Prenuptial Agreement

This article is about Prenuptial Agreements.

A prenuptial agreement, also known as a premarital agreement or prenup, is a legal contract entered into by a couple prior to marriage.

The prenup outlines what will happen to each person’s assets, debts, and finances if the marriage ends in divorce or if one spouse dies.

While prenups were once seen primarily for the wealthy trying to protect large estates, they have become more commonplace for couples of all economic levels in recent decades.

Here is an in-depth look at what prenuptial agreements are, what they can and cannot cover, reasons to consider one, pros and cons, enforceability, and steps for creating an effective agreement.

What Can a Prenuptial Agreement Do?

The primary matters a prenup can address include:

– Division of property and assets acquired during the marriage.

This determines what is considered separate vs joint property.

– Division of property and assets owned before the marriage by each spouse.

A prenup protects separate property from equitable distribution in divorce.

– Allocation of debt accrued by each spouse before and during the marriage.

– Amount, duration, and schedule of any spousal support payments in case of separation or divorce.

– Life insurance and retirement benefits.

A prenup can dictate who remains beneficiary of accounts in event of divorce.

– Inheritance rights of each spouse, including rights of election against the other spouse’s estate.

– Handling of property inherited during the marriage by one spouse.

– Custody arrangements or education expenses for children from a prior relationship.

– Compensation for a spouse giving up a career to care for children.

– Lifestyle clauses, such as compensation for adultery.

Enforceability varies by state.

– Choice of which state laws govern the prenup terms.

What Cannot Be Included in Prenups

There are certain matters state laws prohibit covering in a prenuptial agreement:

– Child custody and visitation.

Courts determine custody based on a child’s best interests.

– Child support amounts.

Courts calculate this based on state guidelines and the child’s needs.

– Alimony/spousal support in some states, such as California, or limits deemed unconscionable.

– Anything illegal or against public policy.

– Requirements to stay home and raise children or perform other marital obligations.

Reasons to Consider a Prenuptial Agreement

There are several reasons why a prenup offers advantages for many couples:

– Protect assets brought into the marriage.

This especially applies to family businesses, intellectual property, real estate, inheritances, trust funds, investments, pensions, and collectibles.

– Limit responsibility for your spouse’s preexisting debts.

These remain that spouse’s separate liabilities.

– Avoid disputes over gifted or inherited property received during the marriage by one spouse.

– Provide for children from a previous relationship.

This can include custody, education expenses, or existing child support.

– Set expectations for spousal support if the lower-earning spouse sacrifices their career.

– Clarify inheritance rights and waivers of elective share of spouse’s estate.

– Preserve family heirlooms and convey them to children of earlier marriage in the event of death or divorce.

– Protect professional licenses and degrees earned by one spouse from being divided.

– Provide for a spouse giving up career opportunities to raise children.

– Create financial incentives to promote fidelity and deter harmful conduct like gambling.

Pros of Prenuptial Agreements

– Allows customization of financial arrangements rather than relying on state laws.

– Offers predictability and reduces disputes later over property division.

– Avoids costly litigation if a divorce occurs.

– Defines separate property so gifts and inheritances stay with original recipient.

– Encourages open financial discussion before the wedding.

– Can protect children’s inheritance rights from a previous marriage.

– Can limit need to pay spouse’s separate premarital debts.

– Can provide for pets and other beloved property.

Cons of Prenuptial Agreements

– Can signal lack of trust or create resentment.

– Legal fees for drafting two attorneys, one for each spouse.

– Predicting future needs and circumstances is difficult.

– May be viewed as unromantic.

– Terms could later be deemed unfair to one spouse.

– Enforcing lifestyle clauses varies by state.

– Sunset provisions could require renegotiating later.

– Does not guarantee a smooth divorce settlement.

When to Bring Up a Prenuptial Agreement

Ideally, the topic of a prenup should be raised early once marriage discussions become serious.

However, initiating the conversation can be tricky.

Here are some tips:

– Frame it as a financial planning matter, just like setting up a joint budget would be.

– Emphasize it is about avoiding disputes and confusion, not lack of trust.

– Highlight how it protects assets and property brought into the marriage by each person.

– Send your partner some general information first so they can consider it.

– Schedule a calm, unrushed discussion well in advance of wedding planning.

– Suggest a prenup gives each of you protection and is mutually beneficial.

Some professionals recommend introducing the prenup along with compatible topics like estate planning, financial goal setting, and defining shared values about money and property.

Prenup Negotiation Process

Here are steps both parties should take to negotiate a balanced prenuptial agreement:

1.

Have separate lawyers.

Even if using one lawyer to draft the agreement, each party should retain their own counsel to review terms and represent their individual interests.

2.

Fully disclose all assets, debts, income, and expenses.

Complete transparency is required.

Share tax returns, financial statements, pay stubs, credit reports, and documentation of property ownership.

3.

List goals and concerns of each spouse.

Identify shared objectives for finances and property during the marriage.

Discuss concerns prenup should address.

4.

Research state laws on prenups and community property.

Knowledge of default rules provides context for negotiations.

5.

Start with a template then customize.

Adapt a pre-drafted prenup to fit your situation and needs.

6.

Negotiate compromises on areas of disagreement.

Be willing to find middle ground.

7.

Allow time for review, revisions, and re-evaluation.

Do not rush the process.

8.

Keep discussions calm and constructive.

Remember, this sets the tone for handling future disagreements.

9.

Accept that no spouse gets everything they want.

Compromise is essential.

10.

Do not wait until right before the wedding.

Sign well in advance to avoid duress concerns.

11.

Follow proper signing formalities.

Rules vary by state but generally require notarization and witness signatures.

What States Allow Prenuptial Agreements?

All 50 states recognize prenuptial agreements as legally valid and enforceable contracts as long as procedural requirements are met.

26 states have adopted some version of the Uniform Premarital Agreement Act (UPAA) which establishes basic ground rules and requirements.

States adopting the UPAA include:

Arizona, Arkansas, California, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Oregon, Rhode Island, South Dakota, Utah, and Virginia.

While state laws vary somewhat, the same essential elements are required nationwide for an enforceable prenup, described next.

Requirements for an Enforceable Prenuptial Agreement

To withstand legal scrutiny, a premarital agreement must adhere to the following core requirements:

– Made voluntarily by both parties.

Cannot be signed under coercion or duress.

– Full financial disclosure by each person.

Complete transparency is mandatory.

– Representation by separate attorneys, or waiver of counsel in writing.

– Agreement is entered into knowingly.

Terms must be understood.

– Terms do not unconscionably favor one spouse or infringe on rights of children.

– Signed by both parties, not just their attorneys.

Many states also require notarization.

– Reasonable time to review terms before signing.

Last minute signing can risk enforceability.

– Satisfies all additional technical requirements of your state’s laws.

A prenup meeting all of the above requirements is presumed legally valid and binding.

One spouse cannot later have the agreement voided merely because a divorce is filed or they are unhappy with the terms in hindsight.

Procedural and substantive fairness is the key.

Can a Prenup be Changed or Challenged?

A properly executed prenuptial agreement is extremely tough to overturn or modify.

However, some limited circumstances allow challenges:

– Proof of fraud, misrepresentation, or failure to disclose assets/liabilities.

– Showing agreement is unconscionable and excessively favors one spouse over the other.

– Signed under provable duress immediately preceding the wedding date.

– Birth of a child not referenced in the prenup.

Child’s rights supersede contract.

– Breach of fiduciary duty between spouses.

Actions must clearly violate financial obligations of marriage.

– Changed circumstances not foreseeable when signed, especially related to custodial obligations.

– Procedural defects like signatures done under undue influence, coercion, intoxication, or incompetence.

For these reasons, it is critical prenups are negotiated equitably and adhere to all legal formalities.

Violations of law or public policy also render terms unenforceable.

Overall, however, challenging prenups post-marriage is an uphill battle except in extreme cases.

Alternatives to Prenuptial Agreements

Some couples are uncomfortable with prenups but still want to define financial rights and obligations within their marriage.

Alternatives to consider include:

Postnuptial Agreement – Identical to prenup but executed after wedding.

Must still follow same contract requirements.

Provides option if prenup discussion is tabled before marriage.

Community Property Agreement – Converts separate property to community property owned equally.

May require transmutation deed.

Tenancy by the Entirety – Joint ownership with right of survivorship that passes property to surviving spouse.

Irrevocable Trust – Transfers assets from separate ownership to an irrevocable trust for benefit of both spouses.

Removes assets from estate.

Will Contracts – Bind each other to keep estate planning documents in place.

May require independent representation.

Joint Accounts with Survivorship Rights – Pass to the surviving spouse without probate.

Beneficiary Deed Transfer on Death – Transfers real estate to designated recipient upon death.

Avoids probate.

Payable on Death Account – Transfers securities or bank accounts to named beneficiary upon death.

Life Insurance – Names spouse as sole beneficiary on policies.

Proceeds payable at death.

While these arrangements transfer property rights to the spouse at death, they do not allow customization of terms like a prenup does for divorce proceedings.

For maximum protection, combining a prenup with alternate ownership and beneficiary designations is ideal.

Key Takeaways

A prenuptial agreement provides a way to avoid uncertainties over property rights and support obligations within marriage and in case of divorce or death of a spouse.

While prenups were once mostly for the wealthy, they have now become mainstream for couples at all income levels who want to define financial terms, protect assets, and prevent potential disputes.

For prenups to be binding, strict requirements must be met including full disclosure, separate legal counsel, and adhering to state laws.

When done properly, prenups can add predictability, open communication, and shared understanding of finances between marriage partners.