’s a choice that some people make. Not everyone makes it. You’re not going to do a prenup and still say, “All of our money going into the marriage is going to be community property.” And that’s a choice that people make too.

What’s really important for me, honestly, is making sure that the couple has these conversations about how they want to deal with the money before the marriage because so many marriages fail because there is that lack of communication.

Hilary Hendershott: Right. They just don’t talk about it.

Kara Foster: Exactly. They don’t talk about it. They don’t know coming into the marriage, “Oh, you had $200,000 of student loan debt. What?”

Hilary Hendershott: That’s a material piece of information.

Kara Foster: Yeah, exactly. But so many people don’t talk about this before they get married and prenups force that on you. They force you to disclose all of your assets; all of your debt so that the agreements can be made with full knowledge of everything that’s on the table. So, that is one of the things I really, really do like about prenups is they open up those lines of communication for people. A lot of people, when they get married, they’re like, “Oh, we’re just in love,” and a prenup kind of kills that vibe, right? But honestly, if you want to have a long-lasting relationship, you need to have these hard conversations with your spouse. You need to have that open line of communication. Because if you don’t, when things do get hard–and they always will, life can be hard and marriage is hard–you have to be able to talk to your spouse.

Hilary Hendershott: Yeah. I mean, it’s going to come up anyway. It’s going to come up when it has to come up or it’s going to come up when you choose to have it come up. It’s kind of like you get to pick. You don’t get to avoid the topic altogether. Okay. And so, just point of information, each party needs their own attorney. Is that correct?

Kara Foster: Ideally, yes. It is not necessarily absolutely required but ideally, yes. You want to have both parties represented. So, if you are dealing with spousal support in a prenuptial agreement, each party has to be represented. Otherwise, it is not valid. So, that is one piece about prenuptial agreements that you can make a contract about–with spousal support, i.e., alimony–you can contract about it in a prenuptial agreement, but if you’re going to do so, each side has to have an attorney by law. But if you don’t have that in there, one person could be unrepresented but I really don’t recommend it.

Hilary Hendershott: Right. For obvious reasons. I mean, you want to know that each party went in clear-headed and fully informed and nobody gave biased advice. Approximate cost of a prenup agreement, is there a range?

Kara Foster: It depends. It depends on the hourly rate of the attorney. There are some attorneys who will do it flat fee. We don’t do anything flat fee in family law because we, quite frankly, just don’t know how it’s going to go. I’ve had prenups that have cost $2,000. I’ve had prenups that have cost $10,000. So, it really just depends. Typically, they’re somewhere in the middle, right? Somewhere around like $4,000 would be normal.

Hilary Hendershott: So, about the cost of an estate plan. Something like that.

Kara Foster: Yeah.

Hilary Hendershott: Okay. So, most people have heard of a prenup. If they didn’t know the details, I’m sure you’ve elucidated the details a little bit already today. But what’s a postnup?

Kara Foster: So, a postnup is very similar to a prenup in that it is two spouses contracting about property and income. Except it happens after they’re already married. So, a postnup is, obviously, kind of the same, you can deal with the same kinds of things. You can decide partway through the marriage that you want to assign certain assets to certain people and then even say, “Okay. From this point on, our income is going to be separate.” Or you can do all of that. You cannot deal with spousal support. That is one thing with the postnup that is…

Hilary Hendershott: Oh really?

Kara Foster: Yeah, that one is different. Spousal support is one of those tricky things. People will try and put that in there, but I always tell my clients like, “This isn’t actually enforceable because the Family Code specifically says for postnups that it can only deal with property.”

Hilary Hendershott: That’s interesting. So, it’s like they either changed their mind after they got married, or for some reason, they’re thinking differently about the agreement after they got married versus before. In other words, it seems like it’s always better to do it before.

Kara Foster: Yes, it’s certainly more enforceable. It is definitely better to do a prenup, but sometimes postnups can honestly save marriages. So, different people have different spending habits. And with a postnup and if people are whining about money all the time, they can use the postnup to say, “Okay. We’re going to split things up. You deal with your accounts. That’s on you. I will deal with my accounts. Those are mine.” And it can be a way to save some marriages because maybe the love isn’t gone but there’s just so much discord and fighting over the money. And that’s one way to help.

Hilary Hendershott: That can be tough. So, what can people expect from the process of creating a prenup or a postnup? How long does it take? How many meetings? Are they together? Separate?

Kara Foster: So, there are going to be separate meetings because each party should be represented by their own individual attorney. They should not be having meetings together, typically. If they are having meetings together, it’s usually everyone together but that’s not to say that the parties can’t talk to each other. They should talk to each other. The way that we do prenups is, once a client retains, we will send them a questionnaire going through a whole laundry list of things, some things just to get the conversation flowing with the other person. And it’s very long and comprehensive because everyone has different issues, right? Every individual is different in the assets that they have, the work that they do.

So, we try and cover everything and tell them, “Go through this with your spouse. You guys go through that, talk about it, come up with the agreement, what you guys want to have in this prenup. And then give it back to me and then we’ll draft it.”

The way to make prenups expensive is to just have one person go to an attorney and say, “This is what I want,” and have not talked to the other spouse. That $10,000 prenup that I was talking about, that’s what happened. So, we definitely learned from this to say, “We’re not going to draft anything until you guys are on the same page about what you want in this document because once you guys are on the same page and both people can go and talk to their respective attorneys about what they are entitled to, what they think is fair, come back with each other, decide between each other what they want to have in it, then we’ll draft it.”

And that dramatically cuts down on the cost. Because once they’re in agreement, there’s going to be very little back and forth between attorneys about the actual content of the agreement. There might be a little few language changes here and there, but it’s usually not a fight and a negotiation back and forth when the couple is on board.

Hilary Hendershott: Understood. So, it’s just like a divorce. The less attorney time you use, the less it costs.

Kara Foster: Absolutely.

Hilary Hendershott: Okay, good.

Kara Foster: Absolutely. We’re charging for our time. The other thing that we have them do is go through the disclosure process. So, like I mentioned earlier, each party has to tell the other one about all of their assets, all of their debts, and we’ll use the same forms as we use in a divorce because the court has already said these are adequate disclosures. And there’s no real law on what’s an adequate disclosure for prenups, but you can have a prenup overturned for inadequate disclosures. So, we want to make sure that everyone is fully informed to the extent possible that we can. And we’ll have them fill out the forms with all of their assets, all of their debts, attach a recent statement for all of their accounts, deeds to any properties that they have, and we’ll send that over to the other side and then they’ll send their stuff over.

And those assets and debts are also listed out in the prenup as an exhibit so that there is a record with the prenup as to what assets and debts each person had coming into the marriage because that is usually top of their list that they want to protect is whatever they’re coming into it with.

Hilary Hendershott: Right. Protect the assets. The debts can be joint. “Those can be in the community, honey.” Are the considerations any different for hetero couples versus same-sex couples?

Kara Foster: No.

Hilary Hendershott: Identical?

Kara Foster: It’s identical. Yeah.

Hilary Hendershott: Okay. What are some of the unique and/or sticky situations that a pre- or postnup can help people avoid?

Kara Foster: So, prenups, obviously, with spousal support. A lot of times we have people come in who this is their second or maybe third marriage and they really want to make sure that they’re not going to go through that nasty divorce again. So, they want to have everything very clean and laid out that this is what’s going to happen if things go south and this is the amount of spousal support that someone can receive. I caution people with spousal support agreements, though, because they are reviewed by the court differently than property agreements. Property agreements, the court’s going to look at it and say, “Did you know what you were agreeing to and you signed off on it?” Okay. It is what it is, right?

The spousal support is different in that the court’s not going to look at it and just say, “Well, did you know what you were agreeing to?” They’re going to look at it and say, “Is this unconscionable, either at the time you signed it or now?”

Hilary Hendershott: How interesting. Really?

Kara Foster: Because you don’t know what’s going to happen in life. And especially if people are getting married young, if they don’t have kids yet, they don’t know if one of them is going to stay home and watch the kids and give up their career. And if you’ve agreed to keep everything separate, one person’s giving up a lot in order to stay home with the children.

Hilary Hendershott: One person doesn’t have two nickels to rub together, right?

Kara Foster: Exactly. So, the court will look at spousal support agreements a little bit differently. In that, I just try and caution people to try and make things as fair as possible because otherwise, they run the risk of it getting overturned. And even complete waivers of spousal support really run the risk of getting overturned.

Hilary Hendershott: Really? Interesting. Well, that is fascinating. Okay. Good to know. The court has a heart. I didn’t know.

Kara Foster: Yes. The Family Court is technically a court of equity.

Hilary Hendershott: Okay. So, conversely, the sticky situations include you 20 years ago not having made good decisions for you today. So, what we’ve learned is that the court may step in and actually help you out. Do you think there’s a downside to prenups? Prenups have a really weird reputation, right? The general consensus is only selfish, stingy people get prenups. What do people say to you about prenups? Do you even address that with people?

Kara Foster: You know, I do, and I get that a lot. And I just don’t think that’s true. Like I was saying earlier, I think they’re a very good tool to have people open up those lines of communication ahead of the marriage and use that as a roadmap for the marriage and for them to communicate with each other and for them to decide what they think is fair with each other going into that marriage.

Hilary Hendershott: Do you ever get one party really just doesn’t want a prenup and the other party does?

Kara Foster: Typically, no. That’s not typically something that I see.

Hilary Hendershott: Because they wouldn’t show up to your office, right?

Kara Foster: Right. You’re not required to have a prenup. If one person doesn’t want to have a prenup, the other option is you just don’t get married.

Hilary Hendershott: Right. And speaking of not getting married, I mean, this is a trend, right? More and more people are eschewing the traditional institution of marriage. Do you have any clients that aren’t married? I mean, is there a way to pre-contract for things financially if you’re not married?

Kara Foster: There is. So, depending on what assets they own, there are people that are cohabitating and maybe they’ll buy a house together, but they’re not actually getting married and they don’t intend to get married. And that’s fine. But with that house, right, there needs to be certain agreements. And in that respect, we can do what’s called a cohabitation agreement. And that, kind of similar to a prenup, will lay out, “If this relationship ends, this is what’s going to happen with the property. And during the relationship, this is how we’re going to deal with finances. And these are the agreements that we’re going to make with each other in order to keep everything running smoothly.”

Hilary Hendershott: Okay. So you do cohabitation agreements?

Kara Foster: Yes.

Hilary Hendershott: So, if an unmarried couple came to you and said, “We’re going to buy real estate,” or let’s say you’re at a cocktail party and they say, “Y’all, we’re buying a $2 million house. It’s a one-bedroom fixer-upper in San Jose, California.” What would be your advice to them? Don’t do it? Get a cohabitation agreement?

Kara Foster: An unmarried couple buying property, definitely get a cohabitation agreement.

Hilary Hendershott: Yeah. I mean, I think people just don’t think about the things that they hope won’t happen like disability, extended illness, unemployment, right? I mean, so many things can go wrong when you share a piece of property and like, “Here you are. I have to live here with you,” right?

Kara Foster: Yeah.

Hilary Hendershott: Who’s going to pay the mortgage, right?

Kara Foster: Who’s going to pay the mortgage? The other thing about that, honestly, is that people don’t understand title. They don’t understand what happens when you title properties in certain ways. And when you buy the property, the real estate agent can’t advise you. The mortgage broker can’t advise you. Because they’re not attorneys. So, then they end up taking title in ways that they regret later, which is also something that we end up seeing. We’ll do what’s called transmutation agreements where we can change the character of the property mid-marriage to either be separate or community or fix titling issues. Maybe they bought it as joint tenants, but then they needed to be community property so that they can put it into a community property trust.

Hilary Hendershott: Right. I mean, just as an example, you tell me if I’m wrong. This is what I usually say to people. If you take title as joint tenants and someone dies, well, now that person’s beneficiary co-owns your house with you. So, it might be their mother, their brother, their ex-girlfriend. Tell me.

Kara Foster: No. That’s tenants in common. That is tenants in common. So, joint tenants is you both wholly own the property equally. It’s kind of like community property and that if you did a partition action and had to split the house, you would each get 50%.

Hilary Hendershott: Okay. So, with joint tenants, if one person dies, you now own the property 100%.

Kara Foster: Yes. But it’s a lot easier if you also add on there, “with right of survivorship.”

Hilary Hendershott: Correct. I was trying to avoid saying those words. I just said it’s something I can’t pronounce easily. It’s like JTWROS. Yes. Okay. Good. So, pay attention to how you take title. Kara, you tell me if this is an out-of-bounds question, but if you’re married, did you get a prenup?

Kara Foster: I did not get a prenup. No.

Hilary Hendershott: Yeah. What were the thinking that went into that? Usually, lawyers love to do lawyer stuff, so I’m surprised you didn’t.

Kara Foster: Yeah. I mean, my husband and I have been together since I was in law school. So, in my mind, everything that we’ve done, we’ve done together. And I don’t feel the need to protect any of that from him because I think he’s entitled to it. He went through law school with me. He went through the bar. He’s dealt with all of my student loans, and continues to.

Hilary Hendershott: Awww. Well, that’s sweet to hear. Sounds like a good guy. Sounds like a good marriage. Is there anything I haven’t asked about prenups and postnups and the idea of romantic coupling as it impacts finances; assets that you think is important for people to know?

Kara Foster: I think what’s really important that I think I want people to know, especially seeing it from the divorce aspect, is that you really should have open and honest conversations with your spouse about the finances consistently. You should both be on the same page and know what is going on in your finances because so many times we see one spouse come in and the other spouse dealt with the finances. It was a division of labor that they agreed to during the marriage. But what ends up happening is that you have this person who has zero clue about anything that’s going on with the finances.

And if you’re trying to open up that conversation, right, if you’re that out spouse and you’re trying to open up the conversation with your spouse to say, “Hey, you know, let’s sit down and talk. I just want to know where the accounts are. What’s in the accounts?”

Hilary Hendershott: Who’s the beneficiary?

Kara Foster: Yeah. Who’s listed as beneficiaries on things? If the other spouse gets cagey about it, that’s a red flag, right? If they don’t want to share that information with you, that’s a red flag. But one way to kind of, I guess, head that off instead of saying, “Oh, yeah, well, clearly I want to divorce you so I want to know where everything is.” But honestly, it’s very important for estate planning purposes, right? What if that person, something happened, and a bus hit that person and they were just suddenly gone? How is the out spouse supposed to pay bills; live; take care of the kids if they have no idea where any of the money is, how to get into any of the accounts, any of that? They need to have that information. Even if it’s a fantastic relationship and there’s no chance that you’re going to divorce, you still need that information.

Hilary Hendershott: Right. Ultimately, no one lives forever, right? And life is expensive. So, I appreciate that. Financial transparency, financial communication, financial partnership, it’s all recommended. Very good. We appreciate your time today. Let’s wrap up our conversation with my signature question. If your money were thanking you or writing you a love note or a love letter, what would it be acknowledging you for?

Kara Foster: You know, I think back to just what I was saying is just always knowing what the accounts are at, what is happening, how to get into the accounts, and just being really aware of the whole picture, and always having that top-of-mind and discussing it with my spouse so that everyone is fully informed.

Hilary Hendershott: Money is like anyone important in your life. Be that your romantic partner, your child, your dog, it likes to be paid attention to. It likes to have your eyes on it, it likes you to know that it’s there and that it’s working for you. So, kudos to you for doing all that.

Kara Foster: Thank you.

Hilary Hendershott: Where can people find you on the Internet?

Kara Foster: We are at FosterHsu.com. Foster is F-O-S-T-E-R. Hsu is H-S-U dot com.

Hilary Hendershott: Great. And we’re going to put that web address in the show notes for today’s episode. So, if you’re in California and you liked today’s conversation, give Kara a call. Kara, thank you so much for being here today on Love Your Money®.

Kara Foster: Thank you for having me.

[END]