A prenuptial agreement — sometimes referred to as a “prenup” or a “premarital agreement” — is an agreement signed by a couple prior to marriage. The agreement determines how the couple’s assets will be divided if they divorce and may set the amount of alimony paid by the high-net-worth partner. It may also impact the division of an individual’s property upon death.
Lawyers advise clients to negotiate a prenuptial agreement under a variety of circumstances. As a general rule of thumb, the wealthier you are, the more important it is to have a prenuptial agreement. Upon divorce, many states give the less wealthy spouse ownership and control over half the richer partner’s assets, if those assets were acquired during the marriage. This means that a woman with a successful real estate company would discover upon divorce that her husband had a legal right to half of what she earned during the marriage, even if the husband was an obsessive gambler who contributed nothing. This division of assets can be overridden by a prenuptial agreement, which is why this legal instrument is popular with high-net-worth individuals.
In particular, wealthy individuals should insist on a prenuptial agreement if they have children from a first marriage. Upon death, inheritance laws heavily favor the spouse of the deceased over the children of the deceased. This can potentially mean that a spouse of two years receives a greater share of assets than a child of twenty years. Individuals who feel this is a misallocation of assets can arrange for their children to inherit a much larger share of assets than would otherwise be the case using a prenuptial agreement.
Own your own business? A prenuptial contract is critical. Imagine two equally wealthy individuals. One owns a business, while the other is employed as an investment banker. In the event of a divorce, and in the absence of a premarital agreement, the individual with his own business may find his spouse has not only partial ownership, but partial control over his business and its operations. The investment banker, however, is not nearly as impacted — there is nothing for his spouse to control, because he is an employee who does not himself have control over business operations. A prenuptial agreement can ensure that in the event of a divorce, a business does not suffer as former spouses struggle for control.
If a spouse intends to leave the workforce after marriage, the couple should strongly consider negotiating a prenuptial agreement. A househusband or a housewife may enjoy the opportunity to stay at home and focus on the family, but will also forfeit years of earnings and job market experience. This leaves him or her heavily dependent on the wage-earning spouse. A prenuptial agreement can determine what happens if the couple divorces and one of the spouses has no means of support. (Note that prenuptial agreements usually do not affect the amount of child support paid, since the law does not allow parents to limit the rights of future children to collect child support.)
Finally, if one partner has incurred significant debt, the other should seek protection in a prenuptial agreement. State laws differ, but under some circumstances, creditors can reach the property of both spouses to resolve the debts of either.
Abraham Cowley, a 17th century English poet, famously observed that “of all pains, the greatest pain, it is to love, but love in vain.” Cowley was probably referring to the pains of a broken heart, but a divorce can break a wallet as readily as a heart. Prenuptial agreements, thankfully, can soothe the pain.
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