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What are prenup pacts? How do they help?

March 13, 2007 09:08 IST

Former Beatle Paul Mcartney realised love hurts, and how, when the law lords ruled that he pay ex-wife Heather Mills an alimony to the tune of £200 million -- a quarter of his fortune -- after just four years of marriage.

Sir Mcartney's grand faux pas -- he felt it would be "unromantic" to sign a prenuptial agreement.

For die-hard romantics, 'prenups', as these agreements are commonly called, may seem clinical, bordering on mercenary, but they are the most practical solutions to determine equitable division of finances and personal liabilities in the event of a divorce.

A prenup is a contract entered into by two people before they marry. Its content can vary widely, but commonly includes provisions for the division of property and assets should the couple divorce and any rights to spousal support during or after the dissolution of marriage.

"Naturally, for a prenup to be worth the paper it's written on, the parties involved must sign it voluntarily -- free from undue influence, coercion, or duress -- with full financial disclosure and with the assistance of attorney review and advice," says advocate Pavan Duggal, who practices in the Supreme Court.

"As contentious as a divorce is, anxiety related to the division of assets adds further insult to injury; a prenup simply ensures that nobody needs to slug it out over who gets the toaster," he adds.

Sound advice that would definitely have served 29-year-old Sharda Khanna (name changed) well and saved her numerous sleepless nights. Married at 23, divorced at 26 with a two-year-old child, Sharda's tale of horror is the stuff of soap operas -- an abusive mother-in-law, a violent philandering husband, and constant dowry demands.

"Not only was I not allowed to work, but I was not even allowed to open a bank account so that my father could not help me out financially; all the money my father sent us was directly credited to my mother-in-law's account and was used to furnish the household budget, while I had to beg for money to buy even daily toiletries," she says.

After six months of battling it out in courts, Khanna got her divorce and Rs 2 lakh as alimony, which was not even adequate to cover the lawyer's fee. Her father, a senior defence officer, says he was just happy to have his daughter back safe and sound, but admits to making some serious mistakes.

"I transferred bonds worth Rs 2 lakh in my son-in-law's name instead of transferring it jointly in both their names. Even the car that I bought for them, I transferred ownership solely in my son-in-law's name. As a result, when she came back home, they returned neither the bonds, nor the car, or even the jewellery that was all part of her stridhan," says the disturbed father.

For the Khannas, the burning question was one of bringing their daughter out safely from her marital home rather than ensuring an equitable settlement. If, however, the financial settlement were to determine the future course of her life, the story could have been even bleaker.

If you think of prenup agreements as a fetish in Hollywood, where marriages break more as a rule than as an exception, think again. They are gaining popularity in India too.

Says Supreme Court lawyer Pinky Anand of Luthra Anand & Associates: "Just five years ago, a prenup was almost unheard of in India. But, since then, numbers have been climbing steadily."

Lawyers estimate that almost 20 per cent of marriages that take place in the metros, especially in Mumbai and Delhi, involve some form of prenup. "Couples opting for prenups are not just financially unequal couples or wealthy couples, but even those who simply want to avoid the financial entanglement and trauma that follows a divorce," says Anand.

"The problem, however, is that Indian courts have not totally recognised the validity of prenuptial agreements," says Indranil Bose, partner (litigation), Fox Mandal Little, a Delhi-based law firm. The Indian law defines what marriage is and agreements such as these do not fall into that definition. So they are not deemed valid.

"In India, prenuptial agreements are not governed by the Indian marriage laws, but by the existing contract laws," says Duggal.

"Under Section 10 of the Indian Contracts Act, prenuptial agreements have as much sanctity as any other contract, oral or written; just because litigation has not begun in this area does not mean that it has to be treated any differently, and that it cannot be enforced.

Courts do take cognisance of a prenuptial agreement if both parties have mutually agreed, are competent to contract, and the prenuptial agreement clearly states the fair division of property, personal possessions and financial assets of the parties," he argues.

"A big advantage of a prenup is that it forces couples to have that all-important financial discussion before marriage," says Anand.

She adds that issues that can be efficiently dealt with in a prenup range from divorce settlements, if the case arises, and the prevention of disputes regarding joint accounts to the custody issues of the children after the dissolution of a marriage. "Another important benefit of the prenup is that it offers protection from the spouse's debts, if any."

For couples about to take the plunge, it is perhaps wiser to go in for a prenuptial agreement that clearly outlines a fair division of property, personal possessions and financial assets, than fight over a favourite piece of furniture or pet in the process of dissolving the marriage.

It works as a multi-pronged solution. In the case of the men, it protects them from exorbitant divorce settlements. In the case of individual earners, it makes sure that nothing, not even a joint account, can become a point of dispute in case of a divorce. And for women, it is an especially important document as it enables her to assert rights and ensure that she is not done out of her just dues.

It is ironical that today, even though most lawyers agree that divorce laws in India are tipped towards the woman, it's rare to see a woman getting an equitable financial settlement. "One of the reasons for this lies in the way the laws are drafted, and in which the financial settlements are negotiated," says Pawan Duggal.

Most of the entitlements under the divorce law in India are governed by the personal laws of the parties -- the Hindu Marriage Act, 1955, as amended by the Marriage Laws (Amendment) Act, 2001; Muslim Personal Law, or Indian Christian Marriage Act, 1872 -- as the case may be. The Special Marriage Act, 1954, governs inter-religion marriages. Irrespective of the applicable law, a prenup can ensure an equitable division of assets.

"A provision for maintenance exists in all matrimonial laws with the difference that under Hindu Marriage Act, either party -- wife or husband -- can claim maintenance, while under others it is only the wife who can claim it," says Smita Tyagi, a Delhi-based lawyer with law firm Joseph & Joseph.

"Generally, under Indian law, the basis for awarding the amount of permanent alimony and maintenance depends on the income and property of both the parties; conduct of the applicant and the non-applicant and other circumstances, if any. If a woman is not earning she is entitled to maintenance. However, the conduct or unchastity of the woman may debar her from any claim to maintenance. If the wife has sufficient income and property of her own, the court will not grant her any maintenance," avers Tyagi.

"But, if the husband and wife are both earning, the maintenance paid to the wife usually varies between one-third and one-fifth of the joint income of the husband and wife, though there is no fixed arithmetical rule."

"It may not be possible to prevent a divorce, but it is always possible to ensure that you do not get the rough end of the stick when it comes to financial settlements," asserts Anand.

Awareness key to post-marital security

What can a woman who has not signed a prenuptial agreement do to ensure an equitable financial deal in case of a divorce?

"Since it is an extremely emotional time, women tend to get extremely overwhelmed, and the strain often deters them from thinking through their finances," says Supreme Court lawyer Pavan Duggal. "By the time their head clears, it is often too late."

Despite the definite legal provisions for maintenance for the woman, the amount actually awarded is usually a pittance primarily because the onus of proving the husband's income and financial ability to pay the maintenance amount depends on the woman.

"Most women are hopelessly unaware of their husband's income or financial assets, which makes it difficult for the courts to award the rightful amount for maintenance since a man would always understate his real income," says Duggal.

The following are a number of measures a woman can take to make sure she does not get a raw deal (here, we will only consider Hindu marriages):

1. The woman must ensure that at least some assets are created in her name, and that she procures some avenues of revenue generation even if she is not working.

A woman is entitled to stridhan, which includes jewellery, cash, and all the gifts that she receives from her parents, in-laws or husband, during the course of their marriage.

It is very important for the woman to make a list of these and keep a copy with herself, and one with her family and, maybe, a close relative. A third copy should be given to the husband and his family. The stridhan is returnable to a woman upon divorce.

2. To ensure that the woman receives financial support after divorce, "it is advisable that both the husband and wife should hold all property at the time of marriage or after marriage jointly," advises Supreme Court lawyer Pinky Anand. Try and prevent the property from being transferred to the Hindu undivided family because in such a case a woman's entitlement could suffer.

3. Take stock of all shares, bonds, mutual funds, any other investments and property you possess together before you decide how to divide it taking into account any inequalities in incomes and responsibilities, especially if children are involved. All bank accounts, savings and deposits should also be held jointly as the court has the jurisdiction to settle any property that is owned jointly.

4. Keep track of all the necessary documents, including any lease agreements, joint account statements, bank account statements, insurance policies, credit card payments, mutual fund statements and financial documents pertaining to transactions that you have carried out together.

5. Gather and organise all financial records and make copies of everything, one for yourself and a second for your attorney.

6. Document your net worth and keep a record of cash flow during separation. If you suspect your soon-to-be ex of hiding assets, hiring a forensic accountant is always an option, albeit an expensive one.

7. Keep a written record of all expenses run up before and during the separation, including bills jointly paid and improvements made to the house.

8. The alimony that a woman gets as settlement can come in two ways -- as a monthly maintenance or as a lump sum. Neither is taxed in her hands, but any income earned by investing them will be. So figure out which option is the most tax-friendly.

"Once the courts decree the amount of monthly maintenance to be disbursed, execution proves to be the real hitch," says Indranil Bose of Fox Mandal Little. It is not uncommon for the husband to renege on payment of maintenance. In such a scenario, the wife can move an application for the attachment of his physical assets and for the execution and resumption of her monthly dues. The courts, however, could take up to six months and beyond to render judgment.

Prenup Primer

  • Getting a divorce is a messy business, both personally and financially, but if you sign a pre-nuptial agreement-wisely handled, well planned and smartly negotiated - you can at least avoid making the costly financial mistakes that could quash your future.
  • While every prenup agreement is unique in itself since it negotiates terms and conditions specific to the contracting parties, lawyers advise on some basic rules and a couple of essentials that should definitely make the cut if the prenup is to hold up.
  • Essentially, a prenup should record the intentions of the husband and wife-to-be concerning the division of money and assets (immovable and moveable) in the event their union dissolves by divorce.
  • The prenup should be structured with a two-tier approach - in the event of dissolution with children, and in a case where no children are involved. In case there are no children involved in the dispute, the prenup should clearly mention whether the maintenance paid would be rendered as a lump-sum one-time payout (alimony) or a monthly maintenance.
  • While in the case of children, not only the maintenance, but also custody) including visitation rights) and child support should find clarity and mention in a prenup agreement. Also, the agreement should state a mechanism by which a guarantee is worked out in order to ensure that the systems that are put in place are actually executed at the time of divorce.
  • The prenup should also decide the fate of property acquired during the marriage - whether jointly or individually owned - and any other financial investments such as shares, fixed deposits, mutual funds, and insurance policies.
  • Many prenuptial agreements even mandate a minimum cooling period (usually six months) between the husband and wife in case the relationship runs into troubled water, before any divorce proceedings from either party can be initiated.
  • A lot of prenups specify the couples right to remarry after the divorce notwithstanding their financial commitments and responsibilities, and make a no-contest, mutual consent divorce contingent on the execution of the other financial and monetary allocation.
Chumki Bharadwaj, Outlook Money