How can you prevent the negative effects of prenuptial agreement?
Marrying with a prenuptial agreement can be sensible in some cases. However, not checking the prenuptial agreement can create problems in the case of a divorce concerning the divide of the Wealth.
National regulation and dividing the wealth in a marriage
If you marry in The Netherlands you automatically do so with a statutory community of property. Because of this the spouses possess each other’s property. This also means that they are both severally liable for each other’s debts. All property and debts that are created during the marriage, fall under this statutory community and are shared.
Because of the statutory community of property, the divide of wealth can in some cases become unfair. This can happen in the following situations;
- large financial inequality between the future spouses.
- One of the future spouses is in debt.
- The desire to remain financially independent.
- Family wealth needs to be safeguarded.
- One of the future spouses takes great business risks.
In the situation mentioned above an equal divide of possessions and debts is not always desirable. (Future) spouses can prevent this statutory community of property by marrying under a prenuptial agreement.
Prenuptial agreements, what choices do you have?
By creating a prenuptial agreement the spouses deviate from the statutory community of property. With this agreement the possessions and debts are divided differently. There are different kinds of prenuptial agreements. We made a list of the most common forms in the following text.
Exclusion of all community of property
Marriage in an exclusion of all community of property is the most extreme form of separating the Wealth between spouses. Exclusion of all community of property can therefore be considered as the opposite of statutory community of property. Exclusion of all community of property has financial risks if one of the spouses has no income of his/her own. The spouse does not share in the potential growth in Wealth from the other spouse.
Annual settlement clause
A form to create a divide that lies between community of property and the exclusion of all community of property is to include an annual settlement clause in the prenuptial agreement. In this clause community of Wealth is excluded, but a settlement is created to create an equal system.
The annual settlement clause ensures that after the household expenses are paid the income is divided fairly every year. In this an own definition of income can be indicated by the spouses.
Example
Maria and Peter are married under the prenuptial agreement with an annual settlement clause. Maria has a monthly net income of €1.000 and deposits €500 into the shared account each month. Peter has a monthly net income of €2.500 of which he deposits €1.500 on the shared account.
The total yearly household expenses are €24.000 (12x (€500 + €1.500)). The total family net income is €42.000 (12x (€1.000 + €2.500)). The total remaining income is €18.000 (Maria: €6.000 and Peter €12.000). Peter has €6.000 more at the end of the year than Maria. He has to transfer €3.000 to Maria. The advantage of an annual settlement is that the financial position of both partners is transparent and that can be fiscally advantageous in transferring income. In addition, the spouse who makes less money has the possibility of creating a capital.
Final settlement clause
In the case of a final settlement we can also speak of a separation of wealth and a settlement of income also takes place. This final settlement clause is created from the moment the marriage ends. This can happen because of a divorce, a legal separation or the death of one of the spouses. This way a settlement is made in the same manner as in a marriage with a community of property agreement.
By taking into account what the dividable income is in these prenuptial agreements, the partners are covered for a potential loss of Wealth in the case of a divorce and against taxes that need to be paid.
Example
Jack and Julia marry under a prenuptial agreement with a final settlement clause. The home where they live is the property of Julia. The marriage has ended and at the moment of the divorce the value of the house is €300.000. Jack and Julia have no other possessions or debts.
Although Jack can make no claim on half of the house, for this is Julia’s property, he is entitled to half of the value of the house. Therefore Julia owes Jack €150.000. If they had excluded their house from their community of property or stated that the final assessment clause would only apply in the case of death, then Julia would not owe Jack anything.
Pay attention to the consequences when forgetting the annual assessment
Partners often have the tendency to ignore the prenuptial agreement after it has been made. Even though the prenuptial agreement applies throughout the entire marriage. Often the annual assessment is not upheld. However, when the marriage ends, because of a divorce or a death, this can cause problems.
If an annual assessment clause is included in the prenuptial agreement, it is also necessary that the assessment is done every year. When this is neglected by both spouses, uncertainty exists about the individual capital of both spouses. It has become clear through the law and several judicial statements by the Supreme Court, that when there is an uncertainty about who owns this capital, the capital is considered part of the community of property. In the case of a divorce the entire community of property needs to be divided. Because of this a situation similar to the statutory community of property is created. Something that was meant to be prevented with this prenuptial agreement.
Example
Charles and Karen are about to get a divorce. Charles has no capital of his own. Karen has shares in her name of her BV (LLC) , and also a large share of bank balances of the BV. Karen assumes she is protected because they married under a prenuptial agreement with an annual assessment clause. By not doing this annual assessment it is uncertain who owns what share of the capital. Therefore, after the divorce, a payment has to be made as if they were married with a community of property. In the least desirable situation Karen will have to give Charles half of her capital.
Fulfilling the annual assessment clause can prevent the situation above.
Modernised regulation can offer a solution in the future.
The political parties VVD, PvdA and D66 have been working on a legislative proposal to modernise the legal conditions for marrying in community of property. According to the current legislation, as described above, the possessions and debts both before and during the marriage are automatically added to the community of property. The Netherlands is one of the few countries that still upholds this standard. This causes misunderstandings with a spouse from another country.
With the legislative proposal the possessions and debts prior to the marriage are not taking into account by default. Furthermore, inheritances and gifts during the marriage are considered part of the private capital. This measure is in line with practise as these conditions are usually taken into account in the prenuptial agreement.
Conclusion
As mentioned before, not honouring the prenuptial agreement can have consequences. Therefore, have the prenuptial agreement checked and every 5 years and consider if it is still fair in relation to your spouse and the wealth. Also, when a settlement has been done, ensure that there is evidence of this in writing.
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Sources:
Fiscaal advies. Nummer 5 2013.
HR 6 December 2002, LJN AE9241, NJ 2005/125
Art. 1:141 Burgerlijk Wetboek (Dutch Civil Code)
www.huwelijksvoorwaarden-nl.nl
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