With the divorce rate in the United States at an abysmal 40 to 50 percent, prenuptial agreements are by no means a romantic gesture, but they can make sense in certain situations. Prenups are designed to determine how assets and debts will be divided in the event of a divorce. Unfortunately, marriage is rarely a straightforward endeavor and divorce can be even messier from a financial standpoint. For states that have community property laws, prenups can be an effective solution. Aside from needing to answer all the other important financial questions before getting married (see 5 Financial Tips for Newlyweds), deciding whether you should get a prenup requires answering another set of questions first.
Do Either of you Own a Business?
If either of you is a business owner, it’s important to think about the impact in the event of a divorce. For keeping business interests separate, a prenup can work well. Otherwise, you may be looking at your estranged spouse owning half of the business. If you’re not able to remain on speaking terms, this could further complicate the business without buyout agreements.
Is Either of you Carrying Debt?
Credit card debt is certainly the last thing you want to think about after dissolving a marriage. If your spouse was irresponsible with their money and racked up a bunch of credit card debt, you may be on the hook to pay a portion of it off. However, a prenup can ensure each spouse remains the sole individual responsible for any debts they may have incurred after the marriage is dissolved. Another reason why it’s important to understand your soon-to-be spouse’s spending and savings habits and effectively communicate your joint financial goals.
Do you have Plans to Move to a New State?
Not all states share the same laws surrounding assets obtained during the marriage. As we mentioned earlier, some states have adopted community property laws. This means all assets, earned income, and liabilities accumulated during marriage are shared equally by both parties. If you get married in a state without community property laws, but later take up permanent residence in a state that does, a prenup can protect the division of assets regardless of your move.
Did you know? A separate property or common law state allows each spouse to keep their assets, liabilities, and earnings separate if they choose. However, a community property state assumes that all assets, liabilities, and earnings incurred after marriage are jointly owned regardless fo their titling.
How Complex is your Financial Situation?
If you’re entering into a marriage with a rather complex financial situation a prenup can help protect what was yours prior to marriage. This could mean equity in a family business, real estate holdings, or sizeable employer stock options. Before you get married, make sure you take into account all of the assets and liabilities you currently possess and consider the long-term impact a divorce could have.
Other Situations to Consider
After answering the above questions, there are still a few additional situations you might want to consider. If you earn significantly more money than your partner, you might want a prenup to protect you from alimony payments. Some jurisdictions will allow you to stipulate limitations on how much alimony is paid. This also serves as protection from otherwise having to go to court to modify alimony payments for any adverse reason such as your income reducing significantly. Conversely, if you make much less than your partner, a prenuptial agreement can ensure you are financially protected (e.g. alimony or ownership stake in assets) if you divorce.
Another situation that warrants consideration is remarrying. If you have children, support obligations, or own a home from a previous marriage, and want those assets to go to those children when you pass away, a prenuptial agreement can help facilitate this process.
The Bottom Line
Regardless of what you decide, you’ll need to have a very frank conversation with your significant other about your financial expectations for marriage. Divorce can be a very messy, painful, and time-consuming process but implementing a prenup can work in favor for the both of you. It can ensure no one feels like they are getting tossed under the bus. The key is to have open, honest, conversations with your soon to be spouse regarding each of your finances. Whether those conversations lead to each of you consenting to a prenup, is beside the point. We get it, signing a prenup in a way is keeping the door open for a potential divorce in the future. It’s not the most romantic way to enter into a marriage, but it can be practical.
Are you getting married soon? Do you have questions about how to manage your finances leading up to and throughout your marriage? Schedule a free consultation with us to begin setting financial goals together!
Disclosure: Prenuptial agreements are legal documents. Millennial Wealth is not a licensed attorney, for more detailed information on how a prenuptial agreement works for your specific situation please consult with an attorney.
Chad Rixse grew up in Anchorage, Alaska, but has lived in the Seattle area since 2007. He majored in Spanish at the University of Washington where he honed his fluency in the language and discovered his passion for travel and connecting with other cultures. He’s a self-professed golf addict who can never seem to get his fill despite still struggling to break 100.