Everyone Hates Prenups, Until…

A prenuptial agreement is the hard, clear-eyed antithesis of the rosy optimism newlyweds bring to the altar.

A prenup isn’t emotionally appealing, but it is proper planning. Like fire insurance, a premarital agreement is a sensible tool that protects you against something you hope will never happen.

A prenuptial agreement is a written contract that outlines how assets and earnings will be divided in the event of a divorce. Without one, assets are divided based on the cooperation of the parties or, in the absence of cooperation, state law as applied by the courts. That can result in unpleasant surprises as well as big legal fees.

Today, people marry later in life than they used to, which gives them more time to accumulate assets. As a result, there’s often more to lose if a relationship goes sour.

A prenup can be especially valuable if one future spouse expects a substantial inheritance, owns a business or anticipates having a much higher income than the other. A prenuptial agreement is also important if one or both partners have children from a previous marriage.

You can make better, less emotion-driven decisions by planning in advance rather than as a marriage deteriorates. The money spent on a prenuptial arrangement is a drop in the bucket compared to a typical wedding, yet it can be the most valuable expenditure.

A financial planner can help a couple identify goals and assets. They should start by creating a list of each individual’s assets, projected income and potential gifts or inheritances. (It is important to be completely honest; hiding assets can invalidate the contract.) Then, each person should consider how he or she would divide these items in the event of a divorce and consider any other provisions to include in the written agreement.

An attorney familiar with marital law and estate planning should draft the agreement. Each partner should be represented by a separate lawyer to strengthen the contract’s legal standing. The agreement should be reviewed by both parties and their lawyers.

Twenty-seven states have adopted the Uniform Premarital and Marital Agreements Act (UPMAA), which provides some consistency in prenuptial arrangements. For a premarital agreement to be enforceable, the UPMAA specifies that each party must enter into the agreement voluntarily, and that the contract must not be unconscionable (grossly unfair) when it is signed.

The couple should sign the agreement well in advance of the wedding day. If the agreement is presented to the bride or groom practically on the way to the altar, a court may determine that the contract wasn’t entered into voluntarily.

Couples should also avoid frivolous provisions, such as forbidding a spouse to cut his or her hair, or requiring a spouse to do housework with certain frequency. Such language can lead a judge to reject the entire document.

The document should have a clear trigger, so that the provisions begin to apply at an easily identifiable point. Is the couple considered divorced when one partner files, or not until the divorce takes legal effect? If ceasing to live together is a trigger, it’s important to be clear about what that entails and how long the separation must last before the couple is considered separated for purposes of the agreement.

Many couples are comfortable with an equal division of assets if their marriage lasts for a long time and are only worried about the potential of a marriage failing quickly. In these cases, it can be appropriate to use the prenuptial agreement to allow a spouse’s interest in property to vest over time or with the birth of children.

Some states automatically invalidate prenuptial agreements after a certain time period or once the couple has a child together. Be aware of default provisions in your state and consider how the agreement handles such issues.

Alternatives: postnups and trusts

If you’re already married without a prenup, consider getting a postnuptial agreement. A postnup is trickier. While it can be better than no plan at all, it is even more important to structure a contract that can stand up to a judge’s scrutiny.

A trust is another option. If wealth comes principally from the family of one spouse, for example, that family may want to set up a trust.

If the trust is properly structured and the trustee has discretion to withhold distributions, the assets should be protected without a prenuptial agreement.

Benjamin C. Sullivan, CFP, is a financial planner and portfolio manager with Palisades Hudson Financial Group in Scarsdale, N.Y. He holds the Certified Financial Planner (CFP) certification and can be reached at ben@palisadeshudson.com.

Palisades Hudson is a fee-only financial planning firm and investment adviser with $1.2 billion under management. It offers investment management, estate planning, insurance consulting, retirement planning, cross-border planning, business valuation and appraisal, family-office and business management, tax preparation, and executive financial planning. Headquartered in Scarsdale, New York, it has branch offices in Atlanta, Fort Lauderdale, Fla., and Portland, Ore.