How to Handle Division of Property in a Prenup

Jan 31, 2023 | Prenuptial Agreements, Protecting Assets

Division of property is like the main course of the prenuptial agreement. With a side of alimony and debt allocation, and an infidelity clause for dessert, you have a full-course meal! Don’t forget the appetizers: a small bite of negotiations and a shareable plate of healthy discussion. Okay, enough with the food talk. In all seriousness, division of property is a crucial aspect of your prenup, and it’s important to understand the ins and outs of it. Keep reading to learn more about how property division works in a prenup (and without one!). 

 

What is a prenup? 

A prenup is a contract between a couple who is about to get married, and they are executed before the wedding. No marriage, no prenup (a prenup is only valid upon marriage). Prenups generally streamline the divorce process by pre-determining hard-hitting issues, such as property division. Prenups can also dictate certain obligations during the marriage, as well. 

 

What typically goes into a prenup? 

Prenups typically cover financial topics such as property division, debt allocation, alimony, and others. The meat and potatoes of a prenup are definitely the division of property. Prenups also cover non-financial topics such as pet ownership, confidentiality, life insurance, and more

The contents of a prenup don’t just cover what will happen in the event of a divorce but also the obligations during the marriage. For example, will you two have a joint bank account? How will expenses be paid during the marriage? And so on, and so forth. 

 

What is considered “property” for division of property purposes?

Some people hear the term “property” and immediately think of houses, apartments, or other types of real property. Yes, property in this context includes houses and apartments, but it also includes other types of property, such as bank accounts, retirement funds, vehicles, artwork, and more. Property, in this context, is basically anything you own with economic value. 

For example, you probably own an old, worn-down blanket, but that’s not likely going to be the subject of property division in a divorce or prenup. On the other hand, the $100 million Monet painting you and your spouse own may be a different story. 

 

Division of property without a prenup 

Before you can understand how to handle the division of property in a prenup, you should probably understand how the division of property works in a divorce. First and foremost, it depends on your state. Second, it depends on the specifics of your situation. 

Let’s dive into the state laws first. There are two property division frameworks in the United States when it comes to divorce: community property and equitable distribution. Community property is only used by nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Equitable distribution is used by the rest of the states. 

Community property states abide by the 50/50 rule. Property accumulated during the marriage, regardless of contribution, is generally divided 50/50 with a few exceptions. On the other hand, equitable distribution states divide property based on a set of factors, such as the length of the marriage, the health of the parties, and the earning capacity of each party. The split may be 65/35, 30/70, 40/60, 45/55, or any other combination.

Let’s look at an example of what might happen in a community property state. Let’s say John and Anna were married in 2009 with no prenup. In 2010, they started a retirement fund; in 2013, they accumulated $500,000 in a joint bank account, and in 2018 they purchased a home together. Generally, since they live in a community property state, all of this property acquired during their marriage from 2010-2018 would be split 50/50. Simple as that! 

What would happen to John and Anna in an equitable distribution state? It would depend on the specific state factors (every state varies slightly), but the court may consider John and Anna’s age and health, their ability to get a job and earn money, the length of the marriage, how much each person contributed to the properties, and any legal obligations to other matters, such as child support. At the end of the day, the decision would lie on the court’s shoulders. The court might say Anna gets 75% and John gets 25%, or they might say Anna gets 40%, and John gets 60%. It’s hard to say exactly what the court’s thinking.

Want to see what a real-life equitable distribution case looks like? Keep reading. A case stemming from New York shows us how equitable distribution doesn’t necessarily mean 50/50. This couple did not have a prenup and filed for divorce. In the divorce decree, the judge awarded the husband 85% of the marital assets and 15% to the wife. Why such an unequal split? Because both spouses were financially independent professionals, they were only married for a short period of time and considering their contributions to the marital estate, this split made the most sense to this court.

 

Division of property in a prenup

Okay, so you understand the consequences of property division without a prenup. Let’s talk about what happens to property division with a prenup. Basically, it boils down to what you want to keep as separate property and what you want to keep as marital/community property. Separate property is property that is yours and yours alone (not subject to division in a divorce). Marital/community property is property that is shared and will be split up in a divorce. 

In your prenup, you will essentially outline what property you want to keep separate and what you are okay with being marital/community property. This may include inheritances, gifts, earned income, appreciation in separate property value, property bought with separate property, income from investments, and any other property listed on your financial schedule

Let’s say you want to keep everything as separate property, except for inheritances (you really love your boo and want to share the wealth!). This would mean that in a divorce, a court may deem your inheritance as marital/community property and split it up. 

Let’s look at an example of how property division may look in a prenup. Let’s say Jane and Joe are about to get married. Jane is a trust fund baby and the CEO of a large company (nice work, Joe). Joe is a teacher. Jane takes in a significant salary, in addition to having many assets. Joe takes in a modest salary and only has debt. Together, they plan on purchasing property to raise a family in. The house will be purchased with Jane’s assets. Before the wedding, Jane and Joe started working on the prenup. They waive alimony (Joe doesn’t want to depend on anyone, even if they get a divorce), and they decide to keep all property separate. What’s Jane’s is Jane’s, and what’s Joe’s is Joe’s. Even if it’s something (like a house) purchased with Jane’s separate assets, she wants to keep that separate. They finalize the prenup, and that’s that. Property division handled. Everything is kept separate. Piece of cake. 

Let’s look at another example slightly different from Jane and Joe. Erica and Bobby are about to get married and want to get their prenup started. Erica is a lawyer, and Bobby is a dentist. They take in relatively equal incomes and have similar net worth. They decide in their prenups that the only property they want to keep separate is their future inheritance. All other property they acquire shall be considered marital/community property, subject to division in a divorce. If they ever get divorced, all but their inheritances will be split up accordingly. Why would they choose this route? Well, it could be for various different reasons. Maybe Erica and Bobby felt they were both financially independent and came into the marriage with similar assets, and they thought it would be fair to have a court divide up what they accumulated together (minus the inheritances). Who knows! What we do know is that this is a perfectly valid and acceptable way to split up your assets in a prenup. 

 

Final Thoughts 

Like we said before, property division is the main course, the meat and potatoes, the bread and butter of a prenup (or whatever other delicious food you’d like to imagine it as). To understand how to handle the division of property in your prenup, it’s best to get to know how your state laws work. Depending on your state and circumstances, you could be looking at a property division split of 50/50, 30/70, or even 10/90 (or any other combination). So, what do you do? Put it in a prenup, of course! Delineating your property as separate property in a prenup will do the trick. Happy prenup-ing!  

 

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