Have you ever heard of “the great wealth transfer?” It’s the term given for the biggest wealth transfer in history that is about to happen, estimating a staggering $68 trillion in wealth that will be passed down from the baby boomer generation between the years of 2018 and 2042. Baby boomers (a.k.a. many of our parents or grandparents) are the wealthiest generation in American history! In part due to the 10-year bull market and the post-World War II economy. Most of their wealth comes from real estate, with the typical boomer owning a home. It begs the question: who is on the receiving end of this great wealth transfer? You guessed it! Millennials!
So, it’s no surprise that your parents may want you to protect your inheritance with a prenup. After all, they worked many years to build up that wealth and naturally want it to stay in the family! Not only do they want to protect inheritances, but also probably any gifts from family and family businesses (if applicable). If your parents are pressuring you to protect your inheritance with a prenup, they might have a point. Without a prenup, inheritances, family gifts, and family businesses can all quickly become marital assets, subject to division with your future ex-spouse. Each state has its own laws surrounding prenups and inheritances, so let’s hone in on Massachusetts’ take on the matter.
Laws on inheritances in MA (without a prenup)
It is a common misconception that inheritances are automatically protected in a divorce, and it’s just not true! In Massachusetts, if you received an inheritance and got a divorce, your ex-spouse may receive a portion of that money. Keep reading to find out why.
Massachusetts is an equitable distribution state, meaning that a court will divide any and all assets held by either spouse in the event of a divorce. This may include inheritances. Yes, that’s right. Your precious asset inheritance from your Great Grandfather, who worked his tail off for 80 years, may become partially your future ex-spouse’s new treasure. In a divorce proceeding, the assigned judge will consider a few factors when determining how to split up an inheritance:
- Size of the inheritance
- When the inheritance was received
- How the inheritance was treated during the marriage
- Each spouse’s future earning potential
The good news? If you know you have an inheritance from your Great Aunt Marge coming one day, and sweet old Marge is still alive at the time you get a divorce, this is not an asset subject to division at the time of the divorce. However, you’re not off the hook yet. Your judge may still look at Great Aunt Marge’s money as part of your future earning potential, and the judge may accordingly divide assets taking that into mind. Meaning that your future inheritance may work against you when divvying up the marital pot.
Let’s use an example to illustrate how inheritances work in a MA divorce. Let’s say Amy and John have been married for 30 years when they decided to call it quits. Amy received an $800,000 inheritance when they had been married for about 15 years. Amy also deposited that $800,000 into a separate bank account that she had. John is an artist and takes in a very low salary compared to Amy. How do you think that inheritance will be awarded in the divorce? Well, given that the inheritance was received during the marriage and there was no prenup, there’s a good chance John is getting a cut of that $800,000. If Amy and John had a prenup in place, that outcome might have turned out quite differently. Keep reading to find out how.
“When a couple divorces in Massachusetts, they are required to divide their marital estate in accordance with legal standards as well as any pre or postnuptial agreements entered into. Inheritance in a Massachusetts divorce is not automatically excluded from the marital estate as it may in other states. Rather, inheritance can be divided by the court as a marital asset, especially in a long-term marriage.” -Christina Pashou, divorce attorney at Conn Cavanaugh in Boston.
How a MA prenup can help protect inheritances
If you don’t like the outcome of the previous section (that is, the potential for your spouse to take a piece of your inheritance or for your inheritance to work against you), then you may consider a prenup! A prenuptial agreement is an official contract that is created, finalized, and signed before marriage. It outlines what happens to your property that is acquired during the marriage and the property that belonged to you before the marriage. Not only that, but it is also a tool for communication with your spouse (and maybe even your parents!). For example, does your soon-to-be spouse know about your inheritance? Maybe they do, and they’re expecting their 50% cut of it. And perhaps you’re okay with that! Or maybe you’re not. Either way, a prenup will help clarify these questions about inheritances and facilitate open communication about the future.
Okay, but how can a prenup specifically protect my inheritance? You can write into your prenup that any inheritances, gifts, and even family businesses are your separate property, not subject to division in case of a divorce. Declaring your inheritance in your prenup as your separate property protects a judge from adding that inheritance to the marital pot and splitting it up if you ever get divorced.
Let’s use an example to illustrate how a prenup can help. Kevin and Ashley just got engaged. Ashley suggests a prenup, and Kevin agrees. Ashley is mostly concerned with the inheritance that she expects from her grandpa (he’s 95 now), and it’s pretty significant (she’s been told it’s going to be around $500,000). She wants to make sure money from her grandpa is protected. So, she outlines in the prenup that she wants to keep all inheritances and gifts separate property. Ashley should also act in accordance with her prenup by keeping the inheritance actually separate (i.e., she knows not to go depositing her inheritance into her joint bank account with Kevin). They finalize the prenup and live happily ever after. *Sigh of relief* Ashley feels so much better and can now sleep at night knowing Gramps’ hard-earned cash will be safe and sound.
Speaking with your parents about inheritances
First things first, do you really know the full picture of your family’s wealth? If not, it’s a good time to speak to them about it before entering a prenup. There may be certain assets or businesses that should be passed down to you that you aren’t even aware of! So, to make sure you get the full picture, it’s best to sit down with them (when all parties are of sound mind) and get the scoop. Heck, maybe they’ll even offer to pay for the prenup if you agree to protect the inheritance!
In your prenup, you also have the choice of not protecting your inheritance. You can allow inheritances to become marital property, subject to division upon divorce. If this is your choice, then you should also talk to your parents about this. They may have their opinions about this choice, but at the end of the day, a prenup is about the marital commitment between you and your fiancé.
Postnuptial agreements are another way to protect inheritances
So, let’s say you opt out of a prenup and then realize a few years into the marriage that your Great Aunt Jo is coming out of left field by handing down a whopping $3 million to you. Great Uncle Bob was a total deadbeat, and they never had kids, so sweet old Jo decided to give her money (unbeknownst to you) to her great-nieces and nephews! At this point, you’d probably be wishing you had a prenup to protect this inheritance. And the answer is yes; you could have protected an inheritance that you didn’t know was coming in a prenup. Okay, so what do you do now? Well, many people are choosing postnuptial agreements (“postnups”) to protect their inheritances. A postnup is an agreement you enter into with your spouse after you’re already married. It’s similar to prenups in that you can contract to things like property in the event of a divorce.
Now, you may be thinking, “okay, great; I’ll just get a postnup if that ever happens to me,” and, sure, that’s one way you could do it, but you should know one important thing. Postnups are not as strong as prenups and are not as frequently upheld in many states. Prenups have been around longer, so they are much more accepted nationwide.
To avoid getting yourself into this pickle, your best bet is to get a prenup. But a postnup is another great option if you weren’t able to get a prenup.
Conclusion
Your parents may want to protect your future inheritance, and with good reason! If you live in Massachusetts, you need to be thinking about what might happen to your inheritance should you get a divorce. The answer is simple: if you don’t have a prenup, your inheritance is at risk of being divided in a divorce. With a prenup, you have a solid layer of protection to make sure your inheritance remains your separate property, not subject to division in a divorce.
HelloPrenup can help you create a prenup while sitting at home on the couch. Our interactive platform allows you and your partner to walk through a questionnaire and financial disclosure to create a prenup tailored to your needs. There’s even a section for negotiations where you two can work out any discrepancies. Then, all that’s left is signatures and notarization! And, bam! You’ve got yourself a legitimate prenuptial agreement.
Patrick, J.D., LL.M. is Head of Legal, serving as our General Counsel overseeing all attorney-related operations, including regulatory efforts and legal affairs. As a seasoned estate planning attorney, Patrick brings over a decade of knowledge and real-life taxation law experience to our service offerings. He holds a B.A. in Economics from Davidson College, a J.D. from Washington University in St. Louis School of Law, and an LL.M in Taxation from the University of San Diego. Before joining Trust & Will, Patrick practiced law in the trusts and estates practice group of law firm Hahn Loeser & Parks LLP. While attending undergrad, Patrick served as a firefighter for the Davidson Fire Department.
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