Several years ago, I read an article arguing that young couples should not, as a general rule, have prenuptial agreements (aka prenups). The core thesis was that couples should enter marriage with an unrestricted commitment to forever sharing all aspects of their future, including finances. According to the article’s author, the notion of “forever” should be the focus, and the inherent nature of a prenup is the anticipation that “forever” might not be in the cards. Although I disagree with the author’s conclusion, I readily concede that negativity surrounds prenups.
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. The romantic in me subscribes to the author’s point of view, but my professional and life experiences strongly dictate otherwise. Because even though most people enter rightfully marriage with the utmost optimism, statistics reveal that about half of all marriages in the U.S. end in divorce.
In my experience, young couples are generally hesitant to engage in the prenup conversation——unless, that is, they are being pressured by parents when there might be the potential to inherit family assets. Otherwise, they don’t have substantial assets at this stage of their professional life (at least when you factor in outstanding student loans).
This scenario is different than when I recommend a prenup to older clients, especially when they are entering a second or later marriage, often with children from a prior marriage. In these instances, the general agreement is that the couple should at least consider a prenup for two main reasons: Older clients tend to be more established in their careers and can have meaningful assets. They also know firsthand that despite the best intentions, marriages don’t always work out.
Prenuptial agreements allow individuals to protect themselves financially with a prearranged, legally binding agreement between spouses. These contracts address the designation of specific current and future assets as individually owned, rather than as marital property that will be subject to division upon divorce.
They are complicated legal agreements, controlled by state law, and each side should be represented by separate legal counsel to increase the likelihood of enforceability. In no case should couples rely on DIY documents found online.
When asked, I recommend choosing attorneys with experience in matrimonial law so each party can enter the marriage with reasonable expectations and a full understanding of the financial implications of a potential divorce.
Prenups should be discussed and executed during the early stages of the engagement; a document that is first presented shortly before the wedding may be nullified by the claim that it was signed while under duress.
In the U.S., there are two different systems for classifying marital property, which are determined by state law: the common law property system and the community property system. Each of these systems treats the couple’s property somewhat differently and is best explained by the attorneys drafting the agreement as to how the applicable legal system affects rights of ownership; rights to income from property; rights and duties of management and control; the rights to make lifetime gifts; and, the property rights in the event of divorce or death.
Notwithstanding the legal system (common or community law), the prenuptial agreement provides protection to spouses who enter a marriage with significant assets—or are likely to obtain significant assets through income or inheritance—and hope to keep these assets separate.
Prenuptial agreements can be crucial in protecting children in high-net-worth families. The documents create a clear and concise framework that helps to avoid the uncertainty of a potential divorce settlement, thus ensuring that the intended beneficiaries receive the appropriate family assets. I’ve seen estate and trust documents that require a potential beneficiary to have an in-force prenup to receive distributions.
Clearly, the subject of prenuptial agreements is neither romantic nor always simple. Whenever both sides to an agreement have their own attorneys, the process can become adversarial. Nonetheless, despite the potential hassle, engaging in the prenup conversation may be necessary and pragmatic, and be invaluable in the event “forever” doesn’t come to pass.
The author does not provide tax, legal, financial, or investment advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, financial, and investment advisors before engaging in any transaction.
