Last week’s column discussed the importance for engaged couples of having open conversations about money before the wedding. This week we’ll look at some reasons a couple might want to consider signing a formal prenuptial agreement.
Prenups, which establish how assets, debts, and financial responsibilities would be divided in the event of a divorce, are often thought to be the exclusive territory of older couples with wealth and those with children from previous marriages. Certainly, in those cases, the need for a prenup is clear. Anyone who has experienced a divorce painfully understands that even a marriage seemingly made in heaven can implode, with disastrous financial as well as emotional implications. One important aspect of a prenup is to ensure that children from a previous marriage will receive their fair share of the assets that were brought into the second marriage.
Outside of this scenario, it’s understandably easy to assume that prenups are not necessary for couples with minimal finances. However, even for partners without significant assets, prenups can offer valuable benefits. Here’s why such a couple might still consider exploring a prenup.
One of the discoveries that can come out of a prenuptial discussion is the disclosure of significant debt. It isn’t unusual for a partner to not reveal the full amount of debt they carry, until being required to sign a legal agreement of full financial disclosure. Agreeing that the debts a partner brings into the marriage will continue to be their sole responsibility can prevent future emotional and financial conflicts.
Agreements on personal conduct, spending habits, and plans for investing may also be covered in a prenup for partners without current assets.
Another item can be whether and for how long one spouse would receive financial support from the other in case of a divorce. This especially might apply if both are currently employed but expect that one will stay at home after children are born.
Considering how to manage inherited assets is an important topic, one that’s typically given little thought. Unless there is an agreement otherwise, one spouse could be entitled to half of an inheritance left to the other. Imagine how that might feel if, for example, the inheritance was received just months prior to finalizing a divorce. Even within a marriage, the question of who decides how to use an inheritance can be a source of conflict.
If parents anticipate such a problematic situation, they may want to ensure that their child and any offspring receive 100% of money left to them. A common strategy is to leave assets to an irrevocable trust, controlled by a third party, where only the child or their children can benefit from the proceeds. In this case the assets and any income are not considered an asset of that child for purposes of splitting assets in a divorce in most states. Unfortunately, some states, such as Colorado, do not recognize the trust laws of other states. This is just one reason that anyone considering a trust needs to seek legal advice from an experienced and knowledgeable attorney.
Of course, because talking about money is so taboo in many families, it won’t even occur to most young adults embarking on their own marriages to ask parents about estate planning details like trusts. In fact, most are likely to have no clue about their parents’ net worth or how much in the way of inheritances may come their way some day.
Perhaps, for a new couple, building a pattern of open communication about money might include first breaking the money talk taboo with their own parents. The effort to build financial intimacy through honest money conversations can begin with either generation.
Related: Fostering Emotional and Financial Intimacy Through Prenup Money Talks