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Sunday, April 21, 2024

Do I, as a normal person, need a prenup?

Do I, as a normal person, need a prenup?

09.01.2023

It’s easy to read stories about celebrity divorces and think that prenups are something only wealthy people need. But that’s simply not true. Prenups can be valuable for people of all incomes. And contrary to popular belief, prenups don’t just help the partner with the higher income.

According to a 2022 Harris Poll,1 15% of currently engaged or married couples have a prenup. That’s up from just 3% in 2010. Additionally, more than 40% of Americans report supporting the use of prenups, and 35% of unmarried people say they’ll probably use a prenup when they get married.

And no, the people getting prenups today aren’t just the rich and famous. But how does someone know whether a prenup is a good idea for them? And if someone does get a prenup, what sort of protections should they include?

What is a prenup?

A prenup — short for prenuptial agreement — is a legal agreement between two individuals that lays out what happens to their assets in the event the marriage ends, whether it’s through divorce or death.

Prenups generally dictate how the couple's physical and financial assets will be divided. If they’re drafted correctly, they supersede a state’s laws regarding who gets what after a divorce. Some things that can be included in a prenup2 are:

  • Property rights and obligations
  • Division of property
  • Property interests of children from previous relationships
  • Spousal support obligations
  • Rights to life insurance benefits
  • Treatment of inheritance
  • The impact of a will

What a prenup does and doesn’t cover

The most important function of a prenup is to determine how assets are divided after a divorce and what a surviving partner is entitled to if one partner passes away. They can dictate the treatment of assets2 such as:

  • Bank accounts
  • Brokerage accounts
  • Retirement accounts
  • Spousal support
  • Life insurance policies
  • Business ownership
  • Inheritances
  • Real property
  • Property owned before the marriage
  • Property acquired during the marriage

In addition to stating how assets will be divided, a prenup can also state how debt will be divided. It can dictate the treatment of debt each couple came into the marriage with, as well as any debt the couple acquired during the marriage.

Prenups can also include clauses that come into play only in certain circumstances. For example, many prenups include an infidelity clause, which imposes a financial penalty on a partner who has an affair during the marriage.

It’s also important to note that while many people think of prenups as something that applies in the case of a divorce, they can also apply in the case of a death. Prenups with specific death clauses are especially important for people who may have children from a previous relationship who they want to protect. The prenup may dictate what assets will be inherited by the spouse versus which will go to the children.

Of course, it’s also important to talk about what a prenup doesn’t cover. Most importantly, a prenup can’t set the terms for child support or custody. That’s a matter that must be handled separately later on. A prenup also can’t include any terms that are against the law.

Finally, there are situations where a prenup may be signed but then later unenforceable. For example, if one partner can prove they were forced to sign the prenup or that the other person failed to fully disclose their assets, the prenup may be thrown out in court.

What happens without a prenup

If you don’t sign a prenup and then get divorced, your state’s laws will determine how your assets are divided. There are a few different ways things could play out, depending on what state you live in.

Most states have what’s known as equitable distribution3 in cases of divorce. In a state with equitable distribution, assets will be divided in a way that’s fair but not necessarily equal.

Additionally, it’s only property acquired during the marriage that will be divided up. Property acquired before the marriage is considered separate property and remains with the person who owned it before the marriage.

In a community property state, all marital assets are split evenly. Marital assets are considered to be anything acquired during the marriage, including both money and real property. However, as with equitable distribution, property owned before the marriage is generally considered separate and will remain with the original owner.

9 reasons you may want a prenup

There are plenty of reasons someone may want a prenup, regardless of their level of income. Here are some examples, but these certainly aren’t the only situations where a prenup may be a good idea:

  1. You have significant assets: One of the more frequent reasons that someone gets a prenup is because they are coming into a relationship with significant assets and want to protect those assets. This may be more likely for people who have successful careers or come from wealthy families.
  2. You or your family own a business: If you own a business, you may want to protect that business by stating that if you get divorced, the business is all yours. Similarly, many people who come from family businesses may get a prenup to protect their family’s greatest asset.
  3. You have kids from a previous relationship: Blended families may be more likely to need prenups because of their complex situations. If you have children from a previous relationship, you are likely to want to make sure they’re protected and that your ex-spouse can’t take their future inheritance in the event of a future divorce (or your death).
  4. You expect to receive a large inheritance: If you expect to receive a large inheritance in the future, you may want to have a clause in your prenup that ensures that money will remain yours and won’t be intermingled with your marital assets.
  5. You receive a large gift from a family member: Suppose your parents gifted you a large sum of money for you and your future spouse to buy a home. You may decide to get a prenup to say that anything purchased with gift money from family is a separate asset, not a marital one.
  6. You or your partner has significant debt: Generally speaking, debt acquired before the marriage is separate debt. However, if your spouse has large debt (or expects to take on a large amount of debt), you may want a prenup to protect yourself from that debt.
  7. You plan to be a stay-at-home parent: We often think that the person earning the most money will want a prenup to protect their assets. But what about someone who supports their family in a different way? If you’ve stayed home with children while your spouse works, you’ve provided for your family in an important way and will likely want your prenup to ensure you’ll be comfortable financially.
  8. You have (or plan to) financially support your spouse’s career growth: It’s often the case that one spouse financially supports the other while that person invests in their career by going to medical school, law school, etc. The person who pursued higher education ends up with a higher income, but only because the other spouse financially supported them. The spouse who supported their partner during their lower-earning years may want a prenup to ensure they’re paid back for that support.
  9. You have pets: Animals are treated differently than children under divorce law. Rather than being treated as dependents with a custody schedule, they are treated as property that is awarded to just one person. If you and your partner have a pet before getting married, it may be worth getting a prenup to dictate who gets that pet in a divorce.
  10. You want to avoid a fight in court: Anyone who has gone through a divorce can tell you that the person you marry isn’t the same person you divorce. If you want to avoid a fight in court down the road, you could draft a prenup to ensure you and your spouse come to an agreement while you’re still in a good place in your relationship.

Downsides of a prenup

Yes, a prenup can be beneficial to people of all income brackets. But there are also some downsides. These downsides don’t necessarily mean you shouldn’t get a prenup, but they may help you decide how to approach the drafting process and what to include.

  • There’s the potential for an unbalanced prenup: Not all prenups protect both parties. In fact, many prenups may be drafted to specifically protect just one spouse, especially if one person (or one family) takes the reins in the drafting process. For the other party, the prenup could end up being far less favorable than state law.
  • It could cause hurt feelings in the relationship: Many people look at a prenup as a sign the marriage is doomed. After all, can someone really be committed if they’re already planning for the end of the marriage? And if your future spouse feels that way, asking for a prenup could cause a rift in your relationship before the marriage even starts.
  • You can’t predict the future: A prenup determines how you’ll divide your assets in the case of a divorce, which could be years — or even decades — into the future. There’s a good chance your life will be drastically different when that time comes. Your prenup may no longer seem appropriate or fair, but it will probably be binding.

What if you’re already married?

Maybe you’ve read this entire article and realized a prenup might have been a good idea in your situation. The good news is that it’s not too late (as long as your spouse is on board). Once you’re married, you and your spouse can sign a postnuptial agreement — or postnup, for short — which outlines the same things as a prenup.

1 The Harris Poll, “More Couples Are Signing Prenups Before Saying ‘I Do’”, July 2022.

2 LegalZoom, “Prenuptial agreements: What they can and cannot protect,” May 2023.

3 Justia, “Community Property vs. Equitable Distribution in Property Division Law.”

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Erin Gobler

Contributor

Erin Gobler is a money coach who helps people pay off debt and reach their big financial goals without giving up spending on the things they love. She is a freelance writer for Empower.

Author is not a client of Empower Advisory Group, LLC, and is compensated as a freelance writer.

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