Marriage is a contract. Getting married creates a contractual obligation. It involves the granting of rights and the acceptance of responsibilities. The contract doesn’t have an end date. Preparing a prenuptial agreement requires a couple to discuss their beliefs on a number of hot button topics. This can prevent conflict later during the marriage.
The closest contract that is comparable to marriage is a business partnership. Savvy businessmen do not enter a partnership without deciding how to handle future events such as the death or disability of one partner or a decision not to remain in the business. They do not leave it up to the courts to decide how to handle their private affairs.
No one marries with plans to divorce. With high divorce rates, managing the risk of divorce is simply good financial planning.
Importance of a Prenuptial Agreement
When you marry someone without a prenuptial agreement, you are giving up your right to decide how your assets and debts will be distributed. While a prenuptial agreement is something every couple should consider, in some situations it’s even more important:
- When you have children from a prior marriage, a prenuptial agreement can protect their inheritance rights.
- When you have a business, whether it is your business or a business your family has run for generations.
- When your income or assets are substantially different.
- When you get married later in life.
Protecting Children in Second Marriages
A later life marriage, when the spouse’s levels of wealth are significantly different from one another, can create the perfect storm to ruin a lifetime of good financial planning. One example that, unfortunately, isn’t a rare scenario happened when Bob married Sally several years after his first wife died. Bob had three children with whom he had good relationships. He had worked hard to accumulate a legacy he wanted to leave to them together with a ranch that had been in his family for three generations. Sally was a sweet woman. The children were initially happy their father would no longer be alone.
Just months after they married, Sally suffered a stroke that left her partially paralyzed. Bob could not take care of her and the ranch. He made the difficult decision to put Sally in a nursing home. The nursing home cost over $7,000 every month. If she hadn’t been married, Sally would have quickly qualified for Medicaid and the state would have paid for her care. Because she was married to Bob and he had cash in the bank, he had to pay the full $7,000 to care for a woman he hadn’t been married to for a year.
The legacy Bob wanted to leave for his children and the financial security he had spent a lifetime building was disappearing rapidly. He decided to divorce Sally. The state appointed an attorney to represent Sally’s interests and fought to secure as many of Bob’s assets as possible for Sally’s care. Sally would not have wanted this.
If Bob and Sally had a prenuptial agreement, Bob would have been able to divorce Sally without putting his assets at risk.
We don’t know what our future has in store for us. Everything may go well but it is best to manage the risk that thing won’t go well—even if it isn’t romantic.
What Can a Prenuptial Agreement Determine?
The decisions the court makes on your behalf during a divorce, or affect every area of your life including:
- The distribution of marital assets.
- Deciding who gets to keep the family home.
- Whether you can be held responsible for debts of your spouse, including debts incurred prior to the marriage.
- The court can even demand that you reside in a particular state.
- Who gets family heirlooms.
- Who gets the family pet.
Every decision the court makes will cost money. Making decisions in advance reduces the risk that a divorce will cost more than the assets you’re fighting over.
You can specify the distribution of, ownership of, and responsibility for many types of assets and obligations including:
- Your retirement benefits
- Your business
You can also make agreements about how to handle day-to-day financial matters including:
- Whether to use credit for purchases and impose limitations on the use of credit.
- Financial contributions each spouse will make toward projects or homes.
- How much money you will save for long-term and short-term needs.
- Whether you will pay for your children’s college education and any limitations on the expense of the college education.
- How income taxes will be filed, such as jointly or separately.
Protection from Creditors
When you are married, creditors consider the joint marital income of a couple when making credit decisions. One example of a spouse using credit without the agreement of the other was when Allie wanted liposuction and a tummy tuck. Her husband, William, the primary breadwinner, thought she looked fine and refused to agree to the expensive surgery. Allie signed a loan agreement using William’s credit and borrowed $30,000. to have the surgery the next time he was out of town on business. Cosmetic surgery isn’t returnable so he was on the hook for the $30,000 even though he hadn’t agreed to pay for it.
Allie is what is commonly known as a spendthrift, someone who spends money in an extravagant, irresponsible way. Over the course of their marriage, she borrowed significant sums of money without discussing or getting the agreement of her spouse. On another day, she went shopping with a girlfriend and even though her home was fully furnished, she bought over $10,000 of furniture on the spur of the moment.
A prenuptial agreement could have prevented William from being responsible for Allie’s extravagant spending habits.
Gifts, Education, and Heirlooms
Spouses often give one another family heirlooms and large gifts. A prenuptial agreement can attach requirements that determine the distribution of these items if there is a divorce.
One large gift that spouses often do for one another is putting them through school. When one spouse works to put the other through school, it is partially out of love for the person and a desire to help them become all they can be. There is also the expectation that the sacrifices will lead to a better life for them to live together in the future. Divorce can rob the spouse who worked two jobs so the other one could go to school without those benefits. Sometimes, the one who got the education decides that they can upgrade their spouse now that they have a better education.
A prenuptial agreement can’t prevent divorce, but it can provide for repayment for the sacrifices the spouse makes to put the other one through school.
In equitable distribution states like North Carolina and South Carolina, a judge decides the equitable split of marital property during a divorce if a prenuptial agreement isn’t in place and the couple is unable to agree on how to distribute the property. A higher-earning spouse may be awarded a greater percentage of the assets. There is no guarantee that the other spouse’s contributions to the education or career that led to the higher earnings will be considered.
For example, some companies require their up and coming executives to relocate several times in order to gain the experience required of upper-level executives. This usually means the spouse manages each move and helps to settle children into new schools. It can also significantly limit the spouse’s ability to develop their own career. These sacrifices are often willingly made to build a future together. When the future will no longer be together, looking only at the financial contributions the spouses made leads to an unfair distribution of assets. A prenuptial agreement can protect the spouse who sacrifices their career to support their spouse’s career.
Laws vary from state-to-state on the issue of whether alimony can be waived or pre-determined in a prenuptial agreement. Increasingly, states are allowing provisions in prenuptial agreements that establish the amount of alimony that would be paid if a divorce should occur, including agreements that specify no alimony will be paid. To be considered valid, the agreement must be entered:
- Voluntarily, with no evidence of coercion. The further in advance of the wedding, the agreement is signed, the greater the likelihood it will be considered voluntary.
- Knowingly, which means full disclosure of the financial situation was provided prior to marriage.
- Intelligently refers to the capacity to contract and to understand that a right to alimony might exist and that the right is being waived.
Both parties to a prenuptial agreement should seek the advice of their counsel before they sign the contract.
Occasionally, we learn of an individual who hides their wealth prior to marriage out of a fear that they would be married because of their wealth. In this type of scenario, the “knowingly” clause would be violated and the waiver could be voided by the court.
Also, if the financial situation changes substantially, the court may disregard a waiver of alimony made under different circumstances. Examples could include someone who has become a best-selling author or won a large lottery prize with a ticket they received a gift that was considered separate property.
State Laws Vary
Finally, we live in a mobile society. It is not uncommon for couples to relocate to a different state. The laws pertaining to property division and alimony differ from state-to-state. Some states still award lifetime alimony under some conditions. Some states apply community property laws to the distribution of assets while others use equitable distribution rules. The potential impact of relocating from an equitable distribution state like North Carolina to a community property state like California can be minimized using a prenuptial agreement.
An ugly court fight is one of the most expensive and emotionally taxing ways to end a marriage. A prenuptial agreement can specify that arbitration or mediation will be used instead of a court battle.