As couples get ready to walk down the aisle, it can be hard to plan for the possibility of splitting down the road, but with today’s high divorce rate, it’s important they protect their assets.
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“Love doesn’t conquer all,” says Linda Ravdin, principal at Pasternak & Fidis. “Marriage isn’t only about love, it’s about so much more.” Crafting a prenuptial agreement allows both parties to leave, whether by divorce or death, with some economic security.
People are increasingly tying the knot later in life so they have more assets to protect and the rate of second marriages is also rising. Some state laws provide some shield in a split, but experts say they aren’t enough.
A prenup is a form of divorce insurance, says Randy Kessler, founding partner of Kessler & Solomiany. He says it’s common for engaged couples to first meet with a lawyer and then head to a wedding planner. He says couples have the attitude of, “We’re going to predetermine how to divide our assets to avoid paying legal fees to divide them.”
When considering divorce, married couples sometimes sign postnups if they reconcile. Most people who do postnups have some event that jeopardized the marriage, according to Robert Boyd, founding partner of Boyd Collar Nolen & Tuggle. “While they have the upper hand they want to negotiate what they would want in a divorce if the reconciliation doesn’t work out.”
In this situation, postnups protect assets in the case of a divorce. The longer you’re married, for example, the more spousal support you may have to pay, says Ravdin. “You can solve that by having an agreement to prevent paying out more of your assets in the future if it doesn’t work out.”
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Kessler says wealthier people are more likely to get prenups, but all it takes is experience with a parent or best friend who went through a horrible divorce to prompt someone to sign a contract. “You can’t put a dollar limit on avoiding litigation.”
From a financial perspective, when thinking about these agreements, experts recommend considering your net worth, especially if you’ve more than $100,000 in assets or anything of sentimental value that you want to keep post split. Since a couple may acquire significant assets during the marriage, Ravdin recommends talking about how you plan to manage money as a couple and considering a consultation with a lawyer to discuss a prenup.
Signing a prenup doesn’t doom the marriage for failure, and experts offer the follow tips to take into account when forming a contract.
Your lawyer. During negotiations, both people need their own lawyer to be able to protect their interests. “Good practitioners in the field will make sure the other party goes to somebody who knows what they’re doing,” says Boyd.
Time to negotiate. If you’ve had a year-long engagement and then get hit with a prenup just weeks before the wedding, Ravdin says that should raise some red flags unless a postnup is an option. It takes at least three months to gather information about the financial situation and start a negotiation, she says.
Location. “Every state has different laws regarding divorce and how property is divided,” says Ravdin. No matter where you’re married, your divorce will follow the laws where you filed for the certificate. For example, some states don’t allow alimony waivers or penalty clauses outlining repercussions for certain actions.
The prenup will be interpreted in the state it was written in while marital property is defined by the state where you filed for divorce. “If you inherit something during the marriage, that may or may not become marital property depending on the state unless it’s addressed in a prenup or postnup,” says Ravdin.
Income and assets. Kessler suggests considering each other’s earning potential overtime. The person with money should have safeguards for worst-case scenarios since income and assets can fluctuate over time. “Everyone thinks we’re going to make more money but you should plan for if you don’t,” says Kessler. “It’s easy to divvy up money when you have a lot.”
Children. “Prenups can’t predict custody or child support—that has to be considered at the time of the divorce,” says Kessler. Prenups can include a certain amount of money per child but this isn’t money for child support.
Estate Planning. “Someone who’s 30 thinks about the divorce scenario but not what happens if the marriage is long and successful,” says Ravdin. Although many people provide generously for a spouse, depending on how a prenup and a spouse’s will are structured, a surviving spouse can become an impoverished 90 year old.
“If you’re married and you die, your spouse automatically gets a portion of your estate,” says Ravdin. Leaving assets to relatives in a will might not be sufficient, but a prenup or postnup would insure that assets go to the appropriate person. If one spouse dies, these agreements outline a survivor’s entitlements.
On the flip side, if the prenup states that when someone dies, the spouse doesn’t have any rights, the survivor gets nothing unless he or she is voluntarily included in the will, says Ravdin. In this case, the spouse can elect against the will for a percentage of the will, which excludes assets with a beneficiary or Transfer on Death designation like life insurance.
Sunset Provisions. Kessler says prenups can have a sunset provision of either a set number of years or the arrival of children or grandchildren. Prenups are more important in the first few years as you’re figuring out your marriage and can provide incentive for people to stay together. Couples can also renegotiate down the road. To be fair, experts suggest structuring the agreement with generous rights that accrue over time.
Postnups are also used to terminate a prenup, says Ravdin, because you can’t just rip up the agreement.
What happens in divorce?
“Prenups [and postnups] are rarely thrown out,” says Kessler. Courts and judges encourage settlements and would rather enforce the agreement than have a two-week trial. “There are exceptions when someone’s forced to sign the agreement or if there are medical issues but over 90% are enforced,” says Kessler.
Consider your situation five, 10 or 15 years from now. If you have fewer resources and stopped working, there’s no place for the security to come from except your spouse, says Ravdin. “It will strengthen the validity of the agreement and people should make an effort to be fair to the other person, affording the economically weaker party a dignified standard of living so that they can hold their head up.”