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Planning with Pre-Nuptial Agreements

Insights Financial Planning

Financial planning is a very broad term and field, with applicability to much more than investment recommendations, funding retirement or addressing estate planning. We look at how and when assets are used or transferred, tax implications, family issues and more. One particular aspect of planning which may be useful to clients who are married or plan to be married is the pre-nuptial agreement. A pre-nuptial agreement, as its name implies, is used by persons who intend to marry and who wish to address particular financial issues prior to the marriage. A similar approach used by those who are already married is the post-nuptial agreement, which is discussed elsewhere. 

When might one consider using a pre-nuptial agreement? The most common situation is where either one or both of the parties to the planned marriage have amassed substantial assets. Here, the parties can provide in a pre-nuptial agreement that in the event the marriage fails, certain assets will remain with the person currently holding them and such assets will beyond the reach of the other. This approach may also work where one person has substantial obligations and creditors and the other party wishes to remain free of those items. 

Other useful situations for pre-nuptial agreements generally would involve family requirements. For example, if the marriage is a second (or later) marriage for either or both, there may be children from the first marriage (or relationship) who would be provided for by the natural parent but not necessarily by the other party to the agreement. Another situation may be where there is a family business in which one person and his or her family is involved and which should be kept separate from the other party to the agreement in the event of a divorce. These are just common sense items that ensure that a failed marriage does not cause problems with other relationships. 

What is required for a valid pre-nuptial agreement? Although requirements vary state by state, most agreements must provide full disclosure for each party thereto and hidden assets or liabilities may be cause to void the agreement for fraud. In other words, each party should fully understand the circumstances of the other and typically will need to enjoy the benefit of counsel in reviewing and understanding the terms of the agreement before its execution. Duress – or forcing a party to enter into the agreement – is also generally prohibited. The agreement must be entered into willingly by both parties. 

The terms of a pre-nuptial agreement can be very broad. Most importantly, the agreement can provide what property will be considered separate property – and so remaining the property of the original owner – upon a divorce of the parties or upon the death of one of them. Ensuring that certain property flows to the desired beneficiaries and is not diverted to a surviving spouse is another benefit of using a pre-nuptial agreement. In these ways, the agreement supersedes state law (which varies, of course) on how those assets otherwise would be distributed at death or divorce. This is not to say that parties have carte blanche in how the division may be made as some states are more restrictive than others as to how property may be divided and the rights of each spouse upon divorce or death. Consultation with an attorney experienced with your state’s laws will be important in drafting a pre-nuptial agreement to ensure its compliance with legal requirements and ultimately its enforceability and effectiveness if there is a divorce or upon death. 

Other factors which may be the subject of a pre-nuptial agreement may be how a couple proposes to handle expenses, debt and other financial activity during the marriage and can define agreed upon spousal support in the event of a divorce. The parties may also include a sunset provision to terminate the agreement or ameliorate its terms as to one party or another to reflect the passage of time and changes in circumstances within the marriage. In fact, similar to what we often see in estate planning, the parties can agree to terms on all manner of items that are related to the marriage itself and their wishes and goals for the relationship. 

Running through all of this planning and terms of agreement is the need to have your financial adviser(s) aware of how things are intended to work. The only way a financial plan can accurately reflect the impact of various events on your overall planning and how you may work your finances is through full disclosure here as well. For example, in one case, years after the marriage was made and a pre-nuptial agreement created, the spouse with greater resources was planning on how to address a potential earlier than expected death and how the other spouse might be provided for in the plan. The wealthier spouse’s wishes were to provide much more than the original pre-nuptial agreement included and so the advice was to make clear that the pre-nuptial agreement was to be overridden or perhaps even terminated in order to be sure the desired provisions were drafted and effective. Like many other aspects of a financial plan, those relating to a pre-nuptial agreement should be revisited regularly and reaffirmed (or changed) as needed. 

George Chamberlin & Mentor RIA Consulting © 2018

(804) 591-1657