Some people may think of prenuptial agreements as asset protection vehicles for wealthy individuals who are about to be married. When a wealthy individual gets engaged, a “prenup” can help safeguard the assets that individual brings into the marriage from passing to the future spouse in the case of a subsequent death or divorce.
Beyond such situations, prenups may be adopted by other about-to-be- weds. That’s especially true now that second (or even third) marriages are increasingly common, with children from prior unions to be considered.
Example: Jim Smith and Ann Jones have set their wedding date. Neither is considered wealthy, but they both own debt-free homes and have retirement plans, investment accounts, and other assets. In addition, Jim and Ann already have their own children from previous marriages.
In such situations, a well-crafted prenup can delineate specific assets that will go to those children after a possible divorce or the death of one spouse. Terms of the agreement will vary from one situation to the next, but one approach is to set aside certain assets brought into the marriage for each spouse’s children.
In addition to such an asset division, a prenup can address whether the couple will file a joint income tax return and who will pay the tax. Also, debts incurred before and after the marriage should be covered in the agreement.
Even if children from a prior marriage are not an issue, prenups can be helpful. For example, for two people who enter a first marriage after they’ve both had careers and built up significant assets, a prenup can preserve those assets if the marriage doesn’t work. A business owner might want to provide for the retention of the company and a valuation method in case of a divorce; partners or co-shareholders may insist on prenups to keep a portion of their business from ex-spouses in the future. Wealthy parents might want to be sure that a son or daughter executes a prenup before the wedding ceremony.
However, saying that a prenup can do this or that is only a beginning. To be effective, a prenuptial agreement must be enforceable under the laws of the relevant state. Very generally, a prenup should be :
• Formal. Ideally, the agreement should be drafted by an attorney with experience in this area.
• Voluntary. Compliance shouldn’t be coerced.
Suppose the parents of the bride are paying for the wedding and the groom’s family produces a prenup once the out-of-town guests have arrived, asserting that the bride would get nothing in case of a divorce. Such a document may not stand up to a challenge in court.
One tactic that can help to produce a valid prenup is to discuss the issue as early as possible. A prenup that’s been agreed upon after both sides have had competent counsel is more likely to be upheld. For
some marriages, the wealthier individual will hire the attorney to draft the agreement and the other party’s attorney will review it to suggest any changes.
• Fair. Full disclosure of assets may be required of both prospective spouses.
If one party can show the other failed to reveal substantial assets, the aggrieved spouse may be entitled to more than the agreed-upon amounts.
Of course, someone who is about to “live happily ever after” may not feel comfortable suggesting a prenup to a bride- or groom-to-be. One strategy to deflect the blame is to say that your CPA or your attorney is insisting on a prenup.