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Tackling Tricky Topics: the Ins and Outs of Prenuptial Agreements

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Last revision: June 4th, 2019
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Category: Marriage, Divorce and Family
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A Prenuptial Agreement, commonly known as a "prenup," is an agreement entered into before marriage that sets out what happens to assets and liabilities and lays out any spousal support obligations or waivers if a couple divorces or one of the parties dies. Marriage laws stipulate certain defaults upon death or divorce, but a prenup is an easy way to modify those defaults. As challenging as it can be to contemplate the potential end of a marriage just as it is beginning, a prenup is a way to make agreements about difficult and contentious topics while still on loving terms, helping the couple avoid more acrimonious or retaliatory behavior down the line if things turn sour. Further, a prenup allows a couple to avoid subjecting themselves to the arbitrary and ever-changing laws of the state that will govern in the event of a divorce without a prenuptial agreement to guide it. For many couples, it is much easier to create a Prenuptial Agreement at the start of a marriage than creating a Divorce Agreement at the end of that marriage.

Elements of a Prenuptial Agreement

Prenuptial agreements are not one-size-fits-all documents. These agreements can cover a wide range of topics from spousal support to debts to housing arrangements.

Alimony

Prenuptial agreements can provide for spousal support or, in many states, waive it altogether. They can provide for different amounts of support payments, which increase in tiers over the duration of the marriage. There are also different types of alimony. A prenup could, for example, include a waiver of permanent alimony, paid until the death or remarriage of the spouse receiving alimony, in favor of a lump sum or payments for a specific period of time. Some states use a formula in which the length of time alimony is paid is based on the duration of the marriage, for example, one-third of the number of years the couple was married. This would mean that if a couple was married for twelve years, the party receiving spousal support would get it for four years. In the course of preparing a prenup, the couple should find out what the state provides. If it makes sense for them to change the default of the law in their state, they can use the prenuptial agreement to explicitly say so.

Property designation

One of the primary purposes of a prenuptial agreement is to define what counts as marital property and what is considered separate property. Marital property is what is divided between the parties in a property settlement at divorce. Separate property is solely the owner's and not subject to distribution. For example, money inherited from grandparents would commonly be considered separate property. This is where a financial disclosure, discussed later in this guide, comes into play since everything on that list is considered separate from the marital property estate. Thus, an inheritance that was intended to go to just one party inheriting would remain their separate asset and not subject to division. Often, the parties will also agree that any increase in value in separate assets owned by the individual parties prior to the marriage is off the table as well. It is important to fully itemize and assess as accurately as possible the values of the assets that the parties wish to remain separate.

Commingling

Commingling means the mixing of nonmarital money in an account with marital money such that it is not clear which portion is marital and which is nonmarital. Like two glasses of water poured into a single glass, it is difficult, if not impossible, to discern the source of nonmarital assets that have been commingled with marital assets. Once combined, in the event of a divorce, the default is to consider assets combined in this way as commingled and therefore marital, and then subject to litigation over how the assets should be divided. Though it is possible after the fact to hire a professional known as a forensic accountant to track down the source of otherwise commingled assets, it is much cheaper and easier to maintain separate accounts for separate funds and to stipulate that those funds will remain separate in the prenup.

Transmutation

Transmutation is when an asset is converted either from nonmarital to community property, i.e. marital property, or vice versa. Transmutation usually occurs by title -- a written document affirming the mutual agreement to the change in the ownership of the property -- or by commingling, such as putting what was once separate property into a joint account. In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) whose default divorce laws say that assets should be split equally in the event of a divorce no matter the circumstances, it is especially important to make clear that separate property does not transmute into community property upon marriage or upon the non-owner spouse spending marital funds on the separate asset. A prenuptial agreement may specifically state that property will not be considered community or marital property in the marital estate regardless of the contributions made by either party.

Debts

Often, a prenuptial agreement specifies that any debts incurred by one party before or during the marriage do not become the obligations of the other party. That can be a very important provision in an agreement that could later be used to defend against the claims of a creditor going after assets of one spouse for the debt of the other. This is one of the reasons that the financial disclosure entered into as part of preparing the agreement must include not only an accurate list of premarital assets but also a full list of premarital debts.

Handling income

A premarital agreement often discusses how income earned during the marriage will be handled. The parties are able to decide which income, if any, will be considered a joint marital asset and which, if any, will remain separate. There are essentially two kinds of income: active (i.e. income earned through employment or other intentional efforts) and passive (i.e. income from things such as investment accounts or appreciation of real estate that increase in value over time and without any specific effort). These forms of income can potentially be handled differently, with the parties deciding, for example, to consider one form to be marital and the other separate property. This is an important area to be included in a prenup since, without an agreement stating otherwise, the default in all states, even if a paycheck is deposited into a separate account under only one party's name, is that all income is a marital asset and must be part of a property settlement in a divorce.

Understanding

Ideally, a prenuptial agreement should include language that each person is signing the agreement with a full understanding of its consequences, has had plenty of time to consider each provision before signing the agreement, and is comfortable with its contents. For couples who have one or more parties whose first language isn't English, it can be prudent to have the document translated into their native language to be as safe and clear as possible that both parties fully understand all parts of the agreement.

If there is not enough time to fully negotiate the prenup before the marriage OR the couple wishes to modify the prenup they created after they are already created, it is possible to write a document known as a Postnuptial Agreement that contains many of the same provisions while specifying that it was created after the marriage took place rather than in anticipation of that marriage.


Who Needs a Prenuptial Agreement?

Without a prenup, one party may have to hand over half of their assets in the event of a divorce. They may also lose a portion of the value of assets and accounts they brought into the marriage or inherited during the marriage based on how those assets were treated during the marriage. They might be responsible for paying alimony, also known as spousal support or spousal maintenance. Their spouse may have automatic rights to inherit from them in an amount greater than they intend unless there is a separate agreement waiving their rights to the estate. If someone is concerned about protecting their assets and not taking on debts they did not personally incur, a prenup would be a good option.

On the other side, the spouse with fewer assets may have different concerns that can be addressed by a prenup. They may feel concerned about their ability to support themselves in the event of a divorce and want to receive spousal support but potentially be denied these safety nets depending on the length of the marriage, their spouse having better lawyers, or a judge not deeming it equitable or fair. If the legal marriage happens many years into a committed relationship but the divorce happens not long after the legal marriage takes place, they could be treated unfairly in the divorce proceedings.

People who should seriously consider creating a prenup include those in situations where one or both partners have debt, children, or a family business. If there is a large income and/or asset disparity between the partners and if the possibility of having to divide marital assets in half would be a problem, it would be wise to explore a prenup. A stay-at-home spouse who agrees to forego having a job outside of the home might want to be sure that there are provisions in place to make certain they would exit the marriage with certain assets and alimony to help them get back on their feet, all of which can be handled in a prenup.

For those couples who wish to take the plunge into marriage with some protections in place regarding how assets, income, and debts would be handled in case of a divorce, a clearly written agreement can create great peace of mind. Promises can always be made and broken, but it is much harder to break a legal contract. Prenuptial agreements entered into before the marriage make clear what everyone's expectations are before it is too late. The point of the agreement is to save the time and attorneys' fees associated with an adversarial divorce should the relationship end. Many people do not realize that our overburdened court system can tie a couple up in divorce proceedings for years while the assets they are battling over are being consumed by legal fees.


Making Sure the Prenuptial Agreement Holds Up

Occasionally, challenges to the validity of a prenuptial agreement arise during a divorce proceeding when one party is not happy with what was previously negotiated. These challenges can result in the agreement being set aside, especially if there are elements surrounding the creation of the prenup that make it vulnerable to attack. The most important way to protect the validity of the prenup is for both parties to make an honest and complete financial disclosure to each other, listing all assets and debts. Each party should know what they are gaining and giving up by signing the agreement. Nothing should be concealed, no matter how small the account or whether the account is based in another country. The risk in not disclosing fully is that the agreement will be challenged in court by the other party based on the argument that the agreement would not have been signed in the first place if the missing item had been disclosed.

The second major strategy to avoid any potential future challenge of a prenuptial agreement is assuring there is ample time before the wedding for both parties to discuss, read, and review the agreement. One of the common arguments made when trying to set aside a prenuptial agreement is that the agreement was created and signed such a short time before the marriage that there was pressure to get it signed without close review by both parties and any further negotiation of the terms of the agreement. While some states have specific guidelines about timing, generally, there is no concrete guidance about how long one should wait between signing a prenup and the wedding ceremony. The most common rule of thumb is that there should be at least a two-week wait between the signing of the prenup and the start of the marriage.

While it's possible for a couple to create a prenup on their own, commonly, a couple will create the prenup and then have an attorney look over the document to be sure it fully complies with their state's laws and regulations. If the parties choose to take this route, an important consideration is whether they will each have their own legal counsel review the document. While having separate lawyers seems counterintuitive to a loving and agreeable couple, especially a couple looking to save money, using one attorney opens up the possibility of an argument later on down line from a jaded spouse who wants a better settlement to say they were not properly counseled before signing the prenup due to bias on the part of the shared attorney. Therefore, it generally makes the most sense for each party to have their own lawyer review the document before they sign.


Final Takeaways

Though it can be awkward or uncomfortable to create a prenup, which acknowledges the potential end of a marriage just as it is beginning, this sort of agreement serves as an excellent opportunity to talk about difficult things while both parties are on the same page and it is mutually understood that such an agreement is in everyone's best interests. Prenuptial agreements require work up front for the purpose of avoiding incredible expense and pain later on down the line if things take a turn for the worst. Here are the most important things to remember when contemplating creating a prenuptial agreement:

  • A prenup can be adapted to cover a wide variety of topics and stipulations, including alimony, division of property, which assets will be considered separate, financial obligations, and how the parties' incomes will be handled.
  • A higher-earning spouse might want a prenup to protect their considerable assets they earned before the marriage.
  • A lower-earning spouse might want a prenup to make sure they have a safety net if the marriage ends and they need time to get back on their feet and become financially independent.
  • To best ensure that the prenup will hold up to a challenge in court, the parties should make an honest and complete financial disclosure to each other of their assets and debts going into the marriage.
  • The parties should give themselves ample time to create, discuss, and negotiate the prenuptial agreement before the marriage begins so that it does not seem like the agreement was signed under pressure or duress.


About the Author: Malissa Durham is a Legal Templates Programmer and Attorney at Wonder.Legal and is based in the U.S.A.


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