Before a Marriage, Financial Agreement Can Protect Assets of Partners
OK, let’s clear this up right now. A prenuptial agreement does not mean that a couple is expecting their relationship to end in divorce.
But if it does, a prenup can prove valuable. And for folks who are getting remarried, the document has some particular advantages.
Despite the hope that couples learn from earlier mistakes, data from the Department of Health and Human Services’ National Survey of Family Growth show that 15 percent of remarriages end in three years, 25 percent are over in five years. Other studies put the remarriage failure rate substantially higher (60-to-70 percent), especially when stepchildren are involved.
“They’ve got tough choices to make,” says Michelle Ash, a certified divorce financial analyst (CDFA) with Householder Group in Jacksonville, Fla., foremost among them being what do they want to leave to their children and what do they want their new spouse to have. A prenup can help them spell out those wishes and more.
PRENUPS FOR ALL
“Typically, people think about a prenuptial as something the very rich and famous use to protect themselves,” says Nancy Mello, a CDFA and financial advisor with Merrill Lynch’s Global Private Client Group in Dallas, Texas. But they’re not limited to Donald and Ivana (or Donald and Marla or Donald).
The documents are being used much more widely by individuals at all economic levels. Essentially, a prenup is simply a legally binding contract governing how a couple’s assets, regardless of how much or little, will be divided in the event the marriage ends.
“People who are getting remarried and have significant assets want to protect them,” says Mello. “Or those who remarry and have children they want to protect. Second marriages are often more difficult and it’s important for the children to have sense that they’re being protected in a second marriage.”
“When there’s a disparity of income between the parties, the children of the higher-wage earning spouse may fear that they’re going to be left out. Something put in writing will put their minds at ease and make it easier for them to handle the remarriage,” says Mello.
Lisa Turbeville, a certified financial planner and CDFA with Watermark Financial in Pittsburgh, Pa., recently worked with a remarrying couple in just such a situation.
“She was the higher-income party, but each had significant 401(k)s, houses, significant other assets,” says Turbeville. Although each had children, there were no custody issues to consider, but the couple did want to examine expenses that would come up in connection with the kids.
That’s the beauty of a prenup. Couples might just have different way of looking at what is normal or acceptable, says Turbeville. “A prenuptial agreement can help them hash that out, she adds, and can pretty much say whatever you want it to say.”A couple coming together, especially in a remarriage where the parties are older and have more and potentially different life experiences, might have big disconnects that they’re not even aware of. Those can be addressed in a prenup.
Ash has her clients view prenuptial considerations as potential major life changes that could affect the couple.
“What if your career changes substantially and consequently your income changes?” she asks. “Or you take time out of workplace or take a lower-paying job or a different career path? How will you handle that as a couple?”
What about life insurance; who has it and who are the beneficiaries? What are your retirement time horizons and retirement vision? Do you each own a house? Which one will you keep? How will it be titled? Who gets it in the event of divorce or death?
Then there’s the issue of children, both providing for kids from a previous marriage and any additional children of the new marriage.
Couples also need to examine prior assets brought into the marriage, as well as how any earnings (or losses) from a business the couple may start will be handled.
“When I am talking to clients that are considering remarriage and are concerned about prenuptials, I often talk to them as using as an estate planning tool rather than a potential divorce tool,” says Turbeville.
And while prenups are usually seen as a safeguard for a failed relationship, Ash says couples should consider including issues in the document that take into account a successful marriage.
“Will they feel the same way after decades together as they did when the relationship first started?” asks Ash. Possibly not, so they might want to include a graduated schedule of rights, i.e., if the marriage lasts five years, one spouse would get a larger percentage of certain assets.
“Despite the advantages, some couples resist a prenup. There is a stigma. The idea that it’s love and caring versus cold cash,” says Ash.But the truth is that in any marriage, husbands and wives eventually have to talk about money and other assets. With a prenup, you’ll both face those financial matters sooner rather than later.
“Emotions underlie the financial decisions that people make,” says Ash. “The issue that people have to work through as one considers marriage or remarriage is the role that money plays in that relationship. That is such a healthy area to work though in advance.”
And well in advance is the key planners give when it comes to prenups.
“A prenup drafted right before a wedding is not a good idea,” says Mello. “Give yourself and your attorneys enough time to consider it, draft, redraft, work with the other party’s attorney. Modifications are common and it should be collaborative effort.”
Part of that collaboration should be with your attorney. You’ll want an agreement that is not only equitable, but that is ultimately enforceable. And for the agreement to hold up in court, says Ash, both parties must be represented by legal counsel — separate legal counsel.
Plus, each state’s marital laws are different, so you’ll likely need professional counsel on just what is legally allowed to be included in the prenup.
Most of all, though, you’ll want a document that you and your spouse, whether it’s a first or subsequent marriage, can be comfortable with. If you have trouble reaching such an agreement, that might be a sign that the relationship needs a little more work before you walk down the aisle.
“If someone didn’t want to sign a prenup, and it seemed a fair document, it could be red flag,” says Mello. Of course, it could be an innocent objection. But that’s why it’s important to talk about it thoroughly and honestly with each other before speaking to an attorney.
Turbeville agrees: “If you can’t get through the prenup you probably shouldn’t get married. If you can’t talk your way through this, you’re not going to be able to talk your way through other marital issues.”
