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Planning For The Possibility Of Divorce

“Begin with the end in mind” is good advice in most cases, but it is commonly frowned upon in marriages. Despite the stigma, a premarital agreement can mitigate the damage from a divorce or a spouse’s premature death.

At its core, financial planning is about planning for the expected case, but also being well prepared for unlikely and unanticipated events. No one gets into a car expecting to crash, and no one begins a marriage intending for it to end poorly. However, almost everyone buys insurance, while few prepare for the possibility of a broken marriage. As unromantic as it may be, a premarital agreement is a sensible tool that protects you against something you hope will never happen.

A premarital, or prenuptial, agreement is a written contract that a couple enter into prior to their marriage. It outlines how assets and earnings will be divided in the event of a divorce. Without an agreement, assets are divided based on the cooperation of the parties, or in the absence of cooperation, state law as applied by the courts. Money spent on a prenuptial arrangement is a drop in the bucket of the expense of a typical wedding, yet it can be the most valuable expenditure in practical terms.

Why Plan For Separation?

The best time to make life-altering decisions is before problems arise. Deciding how to divide assets and income in the event of a divorce is no different. You can make better, less emotion-driven decisions by planning in advance rather than as a marriage deteriorates.

Though divorce rates have dropped in recent years, enough couples end their marriages to make planning for the possibility worthwhile. In addition, many people now marry later in life, which gives them more time to accumulate assets before getting married. As a result, there’s often more to lose if a relationship goes sour.

Prenuptial agreements are not just for the wealthy. People may feel the need to protect themselves for a variety of reasons in the event of a divorce. For example, the couple may bring very different amounts of wealth to the union, even if the total is relatively modest. Or one future spouse may expect to receive a substantial amount through inheritance or a trust distribution. One member of the couple may own all or part of a business, or may anticipate earning a high income once he or she finishes education or training. All of these factors can affect the decision to pursue a premarital contract. A prenuptial agreement is also important if one or both partners have children from a previous marriage.

Finally, a prenuptial contract is appealing to people who want to minimize the government’s control over their private affairs. By default, most states provide for equitable distribution of assets upon divorce, but this does not necessarily mean equal distribution. Rather than having state law or a judge’s discretion dictate the terms of a divorce, a prenuptial agreement can outline the provisions, so neither party faces unpleasant surprises during an already unpleasant process.

Once a couple decide that they want a prenuptial agreement, they should begin to create a list of all of their individual assets, projected income, trust distributions and gifts or inheritances that they may receive. The couple would likely benefit from sitting down with their respective families and advisers to get the most complete picture of their families’ finances. This is especially important since the law requires full financial disclosure. If one spouse hides assets during the premarital agreement process, it can invalidate the contract. With a thorough list in hand, each person should consider how he or she would divide these items in the event of a divorce and what other provisions to include in the written agreement.

Couples should seek an attorney familiar with marital law and estate planning to draft a formal agreement. It’s also crucial that each partner be represented by separate, qualified counsel to strengthen the contract’s legal standing. The agreement should follow proper legal procedure for a contract and undergo review by both parties, as well as their legal representatives.

State courts have discretion in how they interpret contracts, including prenuptial agreements, so the agreement should be as uncontroversial as possible. Several states have adopted the Uniform Premarital and Marital Agreements Act (UPMAA), which provides some consistency among their laws governing premarital agreements and can serve as a useful guide for discussing the principles of the agreements.

For a premarital agreement to be enforceable, the UPMAA indicates that each party must enter into the agreement voluntarily, and that the contract must not be unconscionable when it is signed. In other words, the document cannot be so unfair that it is unreasonable to suppose that an informed individual would agree to its terms. In most states, a prenuptial agreement is unenforceable if its provisions are so extreme that its execution renders one of the parties eligible for public assistance.

Both parties should sign the agreement well in advance of the wedding. If an agreement is presented to a bride or groom practically on the way to the altar, a court may determine that the contract wasn’t entered into voluntarily, given the pressure involved in the situation and the embarrassment either party would feel as a result of calling off the wedding at the last minute. That said, states can vary in their readings of this aspect of contract law; courts in North Carolina have ruled that a prenuptial agreement is enforceable even if it is signed at the last minute.

Although the provisions of a specific agreement are determined by the couple’s unique circumstances, there are a few guidelines to keep in mind when having the document drafted. The agreement should not contain frivolous provisions, such as forbidding a spouse to cut his or her hair, or requiring a spouse to do housework with certain frequency. Such language can lead a judge to reject the entire document.

The document should have a clear “trigger,” so that the provisions begin to apply at an easily identifiable point. Is the couple considered divorced when one partner files, or not until the divorce takes legal effect? If ceasing to live together is a trigger, it’s important to be clear about what that entails and how long the separation must last before the couple is considered separated for purposes of the agreement.

Many couples are comfortable with an equitable division of assets if their marriage lasts for a long time, and are only worried about the potential of a marriage failing quickly. In these cases, it can be appropriate to use the prenuptial agreement to allow a spouse’s interest in property to vest over time, or with the birth of children. Some states automatically invalidate prenuptial agreements after a certain time period or once the couple has a child together. It is important for couples to be aware of such default provisions in their states of residence and to consider how an agreement handles such issues.

Alternatives To A Prenuptial Agreement

Prenuptial agreements can prevent many problems, but they are not a panacea. As mentioned above, these contracts don’t necessarily last forever, since the agreement can lapse after the birth of a child or the passage of time, depending on state law or on how a contract is drafted. Also, the prenuptial agreement cannot be used to determine custody or visitation issues for children of the marriage, though it can dictate the treatment of children a partner brings to the marriage.

If a married couple regrets not drafting a prenuptial agreement, they can still take steps to control their financial affairs in the case of a divorce. A postnuptial agreement is a more problematic relative of prenuptial agreements, entered into after the spouses have already married. Signing a contract after a marriage has begun that stipulates a split of assets that is not equitable can trigger suspicions of fraud or undue influence on the part of one spouse. While a postnuptial agreement can be better than no plan, it is even more important to structure a contract that can stand up to the scrutiny of a court.

People can also protect their assets or those of their families by keeping the funds in trusts. If the wealth in question comes principally from the family of one spouse, for example, the family can make gifts to trusts for the desired recipient rather than outright. If the trust is properly structured and the trustee has discretion to withhold distributions, the assets should be protected without a prenuptial agreement.

Everyone hopes that they will never need the fire insurance that they purchased for their homes, or that the people they’ve named guardians to their children will never have to act in that capacity. But few would argue that it’s responsible to avoid planning for a disaster just because one hopes never to face it. In the same way, a prenuptial agreement allows individuals to know that, in a worst-case scenario, they have a plan.