Property division is one of the most important aspects of a prenuptial agreement (prenup). The “meat and potatoes,” if you will. If you’re vegan, then “cauliflower and beans.” Many people turn to a prenup in order to divvy up their property, namely, debt, real estate, bank accounts, retirement funds, inheritances, and more. It can be daunting to think about all of the things you have and what to do with them; we get it! Look no further; we’ve compiled this article for you to help you make decisions about property division in your prenup.
What is a prenup?
A prenup is a legal contract that is signed by two people prior to getting married. It outlines the terms and conditions that will govern the couple’s financial affairs during the marriage and in the event of a divorce. The types of topics that are covered in prenups are property division, alimony (i.e., spousal support), debt assignment, lump sum payments, and much more. This article focuses on the property division topic.
What do we mean by “property division”?
For starters, when we refer to property, we mean anything that you and your partner own. It could be real estate, bank accounts, retirement funds, jewelry, crypto, etc. How you split up your and your partner’s “stuff” is the real question here.
Property division is the process of determining how the couple’s assets and liabilities will be divided between them in the event of a divorce. Every state has different laws governing property division.
In community property states like California, the marital pot is split 50/50. In equitable distribution states, like New York, the marital pot is split according to a list of factors, which could be 50/50 but could also be 40/60 or any other combination of split.
Before you get divorced, you have the opportunity to lay out property division in your prenup. If you create a valid and enforceable prenup, you can override your state’s property division laws and make your own rules regarding property division.
How do you decide who gets what in a prenup?
When making decisions about property division in a prenup, it is important for couples to consider their individual financial goals and objectives. For example, one spouse may be more interested in protecting their business interests, while the other may be more focused on protecting their retirement savings. It is also important for couples to consider their future plans, such as whether they plan to have children and whether one spouse will stay at home to care for them.
A huge factor in deciding who gets what in a prenup is asset allocation. Who gets what “stuff?” Assets are basically anything with value, such as real estate, bank accounts, retirement funds, jewelry, etc. Assets are generally split up in a prenup in terms of separate property and marital/community property. If something is separate property, then it is not subject to division in divorce. If something is marital/community property, then it is subject to division in divorce.
Let’s talk about what property gets categorized as either separate or marital/community in a prenup.
First, inheritance and gifts. You can categorize whether or not inheritance and gifts will be considered separate property in your prenup. Even future inheritances and gifts can be included.
Second, the property you already have before getting married. That house you bought when you were 25, years before meeting your partner, what do you want to do with it? Should it be separate property, or are you okay with it potentially becoming marital property?
Third, business assets. Any business you currently own or open in the future can be included in your prenup and categorized as either separate or not.
Fourth, appreciation of separate property. Let’s say you did actually make that apartment you bought ten years ago your separate property. Well, what if it appreciates in value by the time of the divorce (and it probably will)? Do you want that appreciation to be separate or marital/community property?
Fifth, property purchased with separate property. Let’s say you have a house that you deem your separate property. You sell the house and buy a boat. Is this boat now marital/community property, or do you want it to remain separate property because you bought it with separate property funds?
Sixth earned income during the marriage. How do you want to treat things like salaries, bonuses, commissions, etc.? Should these be considered separate property, too?
Another important consideration when making decisions about property division in a prenup is debt. What will happen to your debt? There are two types of debt when it comes to prenups: pre-existing (or pre-marital) debt and future debt accrued during the marriage (we’ll call it marital debt). Pre-existing debt is the debt you accrue before getting married. Marital debt is, of course, the debt you accrue during the marriage. The question becomes, do you want pre-existing debt to be considered your separate or joint debt? What about marital debt? The key here is to decide what debt is separate and what debt is joint.
The Emotional Aspect
Emotions. We’ve talked a lot about finances and legalities, but what about the emotions of it all? Prenups are as much an emotional document as they are a legal one.
First off, the nature of the prenup-making process facilitates extremely in-depth conversations that may take hours or days, depending on your situation. These conversations cover some difficult topics, like divorce, death, marriage, money, kids, and more. All of these topics may be uncharted territory to you as a couple, and the prenup process is the time to put it all out on the table.
Second, a prenup requires you to align with your spouse on expectations of one another, marital roles, and life goals. Do you want to retire when you’re 45 and save every last penny and live far below your means? If so, are you sure your future spouse wants that lifestyle as well? These are the types of things you need to align on in order to come to an agreement.
In the end, you will walk out a stronger couple with a much deeper understanding of each other.
It’s important to note that property division in a prenup is not necessarily the same as property division in divorce laws. Prenups are voluntary agreements between two individuals. State default laws governing property division may look completely different than what is in your prenup.
If your prenup is overly unfair (i.e., unconscionable) or invalid for some procedural issue, like not signing properly, then the court has the ability to “throw out” the prenup. However, this is infrequent! Courts don’t go throwing prenups out left and right for the heck of it. There has to be a really solid legal reason, for example, if enforcing the prenup would cause one person to need public assistance while the other person goes home to their mansion.
If a court does throw out your prenup, they will apply the default state property division laws to your case in order to divide up your stuff.
It’s also good to understand your goals for your prenup as a whole when making decisions about property division. Is your main goal to waive alimony? Well, then, you may want to use property division as your negotiation chip to take alimony off the table. Maybe your main goal is to receive a lump sum payment upon divorce. In that case, you might negotiate for a lump sum payment in lieu of some property. Narrowing in on the goal you want to achieve with the prenup can help make sure you get what you want.
Maybe your goal is simply to protect certain property! That’s why many people are drawn to a prenup in the first place. It could be an inheritance or bank account, or piece of real estate that you really want to protect. If that’s the case, then focusing on which property you most want to safekeep is key.
Compromise and negotiation are natural components of the prenup-making process, so be prepared to budge a little on your original plans. Going into the process with an underlying goal is the best way to allow yourself to compromise on other areas of the prenup.
The Bottom Line
In conclusion, making decisions about property division in a prenup is an important aspect of the prenup process. Couples should consider their individual financial goals and objectives, as well as the debt, default state laws, and the emotional aspect of it all when making decisions about property division.
It’s important for couples to work with a platform like HelloPrenup or an attorney when making decisions about property division in a prenup to ensure that the prenup is fair, legally enforceable, and respects the laws of their state.
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]