Planning with Prenuptial Agreements
August 22, 2023
A prenuptial agreement (also referred to as a “prenup” or marital agreement) is a good planning step to consider before marriage. A handful of states also allow for postnuptial agreements, which are signed after a couple is already married. Such agreements can outline what will happen to assets in the event of death or divorce; otherwise, state laws will control the distribution of property.
Why a Prenuptial Agreement?
- Protect a child’s inheritance or a significant gift during a child’s lifetime
- Protect a business owner’s interests (or business partners may require)
- One or both parties have children from a prior relationship
- One or both parties are bringing significant assets (or debt) to the marriage
- The parties would like to control how property is divided and distributed in the event of death or divorce and not rely on default state law – in the absence of a prenuptial agreement, a spouse generally has the right to:
- Share ownership of assets acquired during the marriage
- Share in the responsibility of debts incurred during the marriage
- Inherit (all or a portion) of the deceased spouse’s estate, regardless of what their will may provide
- Note that in some states, income from separate property, as well as the increase in the value of separate property that occurs during the marriage is considered marital property
Enforceability
- Start as early as possible and execute well in advance of wedding
- Each party should be represented by his or her own counsel
- Both parties must knowingly and voluntarily sign the agreement
- Be transparent about disclosing financial information and be sure to include everything
- Must be in writing; usually must also be revoked in writing – tearing up a prenuptial agreement may not actually revoke it
Elements
- Outline each spouse’s assets and debts and expected assets and debts
- Provide framework for how assets and debts will be allocated
- Some aspects may not be addressed, such as child custody and child support
- Consider adding a sunset clause so that the agreement will become invalid if the marriage lasts a certain number of years
Incorporating Life Insurance
- If a party does not have enough liquid assets, consider purchasing life insurance to supplement or replace assets that go to either children or the surviving spouse.
- For example, H purchased a new home with the proceeds from the sale of H’s previous home. H wants W to have the home upon his death – he can purchase life insurance, naming his children as beneficiaries, to replace the proceeds from the sale of his previous home.
- Life insurance is often required to be kept in place while children are minors.
Investment and insurance products and services are not a deposit, are not FDIC insured, are not insured by any federal government agency, are not guaranteed by the bank, and may go down in value. First Western Trust cannot provide tax or legal advice.
