You may have heard of a little something called an equalization clause in a prenup. It is also sometimes called a lump sum clause. That’s because adding a lump sum payment to your prenup requires one spouse to pay the other spouse a “lump sum” of money when the marriage comes to an end. The question(s) become: how does this clause work, why do people add these types of clauses, what are the advantages/disadvantages, and how are they enforced? Let’s discuss!
What is an equalization clause in a prenup?
An equalization clause is a provision in a prenup that requires one spouse to pay the other spouse a fixed amount of money in the event of a divorce or separation. This fixed amount is determined at the time the prenup is signed, meaning that you both have to agree on this amount. Typically, the lump sum payment would be paid upon the finalization of the divorce settlement.
For example, the equalization clause might say something along the lines of, “Spouse A shall pay Spouse B $30,000 from Spouse A’s separate property.” Of course, there may be stipulations added, such as, “the lump sum payment will only be required if the marriage lasted longer than five (5) years.” Or other stipulations that may be negotiated.
How does an equalization clause work?
When a couple files for divorce or legally separates, the equalization clause generally kicks in. The spouse who is required to pay the equalization payment will need to submit payment as specified in the contract. Of course, every lawyer may write the clause slightly differently, so the way that the lump sum payment is paid may vary slightly from contract to contract.
Advantages of an equalization clause
Let’s talk about the reasons why someone would want to add an equalization clause to their prenup (a.k.a. the advantages).
Equalization of wealth
A major benefit to adding an equalization clause is evening the wealth out between partners if the couple has a large financial disparity. This may be especially important if one person is forgoing their career as a stay-at-home parent.
Balancing power dynamics
When there is a large discrepancy in finances between a couple, it can create uneven power dynamics in the relationship. In other words, the person with more money tends to “hold the power” especially if the other person doesn’t work or there is an extremely large wealth gap.
Peace of mind
Equalization clauses can bring peace of mind to many people, especially for stay-at-home parents. A stay-at-home parent typically gives up their career and their source of income to maintain the home and raise the kids. They may have worries that if there is ever a divorce, they’ll be “SOL.” An equalization clause can bring a lot of peace of mind in that way.
With an equalization clause, both spouses know exactly how much money will be paid in the event of a divorce or separation. This can provide peace of mind and reduce anxiety and uncertainty during a difficult time.
Let’s say Spouse A is vehemently against alimony. He doesn’t like the idea of not knowing what a judge will order in terms of duration and alimony. In exchange for waiving alimony (i.e., taking alimony out), Spouse A agrees instead to an equalization clause of $20,000. This takes out the uncertainty of alimony while still providing financial support to the other spouse in an agreeable way.
Disadvantages of an equalization clause
What would be the downfalls of adding an equalization clause? Let’s talk about it.
The main downfall to this clause is the spouse who is required to pay the money may not like what they agreed to when/if a divorce does happen. It can be particularly stressful or burdening if the separation is emotionally heightened or if there are other financial issues at play.
An equalization clause is a fixed amount of money that is specified at the time the prenup is signed. Again, this can be distressing to some people because they are bound to the amount of money they agreed to at the time of the prenup signing (or they have to “fight” it in court).
Risk of non-payment
There is a risk that the spouse who is required to pay the lump sum may fail to make the required payments. At this point, to have it enforced will cost attorney’s fees in negotiations and possibly the stressor of taking it up to a court and filing a claim.
Who should consider an equalization clause?
An equalization clause can be beneficial for couples who have significant assets or income disparity. If one spouse has a lot more assets or income than the other, an equalization clause can ensure that the spouse with fewer financial resources receives a fair settlement in the event of a divorce or separation.
It may also be beneficial for couples where one person is the stay-at-home person, whether that be for taking care of the home or taking care of the kids, or both. If one person forgoes a career and their own form of income, an equalization clause can equalize any power dynamics and provide peace of mind.
An equalization clause can also be beneficial for couples who want to simplify the process of dividing assets in a divorce or separation. If the couple agrees on a fixed amount of money that one spouse will pay the other, they can avoid the potentially lengthy and expensive process of determining alimony or other issues.
Example Scenario of an Equalization Clause
To give an example of how an equalization clause in a prenup would play out in the event of a divorce, let’s consider a hypothetical scenario:
Henry and Hannah have been married for five years, and they signed a prenup before their wedding. The prenup includes an equalization clause, which requires Henry to pay Hannah $100,000 in the event of a divorce or separation. They included the clause because Hannah planned to become a stay-at-home Mom while Henry worked as a CEO at a large company, making a significant salary.
Unfortunately, the couple decides to divorce after five years. They hire attorneys and begin the process of dividing their assets according to their prenup. Hannah’s attorney points out the equalization clause to Henry’s attorney, and he agrees to honor the clause. Once the divorce settlement is finalized, Henry submits a payment of $100,000 out of his separate property funds to Hannah.
In the end, the equalization clause in Hannah and Henry’s prenup helped to simplify the process of dividing their assets during their divorce. Although there were some challenges along the way, the lump sum payment provided Sarah with a fixed amount of money that she could rely on, and it allowed John to maintain control over his other assets.
How to include an equalization clause in a prenup
If you are considering including an equalization clause in your prenup, it’s important to work with an experienced family law attorney or state-compliant prenup platform such as HelloPrenup. Legal professionals can help you draft a prenup that includes an equalization clause and other provisions that protect your interests.
Things to think about when deciding whether or not to include an equalization clause:
- Financial circumstances: You should consider both spouses’ financial circumstances when determining the amount of the lump sum payment.
- Marital roles: Will one person be a stay-at-home parent and forgo a career?
- Tax implications: You should consider the tax implications of the lump sum payment and how it may affect you.
How to enforce an equalization clause
If a couple includes an equalization clause in their prenup and later divorces or separates, the spouse who is entitled to the payment has a few options as it pertains to enforcing the clause. There are ways to do this before requiring a court to enforce it.
For one, the couple can simply hash it out privately and/or with the divorce attorneys. The attorneys can work it out so a court doesn’t need to get involved. They can also negotiate (less ideal but still an option) to avoid having to take it to court. Finally, they can file a claim in court asking judges to enforce the prenup clause and require the spouse to make the lump sum payment.
Alternatives to an equalization clause
If you decide not to include an equalization clause in your prenup, there are alternative ways to divide assets in a divorce or separation. These include:
- Division of assets: The couple can divide their assets in a way that is equitable and fair so as to have a similar effect of equalizing the wealth between the parties.
- Spousal support: The spouse with fewer financial resources can receive spousal support from the other spouse. This is similar to an equalization payment in that it is monetary payments made from one spouse to the other. However, it’s different because the amount and duration of spousal support can range, depending on the circumstances, whereas an equalization clause is more concrete since it was already decided on.
An equalization clause (sometimes referred to as a wealth equalization clause) can be a great addition to a prenup, depending on your specific situation. They can be especially useful for stay-at-home parents and/or couples with large wealth gaps. Whether or not you should get an equalization clause will be up to you and your partner to agree on.
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: [email protected]