Video Transcript on California high-net-worth people’s prenuptial agreement
I’m Dan Couvrette the publisher of Family Lawyer Magazine and divorcemag.com and today I have the pleasure of speaking with California family lawyer Michael Sarris. We’re going to talk about a number of different divorce-related topics. Michael is a certified family law specialist and not all family lawyers in California, as a matter of fact, a small percentage of them are certified family law specialists. He’s one of them. He also has an extensive background in finance as a corporate securities lawyer, and an investment banker. Prior to becoming a family lawyer that is what he was doing and so Michael focuses his practice now his family law practice in the area of complex divorce cases that involve high net-worth divorcing people, professionals, business owners, etc. So, we’re going to be talking about that today. Michael, thank you very much for taking the time to join me.
Michael Sarris: Thank you for inviting me, Dan.
Let’s start off by talking about prenuptial agreements. That’s something that business owners, professionals, and high-net-worth people need. Can you just tell me what does a couple need to do in order to create a prenuptial agreement?
To be on the safe side it’s best if both parties are represented by an attorney. The law changed in 2002 and there are very strict requirements on what should be done so the premarital agreement will be held valid if it’s challenged in court and you can do it without an attorney, but it’s much easier to be set aside if one of the parties does not have an attorney. There are specific waivers that have to be signed that the party was advised to get an attorney and elected not to do so, that the party understands the right of obligations of the agreement, and acknowledges in a separate waiver that he or she is relinquishing those rights and obligations. And you don’t want to go that route to save a little bit of money and have no attorney to help you.
Therefore, it’s paramount that each party has an attorney. Obviously, the capacity to enter into a contract because a prenuptial agreement like a postnuptial agreement is a contract so you want to sign it without the other side, claiming that it was under duress or undue influence or fraud. So, you want to disclose all of your assets. You want to have them separately in an exhibit. Each party has to sign off that this is my full disclosure. So, you have to approach it from many different sites to make sure if it gets challenged, it will hold up in court.
And who should get a prenuptial agreement? I know you work with a lot of business owners, professionals, and high-net-worth people. Are they the only ones who should get a prenup or is there other people as well, who should get prenups?
Well, certainly people who bring in a lot of assets in a marriage should get a prenuptial agreement because it doesn’t matter that you have separate property when you get married. The community can acquire an interest in the separate property of the spouse as it pays off a mortgage in the house. For example, I get married, I have a house, it’s on my name alone, but it has a mortgage. As time goes by when I pay that mortgage even from my earnings during marriage, the community acquired an interest into that house. So, if I want to protect that house, I need a prenuptial agreement. Another example, somebody has their own business and that they had it before marriage. That’s a separate property business. However, if primarily due to my own personal efforts, the value of the business increases during marriage, then the community acquires an interest. In that case, the only way to protect that interest is to have a prenuptial agreement that is if the party wishes to have that protection. Another example, if somebody earns a lot of money and they feel that, okay, I’m going to work, I’m going to make a lot of money for both of us, but I want to protect my assets. I don’t want you to walk away with half of it if you leave me, but that’s another reason during marriage to have the protection of a prenup.
So, talk about just for a moment can a premarital agreement or a postnuptial agreement, can it override the normal way that assets and property would be divided in a divorce case in California?
Well, this is the reason the parties enter into that contract. They want to change the community property laws of the state of California and therefore it does override, always overrides and that’s why we enter into those.
And I think you’ve touched on this, but I just want to get it clear. Are there any reasons why a premarital or postnuptial agreement could be set aside?
Yes. Well, I’ll give you one reason that’s easy to grasp. You’ve got to have seven days from the day you’re presented with the final version until you sign. So, one party could say, I only had three days and I couldn’t think straight. We had a lot of pressure, wedding was in three days, so I just signed it. So, that’s one way to set it aside. You don’t have an attorney much easier for you to set it aside because you can always claim I didn’t understand what I was giving up. Nobody explained it to me. So, you got to go through a system of checks and balances to have a strong prenuptial agreement and you need both sides to have an attorney,
So, let’s just talk about regular property division. What would a judge need to consider when dividing marital property?
What a court needs to consider or a party?
Yeah. If you went to court and they’re trying to decide who gets what, are there specific factors or issues that need to be addressed?
So, everything that was acquired during marriage from the time, skill, and effort of one spouse belongs to both. So, the time element is very helpful here because you have to see when the property was acquired. If the property was acquired before marriage and is fully paid, that’s separate property. If you bring in your marriage a house, and it’s got no mortgage, that’s your house. It’s always going to be your house. Even if you get a loan on the house after that is not the loan you used to purchase the property because it was paid off by the time you got married. So that will always be separate property. If your parents give you a house and it’s fully paid during marriage, that’s a gift. That’s not from your time, skill, and effort. And so, time matters, and the source of the funds to acquire the property matters.
Title doesn’t necessarily matter. So, if during marriage, if I buy a house and I put it on my name alone, and I say, it’s my own separate property that doesn’t make it a separate property because it was bought during marriage and it was bought with money that I earned during my marriage. So, that will be a community property so title will not prevail. Also, another element is I get married, I have a house it’s fully paid and three years into the marriage I decide to add my wife on title. Well, I am now transmuting title from separate property to community property. That house belongs to both. However, the equity on the date that I changed title to both of us belongs to me. It’s still my separate property unless I actually waive that separate property interest, which we very rarely see happening. So, if on the date I added my wife to title during marriage, the house had equity of 500,000 and later on, when we divorce, the equity is 2 million. Yes, the house belongs to both. We sell it, we get 2 million, I’m going to get the first half, that’s my separate property, and then we’re going to split 1.5. I get another 750, I’m at 1.25…
…because I never waived my separate property interest unless I did in writing, which most people don’t.
Understood. What happens in a case where somebody has stock options at work and maybe they didn’t execute those stock options before they got a divorce? Is there still a value to those stock options when somebody’s going through a divorce?
Yes, of course, the stock options it’s another asset that has to be divided. Now we have to see when they were given to the executive, let’s just say, and what percentage of those have vested because vesting matters. So, if let’s say all these options are given after the date of separation and they haven’t invested yet, most likely is going to be his or her separate property. But if these options were given during marriage and a fair number of them vested, then a fair number of the total amount of options will be community property. An option is the right to buy stock at a certain price and therefore it has to be what they call “in the money.” So, the real price stock price has to be higher than the exercise price and then the easiest way to do it is you divide the options, and you just give the out spouse, the spouse who did not earn the options, you just give them one-half of those that we determined belong to the community.
And what about somebody who thinks that their spouse is hiding assets? I know you deal with some, well, maybe not everybody’s forthcoming when they’re going through a divorce. When one spouse feels like the other spouse is hiding assets how can you help uncover those assets or reassure your clients that no, we’ve got everything on the table, we can see everything?
So, hiding assets is a risky proposition because if the other side finds them, you stand to lose all of it or at least the one-half plus the attorney’s fees and the courts are not sympathetic. So, the way to find them is you have to issue discovery and you have to get all the bank statements and the credit card statements, business and personal, and search. Follow the money as they say. See if there are outflows of money and where they went and then see if they bought assets with that money or if they opened new bank accounts. So extensive discovery is a tool that all attorneys and family law have in their hands and that always goes a long way. Within the discovery category, I will include subpoenas. You can always subpoena financial institutions and get the records from somebody who’s unwilling to provide you.
So, it is always helpful if the spouse knows that, oh, I think my husband had an account at a small federal credit union. Then we send a subpoena, and we get all the information. We don’t care if the husband wants to disclose it or not. We also have private investigators that work in asset discovery and that’s what they do. Assets that are in the United States or outside the United States and that also is very helpful in finding assets. The best ally you can have is a smart client, a client who looks at the records that they have in the house has an idea what they have, what they don’t have gives you helpful clues. Well, I think we have money in Wells Fargo, even though he never disclosed it. We send the subpoena to Wells Fargo and there’s no substitute for a smart client, I think,
Are there any common issues for high-level executives who are going through divorce? Are there things that come up time and time again that you’ve seen in those cases?
Yeah. So, one issue that comes up is that guideline child support would always be very high because child support in California is determined by a computer software called DissoMaster and then the computer software will take into account the wages and earnings of the spouse. Therefore, if one spouse makes a few million dollars a year, the child support formula will always come up high and the argument on the other side will be, well, my kids don’t need all that money. The court is going to look at the reasonable needs of the children, but at the same time, the children are allowed to participate in the lifestyle of the father and therefore there is a balance there that us in preparing the case, have to appear reasonable in what we’re asking on behalf of the children. But at the same time, we do not want to shortchange the children and not allow them to live at the standard that their father can provide. So, it’s always a delicate balance between these two zones so you can find a happy medium.
Tell me a little bit about the type of experts that you bring in. You’ve mentioned different types of experts, but can you give me a sense of how the experts are used and when they’re brought in, and are they brought in every case that you work on? How does that work?
You necessarily need to bring a forensic accountant when you have two major areas. One is if you want to appraise a company. So, let’s say the husband has his own or the wife. She has her own business, and it makes significant amounts of money, half that business could potentially belong to her husband. Well, we don’t know the value of that business and we cannot appraise the business ourselves because we’re not experts. We’re not financial experts even though we understand what the financial experts are doing and how they do it. We need to get all the records, profit and loss statements, tax returns, balance sheets, credit card receipts, bank statements, and give them to a forensic accountant who is going to appraise the business because half that value belongs to the husband. The other area in which we need the forensic accountant is when we want to establish the cash flow of the support payor.
So, wife or husband makes more than the other side, they have to pay support. We need to know their cash flow available for support. When somebody has their own business it’s not as simple as somebody who works for a company and is a W-2 two employee and gets a W-2 at the end of the year. In that case, we would know. But when somebody has their own business, they run a lot of personal expenses through their business and we have to go to a forensic accountant to add all this back and make the appropriate adjustments and say, in my opinion, the cash you have available for support, in this case, is let’s say $50,000 a month. The court will accept the testimony of the expert because he or she is a financial expert. So, in that case, we definitely need a forensic accountant, and these are the two most commonly used areas of expertise where you need to bring in a financial expert.
I mentioned at the beginning about your expertise in the area of finances. You must find that it’s a tremendous asset when you’re working with business owners and professionals to have had that background and most of your colleagues don’t have that background. Do you feel more confident when you’re taking care of those cases do you think than other family lawyers might feel?
Well, I’ve always enjoyed math and I love numbers because numbers are kind of black or white, and that’s the reason I went to business school because I always enjoyed that. I see a lot of attorneys who don’t understand numbers or who are challenged by numbers and I think the attorneys who do have a background or a degree in economics or finance or math, they always have an advantage and I think they get more respect from the courts as well because they can navigate the reports of their own experts or of the other sides experts much better and much more accurately than an attorney who has a smaller understanding let’s just say of numbers and math. It does help a lot.
Mike, I want to thank you for your time. Always insightful when I talk to you about family law. It’s a pleasure to speak with you. If people want to learn more about Michael and his firm, I recommend that you go to the firm’s website. It’s gftlawyers.com and I also recommend that if you are contemplating a divorce and you’re a high-net-worth person or a business owner or a professional, you seek out Michael or somebody like Michael, who has the credentials that he has. Certified family law specialist, business and finance background. You could use that type of qualified professional on your side. Thank you once again, Michael, always a pleasure.
Thank you, Dan. Same here.