The pre-wedding checklist is notoriously long, but if you're engaged, maybe you should add one more thing to it: getting a prenup. A prenuptial agreement is a financial contract made by spouses before marriage to hammer out financial issues and take the guesswork out of property division in a divorce.
"The laws governing divorce give a judge vast latitude in determining important issues like child custody, visitation, property division and alimony, making the outcomes of litigated divorces very uncertain and tough to predict," said divorce attorney Caleb Ballew with the Huntsville, Ala., law firm Martinson and Beason.
That uncertainty is a big reason prenuptial agreements are important, Ballew said. Prenups aren't exactly romantic and, because attorneys draft them, they aren't cheap.
So, who really needs a prenup? You make the final judgement call, of course. But experts suggest you might need a prenup if you have any of these financial considerations before you get married.
1. You Earn Much More Than Your Spouse
States with community property laws consider income either spouse earns during marriage as belonging to both spouses equally. Other states, sometimes called "kitchen sink" states, have "equitable distribution" laws. In these states, all property and money held by either spouse is divided fairly, not necessarily equally, between the two in a divorce.
Equal distribution might work okay in cases where one spouse stays at home and manages the home and kids while the other brings home the bacon. But what if both of you are working full time?
For example, say you make $200,000 per year while your spouse earns $50,000 per year. After 10 years of marriage, you might have saved $750,000 while your spouse only managed to save $200,000. If you divorce, splitting the $950,000 in half might not feel fair.
"Prenups are generally advised when one party has vastly more assets and property coming into a marriage than another," said Ballew. He said prenups take out the guess work out of what happens in a divorce. "In a situation where there is significant difference in assets and/or earning capacity, both parties can benefit from having clarity and control on what will happen after a divorce, rather than leaving it to a judge."
With a prenup, you can decide in advance who gets what if you divorce. One simple way to do this is to specify that all money earned during a marriage belongs to the person earning it as his or her separate property. That means that if you divorce after 10 years, you get the full $750,000, while your spouse gets $200,000.
To convince your spouse that this is the way to go, remind him that life is a roller coaster, and by the 10-year mark, he might be earning three times as much as you are.
2. You Earn Substantially Less Than Your Spouse
A prenup can also be important if you earn substantially less than your spouse.
Let's turn around the prior example — he earns the $200,000 while you only make $50,000 per year. He buys a big house with his big income where you live in style for 10 years, each paying for your respective parts of your extravagant lifestyle, but you don't have any savings. Then, one day, he tells you it's over.
In this scenario, maybe he won't think it's fair that you get half of everything he's purchased during the marriage, but should you walk away with nothing? By making a prenup, you could agree that, in case of divorce, he gets the house and furniture but you get spousal support of $6,000 per month for five years to help you get back on your feet.
3. You Carry Substantially Less Debt Than Your Spouse
You got through graduate school on scholarships while your spouse took out student loans. Or perhaps she carries debt from an unsuccessful business venture or from credit card indulgences. She's hoping to pay it all off quickly once the two of you join forces, but you aren't sure that will work out well for you.
If you divorce down the road, marital debt is divided among a couple. The law varies between states but if all of your debts and income are combined, you might get assigned a portion of that debt.
For example, let's say your spouse enters the marriage owing $150,000, and each of you earns about $60,000 per year. You buy a house, buy cars and make payments on all those debts from the family checkbook. Maybe you refinance the house to pay off the big debts. After 10 years of marriage, you have no equity in the house and a mortgage of $80,000. The court splits the debt equally between you, and you walk away carrying $40,000 of debt.
Avoid this result with a prenup, assigning income to whichever spouse earns it and debt that predates the marriage to the partner who incurred the debt. Then, take care to keep your income and debt separate from other family finances.
Convince your spouse that her debt is hers alone and that it would be unfair if you had to pay part of it. Ask her how she would feel if the roles were reversed.
4. You Own a Business
If you own a business, or an interest in a business, be wary when you marry. If you continue working in the business during the marriage, your spouse might be entitled to a share.
Most state laws identify a business you own before marriage as your separate property. But that can change during the marriage. If you manage your business during the marriage, your efforts may cause the value of your business or investments to increase. Can your spouse claim a part of that if you divorce?
According to Ji Park, founder and managing attorney of Park Family Law in Beverly Hills, Calif., some states permit a spouse to claim an interest in an increase in the value of a business interest or investment you manage during the marriage.
"Any asset, whether it is real property, a business, intellectual property, etc., may develop a community property interest if it is further developed during the marriage," said Park. She went on to explain how that works.
"So, for example, let's say the wife owns a nail salon before marriage that earns approximately $200,000 gross revenue each year," she said. "During the marriage, the husband manages the salon, and it grows to a multimillion-dollar franchise having branches in various states. By California law, the husband can claim an interest in the multimillion-dollar franchise, even though the wife started the business before marriage."
This might be true in community property states even if the wife manages her own salon during marriage. That's because the efforts of her work during marriage belong to both spouses.
Had the parties entered into a prenup, Park said, they could have agreed that regardless of what happens during the marriage, the business would remain 100 percent the wife's separate property. A prenup specifying that the business is separate property and that all income and increases in value — regardless of cause — are also separate property will change the outcome.
When discussing this aspect of a prenup, tell your spouse you'll agree to the same arrangement if he starts a business.
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5. You Intend to Be a Stay-at-Home Parent
You and your partner want kids right away and recognize that one of you should quit their job and work as a stay-at-home parent. You earn less and look forward to full-time parenting, but what might that mean in case of a divorce?
This is the classic situation in which community property laws work best. If your state doesn't have community property rules, set them up in a prenuptial agreement: Whatever one spouse earns belongs to both.
If your spouse balks at this, remind him that the kids you birth and raise will also belong to both of you. And offer him the chance to be the stay-at-home parent instead.
6. You Have Children From a Prior Marriage
If you have children from a prior marriage, you need more control of your money. Children from the present marriage will be the natural beneficiaries of both you and your spouse, but children from an earlier relationship might not.
Lawrence Bloom, a New York and New Jersey divorce attorney, said that you should consider a premarital agreement if you have children from an earlier marriage. He used the example of an older man who was previously married and divorced, has assets and wants to marry a woman who has never been married.
"That man wants to protect his assets from attack in the event of a subsequent divorce; and he also wants to protect his children from his first marriage in the event of his death," Bloom explained. In states like New York and New Jersey, a surviving spouse can choose to take one-half of her deceased husband's estate.
"So even if the man in this example writes a Last Will and Testament leaving everything to his children of his first marriage and nothing to the surviving subsequent spouse, that surviving spouse could challenge the will and get up to 50 percent of the estate," Bloom said.
However, he added, by having a prenup, the couple can agree to waive the statute providing for the surviving spouse's share of the estate. They can also agree to limit it, or they can put in their own substituted benefit for the surviving spouse such as a life insurance policy or annuity.
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7. Your Spouse Has Children From a Prior Marriage
You'll also do better with a prenup if your spouse has kids from an earlier marriage, though for other reasons. If your spouse shares parenting time, which is likely, he might be paying child support to his former spouse for the kids. Child support is based on the amount of income earned by each of the parents, but some jurisdictions consider a new spouse's income.
California, for example, allows a court to factor in a new spouse's income in extraordinary cases including unemployment and income reduction. Other states, like Illinois, allow courts to take a new spouse's contributions to the household income into account in awarding child support.
If you live in a community property state, your income is actually household income. If you specify in a prenuptial agreement that money you earn is your separate property, your spouse has a better equitable argument that it should not count toward child support. Also, if he fails to pay child support, his prior spouse can collect it from community property, but not from your separate property.
8. You Expect to Receive a Substantial Inheritance
You should consider a prenup if you expect to receive an inheritance, according to family law attorney Damien McKinney, with the McKinney Law Group of Tampa, Fla.
"If you expect to inherit substantial amounts of money from family, it is always advisable to have a prenuptial agreement to protect those assets in the event you do divorce," McKinney said.
In community property states, money and property inherited during a marriage remains the separate property of the beneficiary spouse. However, if you mingle it with community property, it can lose its character of separate property and be treated as community property, owned equally by both spouses.
For example, if you inherit $100,000, it is your separate property. However, if you put it into a joint account in your spouse's name and yours, and use it to pay down the mortgage and other household bills, a court might find that your $100,000 has "transmuted" into community property. If you divorce, you might not be able to claim it as your own.
If you live in one of the "kitchen sink" states, all property, separate and marital, can be divided between spouses equitably in a divorce. So even if you hold your inheritance in an investment account in your name only, you might not get all of it when the marriage ends.
A strong premarital agreement can resolve these problems. You and your spouse can agree that, in case of divorce, you each forgo any interest in any property the other person has inherited. Since this can work out for both parties, you shouldn't have too much trouble talking your spouse into it.
9. You Own Real Estate You Plan to Live in as a Couple
You call it "our" house, but in fact you bought it years before you met your intended. If you want it to continue to belong to you and you alone in case of divorce, it's important to get it in a prenup.
Generally, real property purchased before a marriage is the separate property of the spouse who owns it. But that status can easily be altered by intentional or negligent action. If you put the deed in both of your names, it is possible that the court will find it a gift to the other spouse. If you use community funds to renovate or pay upkeep and taxes, your spouse might claim part ownership of at least the property.
This is another situation in which a written agreement you make before marriage can ensure your property rights.