I recently read an article about why young couples should not have prenuptial agreements.
The core argument emphasized the need for entering marriage with an unrestricted commitment to forever sharing all aspects of one’s future, including finances. According to the author, this notion of “forever,” should be the focus.
This is in stark contrast with the potential negativity of a prenuptial agreement. For many young people, a prenuptial could be the first meaningful legal document they will sign – a legal document that describes, in part, how assets will be divided should the marriage eventually fail. While the romantic in me subscribes to the author’s point of view, my professional and life experiences strongly dictate otherwise.
While most people rightfully enter marriage with the utmost of optimism, “forever” is not always the outcome. The statistics reveal that close to half of all marriages in the United States end in divorce. For young couples, the financial future may be uncertain. Without significant family money, young couples may be more hesitant to engage in the conversation. When I discuss the need for a prenuptial agreement with clients entering a second or later marriage, especially when there are children from a prior marriage, there is general agreement that, at a minimum, such an agreement should be considered.
These clients generally are older, more established in their careers, and often have meaningful assets.
They also maintain a visceral understanding that, despite the best of intentions, marriages don’t always work out.
Prenuptial agreements allow individuals to protect themselves financially with a prearranged, legally binding agreement between spouses. It can designate certain current and future assets as individually owned rather than marital property that can be subject to division upon divorce.
There are two different systems for classifying marital property in the United States: the common law property system and the community property system. In a common law system, property acquired by a married person during marriage is the property of that person separately, unless the person agrees with his or her spouse to hold the property jointly.
By contrast, there are nine community property states in the United States and one hybrid (Alaska allows you to opt in). Generally speaking, under the community property system, property acquired by either spouse while married becomes community property. Property acquired before marriage, as well as property inherited or received as a gift during a marriage, is generally considered the separate property of the recipient spouse.
The applicable legal system affects rights of ownership, rights to income from property, rights and duties of management and control, rights to make lifetime gifts, property rights in the event of divorce, and rights to dispose of property at death. Notwithstanding the legal system (common law or community), if one spouse enters a marriage with significant assets and hopes to keep these assets separate, the prenuptial agreement can provide protection in the event of divorce.
Inherited assets can be particularly difficult to deal with. While traditionally considered separate assets, inherited assets can easily become marital property. Although it is possible for these assets to remain separate property through careful segregation, it is fairly easy to unintentionally comingle such assets; thus making them marital assets. For example, depositing inherited assets into a joint account, or using separate assets to purchase a jointly owned residence that benefits both spouses, are examples of comingling that can create marital property. Even when using care to keep assets separate, depending on state law, an inheritance (or the appreciation) may still become marital property. Ultimately, using devices such as trusts along with a prenuptial agreement may provide the ultimate protection against the inadvertent conversion of separate property into marital property.
Prenuptial agreements can be especially important to protect children in the context of high-net worth families. These agreements create a clear and concise framework that helps to avoid uncertainty of a divorce settlement, thus ensuring that the intended beneficiaries receive the appropriate family assets.
Clearly, the subject of prenuptial agreements is neither romantic nor simple. Nonetheless, engaging in the conversation may be necessary and pragmatic. More importantly, in cases of family or personal wealth and children from prior marriages, the conversation may be essential.
