9 Life-Altering Money Rules Hidden in Your Marriage Contract
Written by
Angela Mae
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Levi Leidy
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Getting married is a major decision, one that many people don’t understand the full financial and legal repercussions of. In an interview with Soft White Underbelly, New York City-based divorce attorney James Sexton discussed the many things that change in both spouses’ lives upon signing a marital contract.
Some of these changes aren’t too surprising, such as the fact that a marriage generally involves two people combining their assets and liabilities. However, there are also far less commonly known changes — ones that can still have a major impact on both parties’ finances long after they get married or, in some cases, divorced.
Here are some life-altering money changes that can occur when two people get married (or divorced), according to family law and divorce attorneys. Keep in mind that the exact parameters and rules depend on several factors, such as the existence of a prenuptial agreement and the state.
Future Assets Are Often Joint Assets
If you own an asset prior to the marriage and sign a prenuptial agreement, you could keep those assets separate in the event of a divorce. But any assets acquired during the marriage typically end up becoming the property of both spouses. This includes things like the home and bank accounts.
“Some of the more common stipulations you find in marriage contracts center around the marital home and what will be done with it should there be a divorce,” said Derek Jacques, a divorce attorney with The Mitten Law Firm in Detroit. “This, of course, can impact the finances of both parties of the marriage due to the home being one of the biggest assets a couple will ever own. There can also be items in the contract related to joint bank accounts, alimony and other financial stipulations that anyone entering into a contract needs to be aware of.
“In most jurisdictions, you are essentially turning any future assets you acquire into joint assets,” Jacques added. “Some property can be separate prior to marriage and can remain that way, irrespective of a contract. However, some separate property, like a home one spouse owns prior to the marriage that then both spouses reside in for a number of years, can become joint property.”
Increased Asset Valuation Can Alter Ownership
When you get married, both spouses’ assets should be clearly classified and valued in the marital contract. Classification entails determining which party owns which property or asset at the time of getting married. Valuation determines the value of each asset or property. But even when the contract clearly outlines the valuation and classification of each asset, things can still change down the line.
“Sometimes, even if assets are owned prior to marriage, aka ‘separate assets,’ the increase in their value can be considered marital and subject to division at the time of divorce,” said Lisa Gill, a Nashville divorce lawyer and founder of Gill Family Law, PLLC.
Gill gave the following example to illustrate this: “One spouse owns a house at the time of marriage and it is valued at $750,000. Later, at the time of divorce, the house is valued at $1.5 million. Depending on the laws in your state, the court might determine $750,000 was separate property (because that was the value prior to marriage) and the other $750,000 is marital property (because that portion represents the increase in value occurring during the marriage).
“If you failed to properly list and value this item in the prenuptial agreement, it could result in a costly legal battle. … Failure to include a detailed list of assets with values might even invalidate a prenuptial agreement, making it unenforceable.”
Valuation and classification are also a concern for business owners.
“Business owners need to make sure ownership interests are properly identified and valued at the time of marriage,” Gill said. “The parties need to either have a business valuation done at the time of the prenuptial agreement to determine value or agree to a liquidated amount in the contract.
“Failing to agree on the value of business interests at the beginning means you end up having to litigate a historical business valuation, which can be very time consuming and costly.”
Your Property May Not Be Equally Distributed
When you get married, you’re combining your assets and property with your spouse’s. If you get divorced, you might think that everything will be split equally, but this isn’t always the case.
Depending on your circumstances and state of residence, a court could divide your assets equitably. What this means is that one party may receive more or less than 50% of the assets based on what the court considers to be fair, based on factors like financial need and each person’s contribution to the marriage.
Alphonse Provinziano, a family law attorney and the founder of Provinziano & Associates in California, gave an example of equal distribution.
“Under California law, all your property you acquire with your income automatically is owned 50-50 by your spouse,” Provinziano said. “So, for the spouse that has a high income with a stay-at-home partner, that means even though they are earning the money, their spouse automatically is reaping the benefits of receiving half of it. For long-term marriages, this can be significant because they end up owning 50% of their retirement and residential property even though they didn’t work and didn’t have a salary.”
“Any cash assets such as investment accounts, savings accounts and checking accounts, are typically divided equally,” added Raiford Dalton Palmer, a Chicago-based family law attorney and managing shareholder of STG Divorce Law, and author of the Amazon bestselling book, “I Just Want This Done.” “Retirement accounts are divided using a qualified domestic relations order (QRDO) in a tax-free transaction, similar to when you roll over a 401(k) to an IRA after leaving a job. Pension benefits are similarly split so that when the person with the plan qualifies, they will both receive benefits.”
You Could Be Hit With Tax Implications
If you get divorced, you may be hit with additional financial obligations — and the associated tax implications — when it comes to things like alimony and child support.
“There are countless nooks and crannies in any divorce agreement that can ultimately impact someone’s personal finances,” said Sean Smallwood, a divorce and family attorney in Orlando, Fla. “Easy-to-spot ones will always include child support and alimony, but something that a lot of people don’t think about when it comes to these things is the fact that child support is paired with after-tax dollars and alimony could potentially be tax deductible, depending on which state you’re in. But if it’s deductible to the payer, then it counts as taxable income to the payee, which a lot of people don’t think about when they’re negotiating alimony in their divorce case.”
Tax implications can also come from selling a marital home, Smallwood noted. “Sometimes, if the home has not been on for at least two years as a primary residence, the sale can result in a substantial tax obligation. Parties could potentially get around this by agreeing to sell the house later after the two years has run.”
You May Be Responsible for Your Children’s College Education
In the event of divorce, child support may not be the only financial obligation you and your ex-spouse will have. You also still might have to pay for college.
“If the divorcing spouses have children, they may be obligated to help cover the cost of college in the future,” Palmer said.
Alimony Is Sometimes Waivable — With Limitations
Alimony is essentially a form of financial support one party gives to the other upon divorce. It’s a legal obligation, but one that might be waivable. Even if it is waived, however, it could still come with certain limitations.
“Limitations can include such things as changes to certain terms based on longevity of the marriage or that there can be alimony but that spousal support will be capped in amount and/or duration,” said Carolyn “CiCi” Van Tine, partner and divorce attorney at Davis Malm.
Inheritances Received During Marriage May Be Joint Assets
As Sexton pointed out in the interview, if you receive an inheritance once married, it may very well be considered joint property. The same goes for any gifts that you give or receive from your spouse — half of everything belongs to you as well as to them.
Regarding inheritances and gifts, here’s what Anne Hamer, Nashville family lawyer and SuperLawyer, had to say: “Stipulations can be made regarding how inheritances and gifts received during the marriage will be treated. They can be designated as separate property, ensuring they remain with the recipient spouse.”
Your Behavior Could Affect Your Finances
While not as common, some marital contracts have lifestyle clauses within them. If one or both parties breaks these clauses, it could impact their finances upon divorce.
“Less common but increasingly seen are lifestyle clauses that dictate behaviors during the marriage,” Hamer said, “such as fidelity clauses or agreements about the division of household chores and responsibilities.”
Even Small Assets Can Be Considered Joint Property
You might not think it, but even a minor asset — like furniture for the house — can be viewed as the property of both parties, and thus divided upon divorce.
“As a general rule, the parties can agree to anything they want regarding finances. The more common agreements are how assets and debts are going to be characterized once acquired in the future,” said Holly J. Moore, divorce attorney at Moore Family Law Group. “For example, if we acquire a house, it [could] be the husband’s separate property. Any furnishings acquired will be the wife’s separate property.”
This applies to things like bank accounts and other material items as well.
“There are also agreements about when something acquired will be joint,” Moore added. “For example, if both parties sign and notarize a paper on a particular asset, it will be held jointly.”
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