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Harmonious Prenuptial Agreements

June is still the month traditionally associated with weddings, even if October has surpassed it to become the most popular month to tie the knot. As they prepare for their big day, the last thing most couples want to dwell on is the possibility that their marriage may not last.

This is one reason I talked to my daughters about prenuptial agreements when they were teenagers, years before any potential grooms entered the picture. Another reason for raising the topic so early was that I did not want imply, by bringing it up later, that I was unhappy with any particular future child-in-law. As a matter of fact, now that one daughter is already married and the other is engaged, I am very happy with their choices. Proposing a prenup should not demonstrate lack of faith in a union, any more than buying homeowners insurance reflects a belief that your new house will one day burn down.

If you are a parent of a soon-to-be bride or groom, bear in mind that the decision about how and whether to enter a prenuptial agreement is ultimately up to the people getting married. You can offer suggestions, advice and support, but you cannot force anything. However, you may want to adjust your own estate or financial plans depending on how the couple proceeds, so if your child is comfortable sharing the details with you, it is worth asking.

Naturally, being both a professional financial planner and the owner of a family-run business, I gave my daughters some notes about how I thought they and their future husbands should go about getting their own prenups. I put those thoughts in an email, and told them I would eventually share most of these points for publication. They included:

Full disclosure. Both partners need access to all relevant information at the stage when they are discussing the agreement’s terms. Beyond being the fair way to proceed, failing to fully disclose may have legal consequences; if it comes out that a spouse hid assets or debts during the prenuptial negotiation, it could invalidate the contract.

Separate representation. In many situations in your married life, the same attorney can assist both partners. This is not one of them. Many attorneys would not be comfortable representing both members of a couple in a negotiation in which they are on opposite sides. Even if you find a lawyer willing to do so, however, a court might not enforce such an agreement, especially in favor of the party who paid the lawyer. Each partner is entitled to legal advice from an experienced attorney who is loyal solely to that individual.

Keep it clear and simple. Some people think the prenuptial agreement is the place to decide how many children they want to have, in what faith those children will be raised, how custody will be structured in case of divorce or separation, what sort of college they will attend, and what sports or musical instruments they will or won’t play. Some people also try to use prenups to decide where they will live, how they will celebrate holidays, and all sorts of other domestic matters.

I do not recommend that your agreement try to do any of this. In any marriage, there are some basic financial and legal issues to settle. I believe you should limit the agreement and the discussion to these issues. Not only will this be easier on you, but it makes it more likely that your agreement will be enforced as you intend.

Be fair. The goal is not to try to extract everything possible from your partner. The goal should be for the couple to enter into married life knowing that they expect everything to work out well, but that if it doesn’t, both parties will exit the marriage with their finances and self-esteem as intact as possible. There should be no losers, and you should win as a couple by treating one another with the consideration you each deserve.

Beyond these foundational principles, every prenuptial agreement – like every marriage – will look a little bit different.

As you begin, take stock of all your individual assets, projected income, trust distributions, and any major gifts or inheritances you expect to receive. You should also discuss your student loans or any other significant debt you will bring to your union. This may require you to go to your parents or other family elders, and possibly their financial advisers, to get a full sense of the big picture (to the extent they are willing to share this information). You may also want to agree to pull a credit report on one another in this planning stage.

For many people planning a wedding, especially a first wedding, their major assets are likely to be their personal earning power. You should both consider the question of alimony as dispassionately as possible. Note that some states do not allow spouses to waive the right to alimony, so if you plan to include that provision in your contract, make sure you know whether your state permits this.

If you have an advanced degree or a professional license, you may also want to specify that the other partner has no claim against a share of its value. Absent such an agreement, in some states a professional license such as a medical or CPA license is considered an asset that is subject to division in the case of a divorce. This is appropriate where one party helped pay for the training of the other, but if that is not the case, you might agree to treat each partner’s professional credentials as separate property that is not subject to division.

Most couples should not waste time and legal fees hashing out the details of potential future child support in the prenuptial agreement process. Instead, it is generally better to specify that child support will be determined by mutual agreement or by the court in the event it becomes an issue. The major exception is for households that include children from prior relationships.

During this process, you should discuss whether and to what extent you plan to keep separate bank accounts. You should also check, if you don’t already know, whether you live in a community property state, as this may further complicate your personal plans. With my daughters, I suggested that they specify that spouses were entitled, but not required, to maintain separate accounts not subject to division in case of divorce; any assets placed in a joint account would be considered joint property. The exact mix of joint and separate assets will look different for different couples, but every couple should discuss their expectations and agree on a system that works for both people, especially as it applies to assets brought to the marriage.

Your agreement should also address claims against the other spouse’s retirement accounts, separate property brought into the marriage, or gifts given to one spouse by parents or another third party. The idea, overall, is that both spouses should agree in advance what constitutes individual property and joint property, in order to prevent messy disputes over the matter in the event of a future separation. The same goes for liabilities incurred prior to the marriage.

You should ask your attorneys about any specific state laws governing prenuptial agreements that could apply to you. For instance, some states automatically invalidate premarital agreements after a couple has been married for a certain number of years or when the couple has children. If such sunset provisions exist in your state, you may want to discuss other financial planning avenues, such as trusts, to make sure both partners are protected.

The entire prenuptial process should be completed, and the agreement signed, well in advance of the wedding. I recommend no less than 30 days, largely because certain courts have refused to enforce last-minute agreements on grounds that at least one of the parties was put under undue pressure. On a practical note, too, you want to make sure you both have time to approach these decisions thoughtfully and without the additional stress of wedding-day plans bearing down on you.

Few people look forward to the prenuptial agreement process, but it can trigger some very productive and necessary conversations about your shared finances and values. When done right, a premarital agreement is a pretty simple and straightforward piece of paperwork, not much more complex – and no less necessary – than getting the marriage license itself. Once the contract is signed, the two of you can get back to other critically important decisions ... like the choice of song for your first dance as a married couple.

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