What is a postnuptial agreement in a marriage? Why a prenup or postnup can be crucial for Estate Planning, and especially for major gifts. How does CunninghamLegal handle postnuptial agreements? Is a postnup agreement conversation bad for a marriage? Do I need a postnup during my marriage if I’m not worried about a divorce?
By James L. Cunningham Jr, Esq.
(with thanks for insights from Neil Forester, Forester Family Law)
When our firm works with high net-worth couples on complex Estate Plans, we may ask them to create a postnuptial agreement as part of the process.
This request often comes as a surprise. After all, our clients may be happily married, with no fear of divorce on the horizon. Can’t issues of inheritance be determined in a typical Living Trust or Will? Do questions about who owns what really need to be legally sorted out in a healthy marriage?
In this article, I want to explain why a postnup might be vital to gift, tax, inheritance, and business planning—along with explaining how we work with experienced family law attorneys to create postnups for clients with complicated holdings and goals.
Most people are familiar with the concept of a prenuptial agreement (commonly known as a prenup)—often used when one or both parties are about to enter a marriage with significant assets: whether property, investments, cash, or business equity. Prenups may also be important to anyone entering a second marriage or blended family. The agreement basically specifies what will become community property and what will continue to be held as separate property during the marriage; although many other issues may be covered, including the status of children from previous marriages, etc.
A postnuptial agreement (commonly known as a postnup) is created after a marriage has begun—perhaps after many years of marriage—but it accomplishes pretty much the same thing. It can also have complex additional tax purposes which may have little to do with the possibility of a divorce.
As always, everyone’s circumstances are different—so the meanings and purposes of your postnup will be highly specific to your needs.
Let me add up front that anything of this importance and sensitivity will require a highly qualified and sensitive family law attorney with specialized expertise. Prenups and postnups are not DIY documents, and few if any “general purpose attorneys” can handle them correctly. Contact us to learn more.
Does gifting require a postnuptial agreement to control estate taxes?
The most common reason to create a postnup is to facilitate large gifts, file proper gift tax returns, and control estate taxes for high net worth families. Most married couples who come to me to help them create a gifting program for their loved ones do not realize they may need a postnup, but quite often they do.
Let’s look at a typical case.
My clients, let’s call them Hal and Wanda, are a happily married couple in their mid-sixties with a combined net worth of around $30 million. Their assets are a complex mix of investments, business interests, and property—some of which came from individual inheritances. They have two adult children, Fred and Julie. I’m working on their Estate Plan.
As of current law, Hal and Wanda each have a $12.06M ($13.61M in 2024) federal estate tax exemption which they can use now to gift assets to their children or further use to protect part of their estate from Death Taxes when they die. When one of them passes first, the surviving spouse can use a federal Portability Election to inherit the deceased spouse’s exemption.
So far, so good.
During our conversations, Hal brings up the idea of gifting Fred $5 million right away so that Fred can launch the software startup he’s been dreaming about. Hal also wants to gift $2 million to Julie right away, so she can buy a house in California. Hal says this could be done without paying gift taxes by “burning” part of Hal’s estate tax exemption—which is currently a legal option. This leaves Wanda’s $12M+ estate exemption intact.
Hal feels a sense of urgency because Fred has a limited window of opportunity for his business, Julie will probably move her family out of California if she can’t buy a house—and perhaps most importantly, Hal knows that the gift/estate tax exemption is due to be slashed in half come 2026.
When Wanda objects to these big gifts, Hal is upset. Then he says, “No problem, I won’t take the money from OUR community property, I’ll take it from the $10 million from MY half of THE community property. We’ll settle up all the rest in the Estate Plan that Jim Cunningham is drafting.”
Complex issues arise around gifting when ownership is unclear
I now have a complex issue to resolve. Is Hal’s $10 million really “his to give,” legally speaking? Does he actually have a right to gift that money as he pleases? Unless Hal and Wanda “transmute” the community property to separate property, Hal is making a gift of community property. Any lawyer who helps Hal give away community property without proper legal counsel is liable to Wanda for half the assets given away—$5M in this case! If Hal and Wanda later divorce, that lawyer may be responsible to pay Wanda $5M! And remember: courts generally presume that assets are community property unless otherwise proven to be separate.
But there’s much more: How will Hal’s gift be allocated on a gift tax return? How will this affect their long-term estate tax exemptions and the portability of those exemptions? To preserve Hal’s exemption, should I create a long-term “spousal lifetime access trust” for Hal and Wanda, related to their separate and/or community property?
And hey, maybe we should also look at issues around the control of Hal’s business, which he created before his marriage with Wanda.
The key to all these questions is the same: What exactly constitutes “community property” and what constitutes “separate property” in Hal and Wanda’s marriage?
The necessity of a postnup to clarify ownership
At this point, I would pause in my work and urge Hal and Wanda to create a postnuptial agreement with two qualified family law attorneys … one for each of them. This agreement will clarify the issues for everyone by “characterizing” assets as separate or community on an asset-by-asset basis, preventing legal problems down the line, regardless of the continuing viability of their marriage.
I would not feel comfortable working on their Estate Plan without such an agreement in place. Indeed, I would advise them against using any lawyer who tried to arrange something as complex as a lifetime spousal access trust or the burning of an exemption in a major gifting process without requiring a postnup—because that’s how it’s done properly.
How are assets transmuted to community property in California, and vice versa?
Before we go on, I need to explain why there’s often significant confusion about which spouse owns what in the Golden State.
California is a community property state, and by law, everything acquired during a marriage becomes community property. That includes real estate, even if only one spouse’s name appears on the title. It also includes acquired business equity, even if only one spouse is involved in the business.
The exceptions are assets owned before the marriage, as well as gifts and inheritances obtained during the marriage—which are considered separate property, at least when the marriage begins.
Anything that starts as separate property, however, can quickly be “transmuted” into community property in the eyes of the law if it is used like community property. For example, if money from a gift or an inheritance is deposited into a joint bank account and used for community expenses; if stocks are sold to pay family bills; or if the mortgage on a home owned by only one spouse before marriage is later paid using joint funds. Any of these or similar events might transmute the asset to community property. And as I said, courts like to assume things are community property.
Community property does not become separate property in the same, inadvertent way. Usually, this occurs only through the use of one or more lawyers and a signed agreement.
Prenups and postnups can reduce confusion that leads to conflict
Lots of arguments during a divorce center around what is community property and what is separate property.
People create prenups and postnups to prevent those arguments, ensure that decision-making during a marriage is clear and amicable, and to clarify taxation and Estate Planning.
It may be emotionally difficult to consider approaching these issues in a healthy marriage—but remember that most often it’s a lack of clarity that leads to dissension and courtrooms.
Important for business equity and control
Prenups and postnups may be especially vital if one or more partners in a marriage own an active stake in a business. How would ownership and control be affected by a disability, a divorce, or a gift? Far too often, businesses are crippled when such issues are not resolved in advance—through buy-out agreements, business partnership insurance, and the like.
The last thing any business needs is a protracted legal battle over control, and it is the responsibility of any principal to have a clear plan and agreement in place with their spouse.
How are prenuptial and postnuptial agreements created?
Here at CunninghamLegal, we do not create prenuptial and postnuptial agreements ourselves. Instead, we refer clients to qualified family law attorneys we have vetted, and with whom we have worked closely.
Why do we refer out for this work? For starters, we do not have the specific expertise—but more importantly, as Estate Planning attorneys, we must represent both parties in a marriage, and we have to stay fully neutral. Our firm would risk a significant conflict of interest or perception of bias in negotiating such an agreement between spouses.
Two paths to consider
I generally see two different paths for couples to take in getting a postnup (or prenup) done.
Here at CunninghamLegal, we will start by helping define the issues that need to be settled. If those issues don’t appear to present a lot of conflicts, we will help each party find their own qualified independent family law attorney to represent them in negotiating the agreement.
This is not, however, the best approach if the parties don’t already agree on significant issues.
If we see potential disagreements, we will recommend that the couple meets with a good family law attorney/mediator together—someone who can resolve the basic issues and draft an agreement. After drafting, this mediator/attorney will then advise each spouse to engage their own independent lawyer for a review of the ultimate agreement—so that each party is assured that their rights are protected. Although not required by code, I don’t know of any reputable family law attorney acting in this central role who doesn’t require each party to be represented by independent counsel for a final review.
An experienced family law attorney/mediator will also offer vital options to make an agreement work for both parties—options that may go well beyond a strict division of “community” and “separate” property. For Hal and Wanda, a postnup agreement might include, for example, reimbursement rights against gifts that either spouse chooses to make on their own—even for separate property.
There’s no question that well-drawn prenups and postnups are a team effort requiring the highest levels of professionalism, sensitivity, and experience. It’s not always a simple process, but the result can be a stronger family unit, capable of withstanding any controversies which may arise, and able to ensure that multi-generational wealth is passed on smoothly—minimizing taxes, conflict, and hassle.
Will it be dangerous to my marriage to have a postnup conversation?
Postnup conversations can indeed be difficult. They can also raise issues that neither party knew existed—like who has rights to family businesses, inherited properties, and previously-owned assets.
Both spouses in a marriage must approach the effort with the right attitude—starting with the understanding that this process can save millions upon millions of dollars for a large estate, prevent serious conflict down the road, and enable everyone to move forward cooperatively in a complex world.
Part of working cooperatively is to select attorneys with a positive approach, who work to avoid, not create problems. These attorneys need the experience to know where the land mines are located and how to step around them gracefully. Please do not hire a hard-core, litigation-minded attorney for your side who is more focused on “rights” than “mutual results.” You need someone to mediate, and work out compromises, not “win.”
All attorneys must look for clarity, make sure that you and your significant other understand exactly what each one of you is signing, and explain all the long-term impacts of the agreement.
With wealth comes responsibility—for yourself, your spouse, and the generations to come. With the right team, you can fulfill that responsibility and continue to confidently enjoy married life.
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We look forward to working with you!
James Cunningham Jr., Esq.
We guide savvy, caring families in the protection and transfer of multi-generational wealth.