If you’re getting married, it is crucial to have a prenuptial agreement. A prenup allows you and your honey to determine what will happen with certain assets, such as real property and retirement funds if you get divorced. You should finalize your prenup before you walk down the aisle both because a prenup must be finalized before you get married and because doing so eliminates lots of stress and anxiety associated with finances. You can also use a prenup to specify what happens if there’s an unexpected death or how debts are handled. It’s best to start talking early about what you want from a prenup, so you don’t end up running out of time (you should not start this process two days before your wedding!)
No matter the size of your assets, big or small, you should be considering a prenup to protect them. Keep reading to learn how you can protect your assets and gain financial clarity in your marriage.
Start talking about a prenup early
It’s important to start talking about a prenup before you get married. Part of protecting your assets is making sure you are both on the same page, fully understanding the terms you are agreeing to, and what rights you are giving up. Pro tip: If you have specific questions about your situation or how your state laws would view any given circumstance, it is important that you speak with a licensed attorney in your state.
Whether you have a substantial amount of assets or not, there are several things that should be discussed and decided upon in advance. A prenup will cover all of the following and potentially more:
- How will premarital assets and debt be handled during the marriage?
- How will assets and debt be accumulated during the marriage?
- Will alimony (i.e., spousal support) be warranted for either party?
- How will inheritance and gifts be dealt with?
Each spouse should have enough time to read through the agreement, ask questions, discuss it with their partner, and have a lawyer review it before signing if they so choose to hire an attorney.
Hint: don’t sign the document on the day of your wedding. Not only can this potentially get your agreement thrown out in some state courts, but it can also be an emotional discussion you don’t want to throw at someone on their wedding day. Most importantly, don’t sign it if you don’t understand what it says or if you feel rushed. If this is the case, make sure you contact a licensed attorney to better understand your rights.
Identifying your assets and debts
In order to protect assets, it’s important to understand what assets and debts are.
- Asset: An asset is any property a person owns that has value. This can include real estate like houses or apartments, vehicles like cars and boats, stocks and bonds held in a brokerage account, cash in a bank account or credit union savings account, gold coins or bars (if they are kept separate from other valuables), collectible items such as artwork or rare coins. Don’t forget about digital assets like crypto! You can read all about protecting your digital assets here. In addition to tangible assets, like cars and houses, there are intangible ones, such as patents, copyrights, and trademarks. These have value, so they should also be protected!
- Debt: Debt is any obligation to pay something to another person or entity. Debts include mortgages on real estate, credit card debt, car loans, and student loans.
Create a financial plan before the wedding
As part of your premarital financial planning and prenup prep, you should create a financial plan and try to stick to it. To ensure that your future finances are on track, you should also sit down with your soon-to-be spouse to create a plan for joint finances. If this sounds complicated, don’t worry—it doesn’t have to be! It can simply mean talking through some questions like:
- What are my financial goals? What are our financial goals?
- What are each spouse’s salaries? (If you haven’t already divulged this!)
- Should we get a joint bank account or keep all accounts separate? (Note: a staggering majority of HelloPrenup couples have shared bank accounts!)
- What does our budget look like? How much do we each want to allocate for “fun spending” each month? (This is an important one for our fellow chronic online shoppers!)
- What debt do we each have? How do we plan to pay it off?
- When will we have children (if at all)? Will we save for their college funds? What about hospital bills for birth?
- What does retirement planning look like for both of us?
- How do we plan on investing outside of 401ks?
A key aspect of a prenuptial agreement is financial disclosure. And, no, you can’t skip it or hide anything. A prenuptial agreement must include disclosure of each party’s property, assets, and liabilities. That means you and your fiancé must be honest with each other about your financial situation.
What if you don’t disclose everything? Well, you may find your prenuptial agreement challenged if you do not disclose your financial situation in full. If the court indeed finds that the prenup is not valid because you didn’t fully disclose your finances, they may very well throw it out. Should your prenup be thrown out, a judge will divvy up your stuff according to state law. Even if you don’t get your prenup thrown out, you will still spend enormous amounts of money on legal fees and forensic financial expert fees to defend your lack of financial disclosure. Trust us; you need to disclose your finances. HelloPrenup allows for an easy way to disclose your finances and attach them directly to the prenup. Now that’s efficient!
You should discuss your financial schedules with your partner to ensure that both spouses are on the same page with regard to assets. It’s possible that one of you is more financially savvy than the other, in which case some extra explanation may be required. You can always get legal advice if there are some parts of the prenup that you don’t understand. Even a financial advisor may help with understanding each other’s assets thoroughly. It’s imperative that both spouses fully understand the prenup and its provisions before signing on the dotted line.
The exchange of backup documentation is something that many couples choose to do to further supplement their financial schedule. Why? Because it may help show that each spouse fully understands that the values stated on the financial statements are correct and no one is in disagreement over them. Doing this can add more protection if your prenup is ever challenged in the future. For example, you may exchange both of your most recent pay stubs and most recent credit card statement and attach them to the prenup.
Splitting up the assets and debt in the prenup in a way that protects you both
Decide what assets are marital/community vs. separate property
Now that you’ve done all your prep work, how do you actually go about deciding how assets and debt should be considered in your prenup in a smart way? The first thing to do is decide what property you wish to deem separate and which property you wish to deem marital/community. Remember, your state’s default law will apply without a prenup. Without a prenup, judges will tell you what is separate and what is marital/community.
Here is some quick background on typical state laws:
- In a community property state, separate property is typically property acquired before the marriage, which may include inheritances and, sometimes, gifts. Community property is typically property acquired during the marriage, regardless of how each party acquired it.
- In an equitable division state, separate and marital property will depend greatly on various factors that each state dictates. Some states take into account the length of the marriage, earning potential of the parties, and whether there are children involved. Things are pretty muddy without a prenup.
Protecting asset value increases
As you draft your prenup, you’ll want to consider more than just the asset itself. Assets may grow in value (one can hope!), and that increased value may also need protecting. For instance, say you have an investment portfolio, and the portfolio’s value increases with time during the marriage. Your ex-spouse may be entitled to a portion of the increase in value, even if the basis would otherwise be deemed separate property. A prenup allows you to protect not only the original asset but also the increase in the asset’s value over the years. Or not. Whether to protect appreciation is up to you. This is especially important for investment funds and real estate that are expected to grow over time.
Protecting future assets
When drafting a prenup, you can protect future assets that don’t exist yet. Say you haven’t purchased real estate yet, but plan to in the future (sometime after the wedding). Your prenup may protect that real estate from being divided up in the divorce if you want it to.
How does this work? Well, you might state in your prenup that you want to keep all assets, real property, and personal property purchased with separate funds or gifts/inheritances to be designated as separate property, not subject to division. You can also state that if the title of the asset is in one name, then it should not be divided up in the divorce.
Without a prenup, that future house might very well be split up, even if it’s only in one name or if you used your inheritance to buy it! You have the power to change that with a prenup!
Divvy up the debt
Ahh, debt. The fun part! Luckily, in a prenup, you can decide what happens to certain debts if you and your spouse divorce. You and your fiancé can decide to share certain debts or assign certain percentages to each other. In addition, you can determine that some debt is wholly the responsibility of one spouse. You should also preemptively consider debt that may not be in existence yet, as well as debt that may be associated with your business (read more on this here!).
If you’re thinking about getting married and want to protect yourself against the risk of divorce, consider having a prenuptial agreement. A prenup may help you protect your assets and prevent you from taking on your partner’s debt. Start the prenup conversation early and be transparent! Discussing finances is never comfortable, but this is your future spouse we’re talking about here! Then, you will need to decide what to actually split up, taking into consideration commingling property, debt, and asset increases. Don’t forget the financial disclosures!
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]