How to Use a Prenup to Establish Financial Responsibility

Jan 20, 2023 | Finances, Prenuptial Agreements, Protecting Assets

Having a financially responsible partner is important, especially if you are. Financial responsibility means paying your bills, paying off your debt, only taking the debt you know you can afford, spending within your means, and efficiently managing your money. Prenups can help establish financial responsibility between spouses in several ways. For starters, creating a prenup fosters alignment on financial goals, roles, and expectations. Second, prenups cover the financial obligations during the marriage and in the event of a divorce. Third, a prenup’s meat and potatoes divide assets and allocate debt–this helps each party understand what’s yours, mine, and ours.

 

Discuss financial roles, goals, and expectations of each other 

One huge benefit of the prenup-making process is a couple’s alignment on financial and life roles, goals, and expectations. The process demands open and honest conversation about everything, even uncomfortable topics, like divorce, death, money, family, children, etc. Throughout the process, you two must come to terms on various topics, which in turn, requires you to align on everything. In a prenup, both people must agree with the terms; it can’t just be one side demanding something and the other not agreeing to it. A prenup is like any other contract where there is a meeting of the minds, and two people come to an AGREEMENT. 

You can determine things like “will one of us stay home with the children?” or “How will we treat any debt that we incur during the marriage?” or “How much money will we each deposit into our joint bank account each month?” or “Is this piece of property mine or theirs?” These questions and many more are likely to arise in the prenup-making process, and you two must discuss it to come to terms. 

 

Choose whether you will use a joint bank account or separate bank accounts during the marriage

One common misconception about prenups is that they only cover what happens in a divorce. It’s not true! Prenups may cover financial obligations during the marriage, too. One thing a prenup may cover in particular is the use of joint or separate bank accounts. That is, will you two share a bank account or maintain separate accounts? This is important because joint bank accounts are generally subject to division (i.e., marital/community property) in a divorce. If you have a separate bank account, you can deem that as separate property and attempt to avoid division in a divorce.

Another important note is that if you do have joint bank accounts, you should be sure not to deposit separate property funds into your joint bank account. So, any property that you deem separate property (not subject to division) in the prenup should not go into that joint bank account; otherwise, it may be considered commingling. If it is considered commingling, those separate property funds will likely be considered joint funds and split up in a divorce, and you definitely don’t want to lose your separate property!!

 

If using a joint bank account, determine how expenses will be paid and income deposited 

If you two plan on having a joint bank account, you typically have to discuss how much money will go in and out every month. Why? Because a joint bank account will generally be deemed joint property subject to division (i.e., marital/community property) in the event of a divorce. In other words, you don’t want to be disappointed in how much your partner has spent/contributed in the event of a divorce. The joint bank account will likely be divided accordingly (depending on your state and case, it could be split 50/50, 60/40, 70/30, etc.) 

Let’s illustrate with an example of how this can get sticky if you don’t agree to what goes in and out of the joint account. Let’s say Mike and Ashley are married, and they share a joint bank account. In their prenup, they agree that they will have a joint bank account and make good-faith efforts to contribute to the account 50/50. The prenup says neither Mike nor Ashley may argue in a divorce that the other party didn’t contribute their amount. 

At the beginning of the marriage, everything was peachy–Mike and Ashley contributed about 50/50 to the bank account as they agreed in their prenup. However, Mike eventually loses his job… starts playing video games a lot, and completely loses all motivation. He contributes very little to the account, but Ashley continues with her 50% contribution. This goes on for several years. They eventually get a divorce, and Ashley feels jipped that this bank account will be split up as community/marital property when she feels she has been the only major contributor for years. However, Ashley signed the contract, which says she cannot argue that Mike didn’t contribute his piece. It’s in the prenup. The joint bank account is still joint property and subject to being split up in the divorce. Knowledge and planning=power. 

 

Determine how debt will be assigned in a divorce

Establishing financial responsibility involves ensuring debt is handled in a way you both are comfortable with. In a prenup, you may determine how pre-marital debt (debt incurred before the marriage) and debt incurred during the marriage will be treated, which allows you both to understand your financial responsibility as it relates to debt.

For example, let’s say, in your prenup, you both agree to take personal responsibility for any pre-marital debt, but you also agree that you will both share any debt taken on during the marriage. Suppose your spouse has medical school debt from before the marriage and wants to start a business during the marriage. In that case, you are now financially responsible for any of that business debt (but probably not the medical school debt). 

 

Determine how assets and earned income will be distributed in a divorce

Who gets the house? Who gets the car? Assets are basically anything with value, and in a divorce without a prenup, your marital/community assets (and sometimes separate assets) are divided between you and your spouse. With a prenup, you can determine what separate property (not subject to division) is and what is marital/community property (subject to division). You can also determine how to treat earned income in a prenup. How will that salary, bonuses, commission, rental property income, etc., be treated–separate or joint property? Subject to division or not? These things help establish financial responsibility because it helps each party understand who owns what. When you understand what you own, you take responsibility for it.

 

Discuss whether or not alimony is on the table 

In your prenup, you can waive alimony for one or both parties (or not.) If you choose to leave alimony on the table, you are essentially leaving it up to the court to decide the duration and amount. Alimony is sometimes referred to as spousal support or maintenance, depending on your state. It is the financial support paid from one ex-spouse to the other. It could be for a very short period of time or for a longer period of time. Each state generally has its own formula for how to calculate alimony, and a judge will determine this at the time of the divorce. 

Understanding if you or your partner will pay alimony helps both of you take financial responsibility for that potential (or not if no alimony is on the table). For example, if one spouse waives alimony, they need to take responsibility for their own finances, knowing that they will not have spousal support after the marriage comes to an end.

 

The Bottom Line

Prenups are a great way for both spouses to establish their financial responsibility not only during the marriage but if the marriage comes to an end. Prenups can help you establish financial responsibility in a few ways. For one, the process fosters in-depth communication over finances, goals, and expectations of one another. Two, prenups allow you to include financial obligations during the marriage, such as whether or not you will use a joint bank account, and if so, what will expenses and contributions look like? Three, prenups outline what you own and what you are financially responsible for, such as which assets are yours, which debt you are responsible for, and if alimony is something you two will allow.

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