Though it may seem unromantic, couples that plan to exchange marriage vows ought to consider implementing a prenuptial agreement long before saying "I do."
While there was a time when only the wealthy executed such agreements, now more and more couples--especially those who own businesses, have been married before or have a blended family structure--need to evaluate the pros and cons of a prenuptial agreement as part of their wedding plans.
In essence, a prenuptial (or premarital) agreement is nothing more than a written contract signed by two people before they're married. It can be used to accomplish many legal and financial objectives, but in general, couples use it to protect separate property (a family business, for instance), support an estate plan, define what's marital or community property, reduce conflicts and save money in the event of divorce, clarify special arrangements, and establish procedures and ground rules for deciding future events.
Typically, the agreement spells out exactly what each person brings to the marriage in terms of what they own (assets) and what they owe (liabilities), and then details how those assets and liabilities will be disposed of after separation, divorce or death. It might also detail how any assets and liabilities acquired during a marriage (say, through an inheritance) will be disposed of after separation, divorce or death.
In short, a prenuptial agreement can help ensure there's an orderly process that will take place if a marriage ends. That order can turn to chaos, however, if certain conditions aren't met. There are a few that are essential to comply with, if you want your agreement to fulfill its intended purpose. Of course, meeting the conditions I've outlined below doesn't guarantee an agreement won't be challenged by an unhappy spouse or struck down in court. But it can go a long way toward making sure there's marital bliss in the short term.
- Make a full disclosure. Each person should prepare a detailed financial statement that includes all assets and liabilities, annual gross income, interests in family trusts, and even potential inheritances. Full disclosure ensures that each person understands what he or she is getting and giving up; failure to do so can result in a prenuptial agreement being set aside.
- Be fair. The agreement should be fair. Courts tend to strike down agreements that favor one spouse over the other. Plus, courts will set aside agreements signed under pressure, such as within 48 hours of the wedding.
- Put it in writing. Though each state has different laws regarding prenuptial agreements, they basically follow the same general form: A prenuptial agreement is a written contract signed by the two prospective spouses and witnessed by a notary. These agreements need not be filed with a court and can be drawn up by the two prospective spouses without assistance.
- Add clauses. Generally, the agreement should contain a clause stating that if any provision of the agreement is invalidated, the rest of the agreement remains valid. Couples should also add a clause that makes sure the laws of the state in which the couple are going to be married take precedence should they get divorced in another state. In the absence of such a clause, couples that get divorced may have their assets divided according to the laws of the state in which they reside when they divorce. Thus, community property states--Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin--will generally divide in half the couple's assets acquired during the marriage, while other states--the equitable distribution states--may decide how to split the assets fairly, based on years of marriage, status of children, lifestyle considerations and any number of other factors. Finally, the agreement should contain a clause stating that all arrangements between the prospective spouses regarding their assets and liabilities are included in the prenuptial agreement.
- Include specific and circumstantial information. Couples might also wish to quantify "maintenance," the amount of alimony a divorced spouse may receive from his or her wealthier counterpart. In addition, an agreement could speak to the preservation of a business, family assets or a family fortune held prior to the marriage so that those assets stay with the original owner should the marriage end in divorce. For more complex situations, couples about to exchange marriage vows might also consider protecting separate property through other more sophisticated legal tools.
- Hire a lawyer to review the agreement. Last, but by no means least, it's important that each person hire separate counsel to review the contract, make sure his or her interests are protected and ensure that the agreement follows the letter of the law of the state in which they'll marry. Some agreements get struck down because each party didn't hire his or her own lawyer to review the agreement.
Debra Neiman, CFP, is principal of Neiman & Associates Financial Services, a financial planning firm and registered investment advisor in Watertown, Massachusetts. She's also the co-author of the recently released book, Money Without Matrimony: The Unmarried Couple's Guide to Financial Security.