Many people have an instinctively negative reaction when they hear the term “prenuptial agreement.” That’s because, when prenups first became popular, they were often seen as weapons by which rich spouses took advantage of less wealthy, less sophisticated partners. A person who got engaged and said, “I want a prenup” was often seen as unromantic at best and scheming at worst.
But the truth is, prenups often provide important advantages for both partners. They’re not always just about protecting yourself in the event of divorce. They’re often about planning your future affairs so as to arrange things legally and tax-wise in ways that are mutually beneficial.
If you approach a prenup in this spirit, it’s often a win-win for everyone.
• Spouses who have children from a prior marriage are typically very concerned about protecting them. A prenup can be a good way to make sure that if something happens to you, both your spouse and your children will be taken care of, in a way that’s fair and that minimizes intra-family disputes.
• Prenups can be a way to protect against joint liability for debts. For instance, if a spouse owns a small business and personally guarantees loans, or is a professional and is subject to malpractice claims, a prenup can limit legal responsibility and preserve assets for both spouses.
• If one spouse co-owns a business, a clear succession plan is often necessary to obtain financing. A prenup can clarify what happens if the business owner dies, and make running the business easier.
• By making clear how assets will be titled during the marriage, a prenup can facilitate gift and estate tax planning.
Speaking of prenups, it’s worth noting that it’s often neither the bride nor the groom who is most interested in having a prenup signed. It’s the parents of the couple, who are worried that the assets they plan to pass on to their children might someday be decimated by divorce.
It’s not uncommon for parents to bring up the idea of a prenup, only to have it rejected out of hand by the infatuated lovebirds.
But if parents are legitimately concerned, there is something they can do that doesn’t require getting the engaged couple to sign anything at all. Rather than giving the assets to their child, either directly or in a will, the assets can be put into a trust for the child’s benefit. The parents can name a trustee who will have discretion to manage and distribute the assets for the child.
If the trust is set up properly, then the assets will be protected in the event of a divorce. Even better, the trust may have many of the other benefits of a prenup described above – helping children from a prior marriage, protecting against debts, allowing for clear control of business interests, and so on.