Protecting your assets isn’t just about insurance. Couples willingly enter marriage without considering the impact of a break-up while few would enter a business partnership without planning who takes home what value if the business were to close or be sold.
The bread winning spouse may fear the consequence of asking for an agreement. The non-moneyed spouse may feel like a gold digger. But without an agreement spouses risk their financial security.
The basic rule is as follows: Anything owned before marriage or inherited is separate property so long as it is kept separate. However, depending on the laws in your state, it may be hard to keep that property or the income from it separate.
One important key to a durable pre or post nuptial agreement is transparency. Without full financial disclosure a pre or post nuptial agreement could be invalidated. Both parties should fully understand each other’s financial resources.
Any agreement is at risk of being invalidated if any of the terms of the agreement are drastic – like requiring a spouse maintain his or her weight or leaving a spouse destitute upon divorce. Any agreement must be clear, and it must be revised as the assets and income of the marriage change in order for the agreement to be valid. Agreements take time to negotiate and both spouses need their own legal representation and financial plan. Asking a future spouse to sign at the alter or under pressure could invalidate the agreement.
One misunderstanding about these agreements is that every asset or account must be in the agreement. While full financial disclosure is key to the durability of the agreement, the agreement may only cover one or two assets or accounts. For example, a post nuptial agreement could cover (by agreement between spouses) how the residential home or stock options would be split in divorce. The division of other assets would only be decided under the laws of the state or by agreement at the time of a divorce. This tool is particularly useful in second marriages where one spouse came into the marriage with separate property but the other earned quite a bit during the marriage.
A story I relate in my book, “I Now Pronounce Your Financially Fit” goes something like this:
Bob and Sue marry in their thirties and now have two college age boys. They decide to split. Sue knew that Bob had a $1 million trust fund before marriage. They decided to keep the trust invested for their retirement. Bob stayed home with the children and Sue worked a regular 9-5 that supported the needs of the family which included buying their home. Bob never contributed to his family’s living expense because he expected that the couple would use the trust to support their retirement needs.
Sue made few contributions to her 401k savings at work because she knew that the trust would support their retirement. Upon divorce, Bob was awarded “all of mine and half of yours”. He was awarded the trust which was separate property, half the equity in the home and half of that small 401k. Sue left the relationship with only half the proceeds of the home and half of her small 401k.
To protect her retirement and as part of their family’s financial plan, Sue could have asked that Bob move money into their joint account from the trust over time from the beginning of the marriage in an amount that might have supported her retirement in case of divorce. Alternatively, a pre or post nuptial agreement could have awarded Sue an increasing part of the trust based on years of marriage. Because she was afraid to ask for such an agreement, she left the marriage with very little in savings. Sue will have to work for much longer than she expected.
Home, auto and life insurance policies protect your property or income from loss. Without an agreement, there is no insurance for marriage or how generous a spouse may be in case of a divorce. The only protection is an agreement.
For more information or if you’d like to talk about your specific situation, please contact Robertson Stephens.
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