Prenuptial agreements traditionally have been seen as symbols of mistrust and control. Yet, despite how uncomfortable conversations about prenuptial agreements may be for couples and their families, they can serve a number of important purposes, including:
- Keeping family wealth, however defined, within the family that generated it, and protecting it for many generations.
- Establishing a set of rules, agreed to by the couple, or the couple and their families, governing the disposition of wealth upon the dissolution of a marriage (either by divorce or the death of a spouse).
- Providing a healthy opportunity for a couple to discuss finances in an open and productive way and to create a joint philosophy regarding wealth.
- Integrating a future spouse into the family.
The creation of a successful prenuptial agreement can only be achieved if all parties (the couple, the parents, and other involved parties) understand the process and engage in trusting, frank, and open-minded communication – listening and being listened to – with a commitment to resolving issues without hurt feelings and resentment.
What Is a Prenuptial Agreement?
A prenuptial agreement is a contract between two soon-to-be-married individuals in which they agree upon the rules for their relationship, especially with respect to their property. The agreement can set rules that apply during the marriage and following the termination of the marriage with respect to the disposition of property. It is important to remember that all marriages end at some point, either by divorce or the death of a spouse.
Each state has its own laws dictating what happens to property when a marriage ends. These laws can differ widely from state to state, and the state where a marriage begins may not be the state in which that marriage ends. A prenuptial agreement is a couple’s opportunity to decide what will happen should a marriage end (either by divorce or death) rather than relying on the dictates and uncertainties of state law.
Who should consider aprenuptial agreement?
Any couple can create a prenuptial agreement. However, such agreements should be considered (and are particularly common) when:
- One person (or one person’s family) has significantly more assets or debts than the other.
- One person or one person’s family owns a family business.
- One person or one person’s family has special assets (such as artwork, antiques or jewelry, among others) that they desire to remain with that family.
- One or both persons have children from a prior marriage and they desire to leave property to those children.
- One or both persons are professionals with special education, credentials or licenses who desire their enhanced earnings and potential earnings to remain with them.
Most prenuptial agreements define rules with respect to the couple’s property. A couple can define rules for managing their property during their marriage, and for its division when the marriage ends (either by death of a spouse or by divorce). The couple can also define rules with respect to the provision of spousal support.
Generally, while married, spouses must financially support one another and their children by providing the necessities of life. Spouses can agree as to how they will manage their finances and which spouse will pay which household expenses. Although such arrangements are usually informal, they can be formalized in a prenuptial agreement.
Should the spouses divorce, a prenuptial agreement may require one spouse to provide financial support to the other. Spousal support, sometimes called maintenance or alimony, is a payment from one divorcing spouse to the other, usually for a term of years following the dissolution of a marriage by divorce. The amount of support, term of support, and any increases in support during such term are all separate nuances to consider.
Parents must provide for their minor children. Agreements with respect to child support, especially upon termination of a marriage, are generally not permitted in a prenuptial agreement. It is possible, however, for spouses to agree upon financial arrangements that can be used for children, such as maintaining a certain amount of life insurance coverage, allocation of certain private education costs, and requiring the creation of trusts.
The division of assets when a marriage ends (either by divorce or at death) is another important part of a prenuptial agreement. Absent a prenuptial agreement, state law defines how assets are divided upon divorce. There are two general systems for dividing property upon divorce: common law systems and community property systems. The nuances of each state’s law can mean that even states using the same general system (community property or common law) may classify property differently. It is critical before entering into any agreement to consult an experienced attorney licensed to practice law in the state in which the agreement will be governed.
Generally, in community property states, assets acquired after marriage are owned by each spouse equally (no matter who has title). Assets acquired before the marriage may be characterized as separate property or some type of mixed property. In common law states, marital assets are generally divided equitably (equitable distribution). In essence, the court dissolving the marriage decides what constitutes a fair division of the property. Assets considered marital property are typically subject to division, while assets considered separate property are generally not subject to division.
A prenuptial agreement can change the rules of state law with respect to the division of property. The agreement can, for example, define which assets (or classes of assets) are separate property not subject to division; limit what property (or how much value) may be allocated to a spouse; include a sliding scale, with more property being allocated to a spouse in a longer marriage; or provide some other division unique to the couple and their assets.
When a marriage ends because one spouse dies, other property rights are considered. Almost every state forbids a decedent from completely disinheriting a spouse. How the amount payable to a surviving spouse is calculated and what property is included in the calculation can vary significantly by state. Also, the concepts of marital and separate property may not apply when a spouse dies, as many states calculate the surviving spouse’s required share based on the value of all property owned at death, from whatever source acquired. Note that leaving a trust for a surviving spouse may not satisfy the minimum required amount, potentially allowing the surviving spouse to choose between accepting the trust or taking the minimum statutory amount outright.
A surviving spouse’s rights can be waived in a prenuptial agreement. If one spouse has assets (for example, an interest in a business, an inherited home, family heirlooms, wealth acquired before marriage) and desires to bequeath those assets to someone other than the other spouse, or if a spouse’s will leaves assets in trust for the surviving spouse, it is essential that a prenuptial agreement waiving spousal rights at death be executed. Of course, a prenuptial agreement can also require a decedent to provide a surviving spouse with a minimum amount that differs from that required by state law (even an amount greater than the state law minimum).
When a marriage ends there can be conflict, whether between the spouses in a divorce or the deceased spouse’s children and the surviving spouse. Conflict can bring the prenuptial agreement into court with one side seeking to enforce it and the other side seeking to have it invalidated. Although every state has different rules regarding the enforceability of prenuptial agreements, there are some general steps that you can take to make your agreement more likely to be enforced.
- Disclosure: Failure to fully disclose assets when preparing a prenuptial agreement may jeopardize the agreement’s validity. Waivers of rights are generally not valid if they are not made with full knowledge of what is being waived. Failure to fully disclose assets and expectancies, including their value, can invalidate the agreement.
- Counsel: Each person entering into a prenuptial agreement should be represented by a separate attorney. Failure to be adequately represented is often a factor cited when someone seeks to invalidate a prenuptial agreement. Further, the rules of attorney ethics would prevent the same attorney from representing both parties.
- Timing: A court is more likely to uphold a prenuptial agreement when the parties have had “adequate” time to review the terms of the agreement with an attorney. Of course, what constitutes “adequate” is determined by the court reviewing the prenuptial agreement and the facts and circumstances of its execution. The closer to the wedding an agreement is executed, the more likely a challenge will succeed.
Keep an Open Mind
Suggesting a prenuptial agreement can be difficult. Yet, discussions around a prenuptial agreement can be a way to encourage a frank discussion among the couple and their families. These discussions allow the couple and their families to understand each other’s thoughts and expectations regarding money, property, support and other family matters. It also allows them to define the financial rules of their relationship. Entering into these discussions with an open, understanding and caring attitude can lead to a valid agreement and a more successful marriage.
Each party (and maybe even their families) will need assistance when discussing and preparing an effective prenuptial agreement. Of course, attorneys skilled in domestic relations law will be necessary. Also, the parties and their families may require the assistance of accountants and valuation experts to prepare adequate financial disclosures. Finally, the parties may desire to review their financial status with a financial advisor to determine if the financial arrangement each makes for the other will be adequate, presently and in the future.
For more information, please contact your PNC Private Bank advisor.