Prenuptial agreements, or prenups, are often associated with movie stars, professional athletes, and financial tycoons and their headline-generating divorces. Prenups are very common among this group and for good reason: When these couples divorce, the settlements can be astronomical. Most of us enter a marriage under far different financial situations than actors or athletes, but a prenup can still be useful for us “ordinary” folks.
What is a Prenup?
By definition, a prenup, is a contract marrying parties enter into before they make their nuptials legitimate. In the simplest terms, it protects what’s yours should the marriage come to an end. From making the division of assets concrete, to assuring spousal support, to specific terms regarding the possible forfeit of assets, a prenup legally binds the two parties to the decisions they made when they were of sound mind, in love, and long before divorce even seemed like a possibility.
In a survey of 1,600 members of the American Academy of Matrimonial Lawyers, a professional group based in Chicago, published in October 2013, 63% of the respondents reported an increase in prenups over the previous three years.
Why Prenups Matter
According to author Terry Savage, getting a prenuptial agreement isn’t simply about planning for the worst-case scenario. She says, “We tend to think of prenups as dividing assets, with one wealthier partner wanting ‘protection.’” But, contrary to popular belief, she explains, a couple’s need for a prenup isn’t based solely on their income or assets. The real benefit applies to any relationship: Upfront, honest communication.
“These days, with even lower income people coming into relationships with debt from college, credit cards, or obligations for child support, it might be wise to segregate these debt obligations and discuss whose income will be used to pay them, and whether that impacts the amount each will contribute to ongoing household expenses,” Savage explains.
The conversation about whether or not to have a prenup can be a good entry into a conversation about finances that every couple should have before tying the knot: Who will pay for what? Who will stay home with children? What if someone wants to go back to school? How much of our paychecks will we save for retirement? But too often, as Family and Marriage Therapist Lisa Bahar explains to Daily Finance, those conversations stop before they really get started.
“Money is emotional,” she says. How we make it, how much we have, whether we’re spenders or savers, how much debt we’ve taken on—all of these subjects can be sensitive, which can easily lead people to avoid talking about them at all. So bringing in other people to help facilitate the conversation, whether clergy or financial professionals, can be helpful, she says.
“Marriage is a contract, like a business arrangement,” Bahar says. “There’s a reason paperwork is involved with marriage. It’s a contract between two people, and that includes finances. The irony of it is how people hold that emotionally.”
Bahar says the sooner a prenup is discussed, the better. In other words: Don’t wait until the day before the wedding.
“For some people, [being asked] for a prenup is a sign your partner doesn’t trust you. For others, it gives added security. If you’re someone who absolutely won’t get married without one, it’s best to have that conversation up front,” she says.
When Prenups are a Good Idea
CPA Vivian Groman tells the Los Angeles Times, “I see a prenuptial as the start of an ongoing conversation about money, finances, and, ultimately, the values that you hold that get expressed financially. It’s not that everybody needs a formal legal agreement. But everyone needs to have the conversation.”
Groman considers prenups pivotal in six situations:
Disparate assets: If one party is coming into the marriage with a home and an investment account, the agreement can spell out whether those assets will be kept separate or how they’d be taken into account in the event of a split.
Disparate debts: Young couples may have fewer assets to split than they have debts. If one party has significant obligations, the deal can keep the debts separate too. Beware, however, if one partner owes money to the federal government in the form of student loans or back taxes. In some cases, marriage can make the new partner liable for those debts regardless of a prenuptial agreement, a liability that can continue after a divorce. If one person has such debts, the rules should be understood before marriage.
Vastly disparate income: Earning more or less than your spouse generally isn’t an issue while you’re married, because there’s a presumption that both people share and share alike. But in the event of a split, a prenuptial agreement can set a limit—either a minimum or a maximum—on the amount the higher-wage earner pays or the lower-wage earner would get. One caveat is that state court judges have been known to toss out prenuptial agreements that appear patently unfair to the lower-wage earner, particularly in long-term marriages, according to PrenuptialAgreements.org. You can write an agreement that says “no alimony under any circumstances,” but enforcing it could be another issue.
Second marriages: Prenups can also dictate who pays which expenses for children from previous marriages. They also can outline how both partners’ assets will be split at death (as well as in a divorce). Two things to consider, though: A prenup does not replace an estate plan. A prenuptial agreement holds no sway if your children are applying for college financial aid. Federal financial aid formulas expect married couples to be jointly responsible for their children’s school expenses. If a couple divorces and the custodial parent remarries, the new spouse’s income will be included in financial aid calculations—even if that new spouse won’t help with the college bills.
Business ownership: If one or both parties have a small business, a prenuptial agreement is warranted. It protects the business’ assets and protects the non-owner spouse from potential business liabilities, Groman says.
Inheritances: An inheritance isn’t considered community property, even in community-property states. If you know you’re going to come into some money or other inheritance assets, be prepared for questions and complications. The heir must prevent assets from being commingled with the marital assets to keep his or her ownership intact. It’s relatively easy to do this if you inherit cash, stocks, or bonds. But the situation quickly becomes complicated if you inherit an interest in a home in which you subsequently live. A prenuptial agreement can spell out how you maintain your separate interest in that home, even if you both contribute to the mortgage.
If you don’t fall into any of these categories Groman suggests that couples swap financial information, spelling out their assets and debts, and talk through how they want to handle shared financial responsibilities. She says the conversation should include a discussion of long-term goals and how each person would like to reach them. If you’re planning to have children and one spouse may stop working to be the stay-at-home parent, the talk should outline how the non-working spouse won’t lose out on spending, savings, and a retirement plan.
Remember, a marriage is the biggest partnership of your life. Failing to have a conversation about money when you enter this partnership can lead to serious problems later.
For more information or to schedule a consultation, please contact Greene Crow & Smith by calling (252) 634-9400 or visiting nctriallawyers.com.
(Sources: Amanda Chatel for Forbes Magazine; Kelley Holland for CNBC; Los Angeles Times; Business Insider; Molly McCluskey for Daily Finance; The Wall Street Journal.)