On our blog, we talk a lot about how prenups can help stay-at-home parents and the lesser-earning spouse, but we want to make it clear: prenups can also be beneficial for the person who has more money in the relationship, too. A prenup should benefit both people in some way. It doesn’t need to be 50/50, but it should be reasonably fair to both parties.
So, back to the original question: should you sign a prenup if you have more money? The answer is: You should definitely consider signing a prenup if you have more money than your partner. Let’s dive into how prenups work and what a prenup can do to protect the person with more money.
How prenups work
Before we explain the ways a prenup can help someone with more money in the relationship, let’s talk about how prenups work in general.
Prenuptial agreements are legal contracts between two future spouses (signed before getting married). A prenup can cover both obligations during the marriage and in the event of a divorce. For example, joint bank accounts during the marriage, property division in a divorce, alimony in a divorce, and more.
Prenups should be reasonably fair to both parties. Meaning one party shouldn’t sail off on their yacht while the other person collects food stamps. That is generally a no-no in many state courts’ eyes. Now, states do differ on what is considered “fair,” so what is an enforceable prenup in one state may not be the case in another state.
If you end up filing for divorce, you and your spouse are generally required to abide by the terms of the prenup. However, one of the spouses may challenge the validity/enforceability of the prenup. If that happens, you might have to settle before getting to court (challenging a prenup isn’t free!). Or, you can take it to court and spend the money to fight it. If you do this, a judge will decide on your prenup and say whether or not it is enforceable.
The bottom line is; generally, people are required to follow the terms of their prenup unless one party challenges it and it’s deemed unenforceable.
What can a prenup do?
Now that you understand the foundation of how a prenup works, let’s talk about what a prenup can do and how it may protect someone with more money. Remember, prenups should protect both parties in some way, shape, or form.
If you have more money than your partner, that means you probably have some assets. Assets can be anything from bank accounts and investment funds to real estate and art collections. In a prenup, you (and your partner) can dictate what happens to those existing assets you already own and those you will own in the future. On top of that, you can even protect the appreciation of those assets and the exchange of those assets.
For example, let’s say you made sure to keep your apartment that you own separate property. During the marriage, you sell that property and use the proceeds to buy a new home. Is the new home shared or separate? Well, you can decide that in your prenup!
The same goes for the appreciation of assets. Let’s say you own an investment account, and the principle before getting married is $100,000. At the time of the divorce, that account grew to $500,000. What happens to that $400,000 in appreciation? You can make sure to protect that appreciation (or not) in your prenup.
Many people also ask about future assets because surely you will accumulate assets during the marriage. These can also be protected, even future businesses.
Income is slightly different from an asset but along the same vein. Income may include salaries, bonuses, commissions, royalties, rental income, and much more. What happens to the income that you earn during the marriage? Well, without a prenup, it could very well be deemed joint property. However, in a prenup, you can ensure that your income is kept separate and not divisible in a divorce.
Protect against debt
Another way to maintain your assets is by avoiding your partner’s debt. If your partner is a serial spender and tends to take out thousands in credit card debt or has hundreds of thousands in student loans, this may be an especially important clause for you to include in your prenup.
Debt can be split up into premarital debt and marital debt. Premarital debt is accrued before the marriage, and marital debt is accrued during the marriage. You can make sure that both types of debt are kept to the separate borrower and not divisible in a divorce.
Waive alimony or limit alimony
Alimony is a hot topic, especially when a couple has a large financial disparity between them. Alimony (sometimes called maintenance or spousal support) is money paid from one spouse to the other if the marriage comes to an end. One way to protect your money is to waive alimony.
Disclaimer: waivers of alimony can be sensitive, depending on your state, as many courts are hesitant to enforce waivers of alimony in cases where it’s really needed. For example, a court may be more likely to throw out a waiver of alimony clause in a prenup if it would mean that the person will be completely unable to support themselves otherwise (and may need public assistance). For that reason, many states also have lots of stipulations around waivers, like California.
In California, you are required to obtain legal representation if you waive alimony. This ensures that the person waiving their right to alimony is 100% clear on what they’re doing (because their lawyer presumably will explain the impact in depth).
Another way of handling alimony in a prenup is to limit it in some way. Maybe you leave alimony in but cap the amount of money paid or restrict what types of income can be used towards calculating alimony. This can be a good happy medium between waiving alimony and keeping it in completely, in accordance with state law.
Protect inheritances and gifts
Maybe you’re not “wealthier” than your partner right now, but you will be in the future when PawPaw and MeeMaw pass down their fortunes to you. You can make sure to protect your inheritances with a prenup by keeping all future inherited property separate and not divisible in a divorce.
The same goes for gifts. Maybe you know you’re going to receive tons of gifts from your wealthy family throughout the marriage and want to make sure those gifts stay separate. This is totally doable with a prenup gift clause.
Let’s dive into an example scenario that can help you conceptualize how this may look in the real world.
Natalie and Nate are getting married and want to get a prenup. Natalie is currently a teacher, making about $50,000 per year, and plans to be a stay-at-home mom. Nate is the breadwinner as a tech CEO and makes about $400,000 per year. He also has a few assets, including a house, a car, and a bank account. Plus, he has a well-off family and anticipates an inheritance of $1 million one day from his grandfather.
In their prenup, Natalie wants to make sure she is protected as she will be forgoing her teaching career to stay home with the kids and be a homemaker. Nate, on the other hand, also wants to make sure his wealth stays mostly intact, and he has clear expectations for what he is required to pay in the event of a divorce.
So, here’s what they agree to in their prenup:
- Natalie receives a lump sum payment of $400,000 if the marriage comes to an end
- They waive alimony (Natalie feels comfortable with this because of the lump sum clause, and Nate prefers the lump sum clause because it creates predictability)
- Nate ensures his car, house, and bank are kept separate.
- However, they agree that any appreciation of those assets during the marriage is to be divided in a divorce.
- Nate ensures his inheritance is his separate property.
As you can see, both parties are protected in their own ways, and neither party feels slighted by the potential outcome of a divorce. Natalie receives a $400k lump sum plus a portion of the appreciation on Nate’s separate assets. On the other hand, Nate keeps his car and the principal value of his house and bank account that he entered the marriage with. Plus, he also keeps his inheritance from his family. Nate can rest assured he won’t be on the hook for alimony (as long as it’s an enforceable provision), but he will be required to pay the lump sum clause, which is a fair trade-off, in his opinion, since he can plan for it and have clear expectations of what would happen in a divorce.
Disclaimer: This is just one way to do it, there are definitely other combinations of outcomes that could also achieve the same effect of making both parties comfortable. Also, each state is slightly different, and what may be an enforceable clause in one state may not be in another.
So, to answer your question: “Should I sign a prenup if I have more money,” you should absolutely consider it because a prenup can protect your assets, income, inheritances, and gifts and protect you from paying alimony and taking on your partner’s debt. But keep in mind that prenups should be reasonably fair, and just because you are able to protect yourself, your partner should also be provided for in some way. It doesn’t have to be an exact 50/50 split, but it should be a comfortable outcome for both parties!
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]