Why Having a Prenup is a Smart Financial Decision

Jan 13, 2023 | Finances, Prenuptial Agreements

Having a prenup is a smart financial decision for anyone, not just for people with money. (But don’t get us wrong, prenups are beneficial for wealthier folks, too). If you make significantly less money than your spouse or are a stay-at-home parent, a prenup is a financially savvy choice by providing you with more money in the event of a divorce. Not only do prenups protect both the person with money and without, but they also protect your children! Keep reading to understand all of the ways having a prenup is a smart financial decision.

 

What happens to your finances in a divorce without a prenup

Let’s begin with what happens if you don’t get a prenup. In short, a divorce can take a toll on your finances; there’s no way around it. Between asset division, debt allocation, alimony (i.e., spousal support), and child support, your bank accounts, real estate portfolio, retirement funds, etc., can take a real hit.

Asset division in a divorce without a prenup

Starting off with asset division. Asset division means splitting up different types of property, such as real estate, bank accounts, retirement funds, and any other property that has economic value. In a community property state, property accrued during the marriage is generally split 50/50, regardless of contributions or other factors. Let’s say you started a business during the marriage (with no help from your spouse), and it blew up. You sold it for $20 million dollars. That $20 million is usually subject to the 50/50 split in a community property state. Yikes! Now, if you live in an equitable distribution state (which is a majority of states), then you won’t necessarily have a 50/50 split of property accrued during the marriage. Instead, it could be a 30/70 split, 40/60 split, or any other combination split. Your ex-spouse could even end up with some of your separate property that was accrued BEFORE your marriage. 

All the above is only regarding how your finances will take a hit in terms of property division. There’s still debt allocation, alimony, and child support, which you could end up paying as well. 

Debt allocation in a divorce without a prenup

Regarding debt allocation, a court may award you debt from your spouse, even if you had nothing to do with it. That’s right, if your sweetie took out loans in their name alone, you could still end up footing a portion of that bill. 

Alimony in a divorce without a prenup

As for alimony, each state has different parameters on how to calculate the amount and duration of payments. On top of splitting your property 50/50, 60/40, or whatever split you end up with, you may also end up paying alimony to your ex-spouse (or receiving it if you are the financially disadvantaged spouse). Alimony could be a monthly payment or a lump sum payment, and it could last for a few months to a lifetime. It really depends on many factors. 

Child support in a divorce without a prenup

Next up: child support. Generally, you cannot contract around child support in prenups, so what happens regarding child support is somewhat out of your hands. Yes, on top of alimony and property division, you may be subject to child support. Child support calculations are state-dependent, and how it is determined varies. However, there’s generally no “avoiding” this via prenup, so the cards will fall as they may either way.

 

How a prenup can protect your finances

As you can see, divorces can really take a hit on your finances from all angles: assets, debt, alimony, and child support. You can see your bank account drain, retirement funds split up, your real estate portfolio dwindle, and much more. 

Luckily, you do have some control over this. With a prenup, you have the ability to override default divorce laws on assets, debt, and sometimes alimony in a prenup. In other words, you can create your own rules on what will happen to your finances, and the court generally obliges, with exceptions (i.e., the prenup must be valid, not unconscionable, etc.). What could be a smarter financial decision than that??

A prenup protects your assets 

We talked earlier about how asset division occurs during a divorce, and depending on what state you live in will dictate the parameters around how your “stuff” is split up. Let’s backtrack a bit. What are assets? Assets are any type of property with economic value, so they could be bank accounts, retirement funds, houses, cars, artwork, NFTs, crypto, and much more. 

The meat and potatoes of a prenup is protecting property, i.e., assets. In a prenup, you can dictate what property is to be considered separate property (not subject to division) and what property is marital/community property (subject to division). If it’s deemed separate property in a prenup, it’s generally off limits from being divided in a divorce (as long as you have a valid, enforceable prenup). 

A prenup protects against debt 

Without a prenup, you can be assigned your partner’s debt in a divorce, even if your name wasn’t on it, and sometimes even if the debt was taken out before the marriage. So, yes, that means depending on your state’s divorce laws and your situation, you could end up with a portion of debt from your partner that did not have your name on it and that was taken out before the marriage. Ouch! 

Never fear; a prenup is here! A prenup can help override those default state divorce laws to protect you against absorption of that debt. You can outline that debt (taken out before or during the marriage) should be kept separate. Phew! 

A prenup can waive alimony (i.e., spousal support)

Alimony can be a scary thought for many people or a comforting thought if you’re on the other end of it. Alimony is the financial support from one ex-spouse to another. Whichever end of the spectrum you fall on, alimony could either bolster your finances or diminish them. 

Alimony can get tricky in prenups, but nonetheless, alterations to alimony can be included if done correctly. Generally, you can dictate to either waive alimony or leave it in and let the court determine the amount and duration. If you waive alimony, you effectively are saying, “we will not be allowed alimony in the event of a divorce,” and this may be for one person or both people. Many states have strict requirements around waiving alimony. For example, California generally does not require attorney assistance when executing prenups, but if you waive alimony, you MUST have an attorney; otherwise, it’s an invalid prenup.

A prenup protects your inheritances

It’s a common misconception that inheritances are safe in a divorce. Many people mistakenly believe that they maybe don’t need a prenup because the only asset they have is a future inheritance, but it’s protected anyways…right? Wrong! Inheritances can be split up in a divorce, and if that’s money you’re counting on for retirement or purchasing a home, then you may be SOL in a divorce without a prenup. 

Prenups can protect inheritances from your spouse and make sure that they are considered your separate property and yours alone. This can help keep your inheritance safe and sound even in a divorce.

A prenup protects your businesses 

In a divorce, your former sweetheart could potentially be awarded a chunk of money based on the business’s estimated value. Or maybe they would receive a larger portion of assets to offset the business value. There’s a myriad of ways that your finances can dwindle in a divorce because of your business. 

Prenups can ensure that your business, all of its interest, earned income, and appreciation, can remain your separate property, not subject to division in any way. 

A prenup protects you if you’re a stay-at-home parent or make significantly less than your spouse

We’ve talked a lot about how a prenup can protect your money, but a prenup can also be a smart financial decision for people without much money. For instance, if you are a stay-at-home parent and your spouse is the breadwinner, you would be making an excellent financial decision to get a prenup and include certain provisions that award you, as the stay-at-home parent, more money or assets. 

Here are some ways a person with less money might benefit from a prenup:

  • You might include a wealth equalization clause (lump sum payment upon divorce to the lesser-earning spouse), 
  • You might consider NOT waiving alimony, 
  • You might negotiate for more assets, such as keeping the marital residence, and
  • You might ensure that any assets you do have are protected (inheritances, gifts, etc.).

A prenup protects your finances for your children’s sake

If you have children from a different relationship, a divorce could end up taking from your children, either in the present or future. If your children are under 18, you may lose money in a divorce, which in turn, reduces the amount of money available for your children. Even if your children are adults, losing money to a spouse that isn’t their parent can also reduce the amount of inheritance they receive one day! 

Prenups can indirectly protect your children’s finances by ensuring that you keep your money now to take care of them and also protect any future inheritance to them. 

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All content provided on this blog is for informational purposes only. HelloPrenup, Inc. (“HelloPrenup”) makes no representations as to the accuracy or completeness of any information on this site. HelloPrenup will not be liable for any errors or omissions in this information nor for the availability of this information. These terms and conditions of use are subject to change at any time and without notice. HelloPrenup provides a platform for contract related self-help. The information provided by HelloPrenup along with the content on our website related to legal matters (“Information”) is provided for your private use and does not constitute legal advice. We do not review any information you provide us for legal accuracy or sufficiency, draw legal conclusions, provide opinions about your selection of forms, or apply the law to the facts of your situation. If you need legal advice for a specific problem, you should consult with a licensed attorney. Neither HelloPrenup nor any information provided by Hello Prenup is a substitute for legal advice from a qualified attorney licensed to practice in an appropriate jurisdiction.

Nicole SheeheyNicole Sheehey is HelloPrenup’s Head of Content. She is an Illinois-licensed attorney. You can read more about us here. Questions? Reach out to Nicole directly at [email protected]

 

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