Prenuptial agreements are on the rise, as more individuals are concerned about losing their assets in the wake of the recession. Prenups, when handled correctly, can protect an individual’s assets in the increasingly likely event of divorce. Without a prenup explicitly defining how assets should be divvied up, if a divorce occurs, any income earned during the marriage, including any money added to retirement accounts, could be split between the two individuals. Depending on the state, this split could be 50% to each or it could be some other method considered fair by the courts.
Regular earned income isn’t the only type of wealth that could be affected. Any increase of the value of an asset, whether stock investments or a business, that occurred during the marriage could be considered marital property and divided by a court. For example, even if one spouse purchased a house before marriage, the increase in the value of the house during the marriage will likely be distributed partially to the spouse who doesn’t own the house. A business that’s started years before the marriage but thrives during the marriage, even if the non-owner spouse is not involved with the business, could be split in the event of a divorce.
For someone who has worked hard his or her entire life to build a solid financial future, a divorce is one of the most financially devastating events one can endure. We buy insurance to protect ourselves against loss of health, we diversify investments and choose an appropriate asset allocation to help shield us from financial downturns. A prenup is just another way of protecting assets.
Although we don’t feel edgy about discussing insurance with someone we plan to spend the rest of our lives with, prenups are one of the most taboo topics within the broader taboo topic of money. No one wants to seem greedy. The point of marriage is to make two lives one, not to continue living two independent lives within the same household. A prenup would indicate that divorce is an option down the road, and many couples would not be interested in facing that possibility at a time, before marriage, when the only thought should be living a happy life together.
Classically, couples who opt for prenups usually have one or two individuals who fall into these descriptions:
- Wealthy, either by inheritance or by effort. When one individual has a much higher level of wealth than the other, the wealthier spouse often wants to protect his or her money in the event of a divorce.
- Unequal income. Like an unequal net worth, unequal income or income potential can tilt the balance of power within a marriage. A prenup can either protect the balance or protect the tilt.
- A business owner. For someone who owns a business, a divorce could mean the end of that business. Selling the business is an option for liquidating enough cash to pay for the expenses of breaking up a marriage. If the business is location-based and the owner prefers to move, this, too, could have a devastating affect on the business.
State laws govern prenuptial agreements, and each state falls into one of two categories. In 41 states, divorce without a prenuptial agreement falls under equitable distribution, where the court considers the individual case, circumstances, and finances to determine the most fair division of assets. In the remaining nine states, courts divide all marital property. Prenups can override these state defaults.
Prenuptial agreements are often in the news when celebrity couples move towards marriage. Most recently, Kim Kardashian, who earns about $12 million a year according to Forbes and has a home in Beverly Hills, has signed a prenup with fiancé Kris Humphries, who earns only $3.2 million a year. Kim will be protected through the prenup; in the event of a divorce, she will keep everything she owns now in addition to any income she earns during the marriage.
For engaged couples whose wealth and income are already evenly split, there is still a case for a prenuptial agreement. The court system can be complicated and expensive. A couple that doesn’t discuss financial issues could have a harder time during a divorce. A prenup can smooth some of these difficulties and help both partners leave the marriage with most of their own wealth intact. While prenups have traditionally been instruments of the wealthy, the recession has affected many people’s approach to protecting their assets. More middle-class couples are considering prenups now.
Would you or did you consider a prenuptial agreement before getting married?