BY FPA members Elaine King, CFP®, CDFA™ and and Philip Herzberg, CFP®, MSF

Last Updated: November 1, 2010

As soon as possible, but no later than six months before engagement, you need to have a meaningful conversation to communicate and delineate your financial wishes and estate planning intentions. Recognize that assets could be divided due to unforeseen events, not only divorce. Give profound consideration to drafting a prenuptial agreement, a contract which is especially beneficial if you own a business or successful professional practice, desire to protect the inheritance and interests of your children from a previous relationship, or have substantial assets earned before your marriage.

Regardless of whether you are wealthy or have children from prior marriage(s), a prenuptial agreement can also be an invaluable financial planning tool for you in protecting your spouse from each other’s debts and outlining your spouse’s rights and monetary obligations during and after the marriage. Keeping in perspective that divorce attorneys have confirmed a compelling 73 percent increase in newlyweds signing prenups during the last five years¹, you and your intended spouse will be extremely capable of evaluating and deciding together whether drawing up a prenuptial agreement makes sense by being thoroughly well-versed on the following essentials insights:

Openly discuss the prenuptial agreement before the wedding and be transparent in your feelings and financial issues

• Completely disclosing the assets and liabilities you bring to the union, clarifying your financial expectations, and earnestly expressing emotions to establish provisions for determining future matters can actually enhance the quality of your relationship. Remember that a premarital agreement can specify more than just the financial aspects of marriage, and can outline any of the details of responsibility sharing and decision-making process to which you concur in advance.

• Since the majority of marriages ending in divorce are due to unresolved financial issues that can be prevented, you and your spouse need to prepare a detailed financial statement. Hire separate legal professionals to ascertain stellar representation and consider enlisting the guidance of a financial planner, family law attorney, or tax professional, to assist with this procedure.

Educate yourself on what can happen if you do not have a prenup

• Sans a prenuptial agreement, you and your spouse will be subject to the property-settlement laws and elective-share rules of the state in which you reside. 
• Would you be satisfied with the respective state law protecting your assets before marriage and splitting your marital property in the event of a divorce? Be cognizant of state laws (i.e. equitable distribution or community property state) and relevant provisions, most significantly to protect the inheritance rights of sizable assets, such as a family home or business, for your children from a previous marriage.

• Recognize that debt you have before your marriage is separate property and remains non-marital if you do not co-mingle it. Make it a habit to check for titling of accounts.

Utilize life insurance to compensate the surviving spouse or provide for children from a previous marriage

• Think about formulating separate financial obligations and utilize the prenup-with-life insurance arrangement to facilitate a fixed payout for your spouse, and to give your kids from a previous marriage their full inheritance (i.e. by making children beneficiaries of policies you own). Alternatively, you can compensate your children by setting up an irrevocable life insurance trust (ILIT) to buy life insurance for your children’s benefit and potentially minimize federal estate and income taxes.

• Consult with a financial professional who specializes in insurance or an estate attorney to assess the appropriateness of the strategy for your situation. Refer to these options for further pointers on how to provide for children from a prior marriage.

Pronounce specific stipulations and decisions in your prenups

• You can spell out responsibility for separate and joint debt, protecting you from having to take ownership for the debts of your spouse. If you plan on signing up a profitable career after your marriage, you can define terms of the contract, with provisions to ensure you will be compensated for that sacrifice if the marriage does not last.

• In addition, you can elucidate and decide whether you will file joint or separate tax returns, how you will pay your mortgage and household expenses, and what type of education your kids will receive in the prenuptial agreement. Peruse FPA’s feature on “10 Important Questions to Ask Before Tying the Knot,” for additional considerations to plan ahead for and cover in your premarital agreement.

Do not spell out alimony and child support or utilize a prenup in lieu of an estate plan

• Understand that states will strike off the agreement as unfair and detrimental to your spouse if you define alimony provisions or child support stipulations in your prenup. Affirm no intended clauses will violate state law or policy before inserting sunset provisions for your prenuptial agreement to expire after a determined number of years of marriage.
• Do not include personal preferences (i.e. whether or not to have pets and dividing household tasks) since these are monetary arrangements that are optimally reserved for you and your spouse to deal with privately. Finally, be clear that even though a prenuptial agreement can cover who the appointed trustees and executors will be, you should not utilize the prenup as a substitute for a will or estate plan.

Ultimately, by being knowledgeable of these prudent prenuptial agreement insights and pitfalls when having an open conversation with your spouse-to-be, you can fulfill your aspirations and proactively plan ahead for your family’s financial future. No prenuptial agreement or marriage is bulletproof, and there are resources and strategies available to minimize financial and emotional distress.

To increase your peace of mind, always be clear on your finances and desires before tying the knot. Keep in mind, financial opposites do attract.

FPA member Elaine King, CFP®, CDFA™, is Vice President, Director of Wealth & Well-Being Institute™ at Gibraltar Private Bank & Trust. FPA member Philip Herzberg, CFP®, MSF, is Director of Media Relations & Public Awareness for FPA of Miami-Dade.

¹ 2010 American Academy of Matrimonial Lawyer (AAML) member poll; also, cited in Cindy Krischer Goodman’s September 23, 2010, Miami Herald feature, “Why Women Are Asking for Prenups.”