When folks think of prenuptial agreements (“prenups”), visions of an uber-wealthy individual trying to protect themselves from a potential gold-digger often spring to mind. While they can certainly serve that purpose, prenups are so much more than that. If you are about to get married, enter into a domestic partnership or civil union, or cohabitate, you and your partner should have a financial game plan.
You already have a prenup.
People often fail to realize that they already have a prenup, even if they never signed one. When your relationship eventually terminates—whether by breakup (divorce or otherwise) or death—state law will determine what happens to your assets if you do not have your own plan in place. Do you want the state deciding what happens, or do you want to make those decisions yourself?
Most states in the United States employ a common-law approach, where income that comes to you is presumably yours, and income that comes to your spouse is presumably theirs. Meanwhile, several states instead have community-property laws, which essentially dictate that half your income legally belongs to your spouse and vice-versa. There are pros and cons to both, and generally you can only opt out of community-property treatment (if you live in one of those states) via written agreement, such as a prenup.
Specific terms will vary depending on state law. For example, Nevada uses the phrase “premarital agreement.” Partners who are already married or in a domestic partnership or civil union can also enter into such agreements. The contents will be essentially the same; the contract for an already-married couple would just be called a postnup. This applies to cohabitating relationships, too, where you would have a cohabitation or property agreement. For the sake of simplicity, I will use the term “prenup” throughout this article, but I mean it to encompass all manner of property agreements within relationships such as postnups and cohabitation agreements.
Talk about money—a good prenup prevents problems.
While you certainly need not delve into finances on your first date, at some point before the relationship becomes permanent you should ensure that you are financially compatible with your partner. Making assumptions about your partner’s values, financial or otherwise, will only lead to problems down the road. For instance, there will always be inherent tension where one partner is a “spender” and the other is a “saver” if the relationship lacks an explicit understanding about how to bridge the gap. A good way to avoid this all-too-common problem is to have regular money dates with your partner where you explore your goals, strategies, and behavior patterns.
It may seem nerve-racking to broach the subject of a prenup, particularly due to societal stigmas framing prenups as a document only pursued by individuals untrusting of their partner. By having regular money dates with your partner, though, a prenup becomes a matter of fact rather than a matter of emotion. A prenup outlines what happens to your money in a worst-case-scenario, similar to planning for job loss with an emergency fund or death with a will or trust.
Xa and I were in a domestic partnership in Nevada and then DC for over a year and a half before we got married. (A domestic partnership or civil union is a state-law equivalent to marriage, but it is not recognized under federal law, and is generally not portable from state-to-state.) When we first talked about a domestic partnership, I mentioned we should have a prenup. It was a no-brainer for both of us since we both prefer to control our wishes rather than leave our finances up to the default laws of the state. And because we were already on the same page financially, actually constructing the agreement was a relatively easy task. We signed the prenup—technically a “property agreement” but with a provision that it was also a “premarital agreement” under Nevada law—just before signing our domestic partnership paperwork when her parents and my mother and stepfather were in town for Thanksgiving.
What goes into a prenup?
The short answer to the question of what goes into a prenup is whatever matters to you. If you have discussed your goals, strategies, and behavior patterns, most of the items you need to include will largely fall into place.
Before you get to that point, though, you and your partner must be 100% transparent with one another. Full stop. You need to each provide a complete financial picture, including being honest about your spending and saving habits, financial goals and priorities, and ideal financial structure as a couple. Even if you plan to always maintain completely separate accounts, you must be open about your spending, saving, and investing plans and realities. If you anticipate inheriting a large sum when a particular relative dies, for example, this should be part of the discussion.
There are three primary reasons for transparency. First and foremost, if you cannot be transparent with your partner and vice versa, you lack the trust necessary for a serious relationship. Second, if you are not transparent, your agreement might be invalid. Finally, a lack of transparency will prevent your financial game plan from fully functioning as intended, and any surprises may damage your relationship and your finances later.
Specific topics to include in a prenup include the following:
Community property laws—even if you do not live in a community property state, you might end up in one later.
Treatment of income and expenses (present and anticipated).
Treatment of windfalls, such as inheritances.
Future property acquisitions, whether real or personal property.
For example, will property be acquired individually or jointly?
If acquired individually, what rights (if any) does the other party have upon termination of the relationship?
If acquired jointly, will it be held as tenants in common, joint tenants with rights of survivorship, or tenancy by the entirety? (This decision can also be made at the time of acquisition.)
Payment of debts, including liability for debts incurred pre-agreement, post-agreement, individually, and jointly.
Intended tax filing status.
Inheritance rights.
Beneficiary rights (bank, brokerage, retirement, life insurance, etc.)
Future alimony and child support.
Amending, revoking, or invalidating the agreement.
You can be as general or specific as you need based on your particular situation, but remember that life rarely unfolds as planned!
How do I get started?
If you need some help navigating money conversations with your partner, Ramit Sethi provides some excellent advice including specific money scripts for couples. After you get started on this conversation, never stop having it. Xa and I have regular money dates where we talk about our goals and measure our progress. After all, we are on this journey together!
Once you and your partner decide to have a prenup and get a general idea of what you wish to include, reach out to me for help putting it together. You will be glad you did.
Kommentare