When to Say “I Do” to a Prenup

One of the fun benefits of being a wealth manager is celebrating with clients who are getting married. Because of the close relationships we have, it’s a pleasure to share in these exciting events together. And I’m eager to work with them to plan for the wedding and future of their dreams.

The news can also be challenging, as it often sets the stage for what clients worry will be a more difficult conversation about a prenuptial agreement. These agreements have a negative representation in pop culture, so the thought of one might hang like a dark cloud over the engagement celebration. Who wants to think about the marriage potentially ending now?

But, for better or for worse, these conversations tend to shed light on each partner’s perception of money in a relationship and center around thorny topics such as trust, responsibility, gender roles, equity and financial security. For legacy wealth, other family members may have a strong say over the agreement. And for some women, it may be the biggest window into how much money they have or stand to inherit.

As a wealth manager, it’s my job to protect the long-term financial health of the client and their family. So I assure the couple that a prenup, or marital agreement, can have real value in beginning to build a good marriage. No matter who has what or how much, a marital agreement can be an effective, practical way for spouses to list assets and define roles in the marriage.

For example, with the guidance of a thoughtful expert, couples can use their marital agreement to declare that the husband will care for the children, the wife will work, and all earnings will be divided equally during and, if necessary, after marriage. Setting these expectations early and confirming them throughout your marriage can be a healthy way of tackling the often-taboo subject of money and the roles you plan in your marriage.

We strongly recommend marital agreements in certain financial situations that have nothing to do with a clairvoyant ability to foresee the end of your marriage, such as:

• A significant difference in wealth between spouses. While not always easy to negotiate, a prenup can help you reach key financial decisions ahead of time that can otherwise throw curve balls into the marriage.
• Children from a prior relationship. A marital agreement can ensure that pre-marriage assets are available to those children in the case of death or divorce. It also can help set the stage for your family’s estate planning.
• A business that is owned by you or your family. A marital agreement can confirm and clarify important issues, such as a reasonable salary level for the business-employed spouse to preclude claims against the business alleging otherwise if the marriage ends. These types of issues can cause substantial headaches for small businesses, as well as unnecessary delays in the divorce process.
• Protecting inheritances. No matter how much you love your soon-to-be-husband or wife, you may still want heirlooms and assets to stay in the family. It’s also common for large family estate plans to include a provision that no outright distributions can be made from the trust unless a marital agreement that protects inheritances is in effect, so you may have no choice but to put one in place.

Same agreement, different state

In the case of a divorce, a marital agreement will override the default property division laws of the residence state. Accordingly, all property earned or acquired by either spouse during the marriage will be divided in a way that was predetermined by you and your spouse.

This can be especially valuable for couples who have opportunities to relocate. In a community-property state like California, a couple’s marital property is automatically split 50/50 upon divorce without a marital agreement. However, if a couple moves to a non-community property state, such as New York or Ohio, and then files for divorce, the court will take an inventory of all marital property and then attempt to divide it between the spouses, considering a variety of factors such as:

• Length of marriage
• Earning history and potential future earnings of each spouse
• Each spouse’s role in the marriage
• Future responsibilities for children from the marriage

This process, called equitable distribution, does not necessarily yield a 50/50 property division. It puts the power in the hands of the court and makes it possible that one of the spouses might walk away with no marital property or future spousal support.

While marital agreements may not be appropriate for every couple, if properly drafted they can make a marriage easier and reduce the pain of a divorce. Regardless of what state you live in, the division of property during divorce, or after death, can be an emotional, time-consuming and expensive process. Depending on the situation, a marital agreement can make the process run more smoothly while ensuring that your assets are divided pursuant to your original wishes.

Joint households, separate property

A prenup can also clarify property ownership. If you plan to keep separate property, the key is to not “commingle,” or mix, separate property with marital property. It’s important to understand your state laws regarding separate and marital property before deciding on how assets will be held in and after (if necessary) marriage.

Separate Property

• Property earned or acquired before the marriage
• Gifts and inheritance received by a spouse after the marriage

Separate property is generally off-limits for the division of property at divorce, in both community and non-community property states. But income from separate property may be considered in a divorce, depending on the facts and circumstances.

Marital Property

• Property earned or acquired during the marriage
• Property covered by marital agreement, including gifts and inheritances that are delineated as joint property

Marital property is typically included in the division of property in a divorce.

Tips for talking about a prenup

Bringing up marital agreements with your fiancé can be a tricky business. When discussing a prenup, try to:

• Frame the conversation in practicalities
• Focus on the positives: role definition, mutual expectations, values
• Be honest about your finances to encourage an open exchange and harmony in the marriage

Executing a marital agreement

Marital agreements can be executed prior to marriage (prenuptial) or during marriage (post-nuptial). Either way, their key advantage is that both spouses have control — no matter where their lives take them.

If you think a marital agreement might be right for your marriage, your wealth manager can guide you through the process of establishing and executing one that is thorough and conscionable. If considering an agreement prior to marriage, we recommend executing the marital agreement at least three months before the wedding. Note that some states, like California, mandate that each spouse be represented by separate legal counsel, or waive the right to independent legal counsel in writing, prior to executing the agreement.

We understand that premarital agreements cross over terrain that’s emotional and often difficult to navigate, but in many cases the long-term benefit from disclosing assets and confirming expectations and roles early far outweighs any discomfort in the drafting process and lays the groundwork for a long and happy marriage.

Learn more about women and wealth by reading Aspiriant’s white paper, “Women Taking Charge: Six steps to feel more financially secure.”