Does a prenuptial agreement protect assets?

Will you spend the rest of your life with me?

It's a question that's often posed with the proposition of marriage. However, even the most well-intentioned and optimistic of couples can never really know the answer. While marriage is supposed to be "forever," that's not always the outcome. In fact, according to statistics, nearly half of all marriages in the United States will end in divorce. As such, young people considering marriage must also consider another question: Do I need a prenuptial agreement?

There has been much discussion and debate about this legal document, which describes in part how assets should be divided in the event of a divorce. While the romantic in me wants to believe that marriage is a lifetime commitment to sharing and such a document should not be needed, my professional and life experiences have shown me otherwise.

Reasons for a prenuptial agreement

Often when I discuss the subject of a prenuptial agreement with clients entering a second or later-in-life marriage, they generally agree that it should be considered, especially when they have children from a prior marriage. These clients have usually amassed meaningful assets, are established in their careers, and of course, know firsthand that despite the best intentions, marriage isn't always forever. This is in contrast to younger couples who, without family money, may have a less certain financial future and are reluctant to discuss the subject of prenuptial agreements.

The main benefit of a prenuptial agreement is that it protects assets from divorce by allowing financial protection through a pre-arranged, legally binding contract between you and your spouse. It specifies certain current and future assets that are individually owned versus jointly owned marital property that may be subject to division upon divorce.

The division of property

There are two different systems the U.S. courts use to classify marital property:

• Common law property. In this system, property acquired by a married person during marriage is the property of that person separately; that is, unless the person agrees with their spouse to make it joint property.
• Community property. Nine states in the United States classify marital property as community property. There is one hybrid state, Alaska (which allows you to opt in). In these areas, property acquired by either spouse while married is designated as community property. Property acquired before marriage, as well as property inherited or gifted during a marriage, is generally considered the separate property of the spouse who received it.

The legal system that applies will impact rights of ownership; rights to income from property; rights and duties of management and control; rights to make lifetime gifts; property rights after divorce; and rights to dispose the property upon death. Additionally, whether the legal system is common law or community, if one spouse enters the marriage with substantial assets they wish to keep separate, the prenuptial agreement could provide that protection upon divorce.

The law and inherited assets

Assets from an inheritance can be somewhat complicated. Though these are usually considered separate assets, they can easily become marital property. While they can be segregated with careful planning, inherited assets are often unintentionally co-mingled, making them marital assets. This may occur when the spouse who receives the inheritance deposits inherited assets into a joint account, or when they use inherited assets to purchase a jointly owned home that benefits both spouses. Even when inheritance recipients take great care to separate assets, state laws could still make the inheritance — or the appreciation of it — marital property. To avoid such situations, you could use a prenuptial agreement along with a trust to protect against inadvertently co-mingling inherited assets.

Protecting children

In addition to helping protect assets, prenuptial agreements can be invaluable in protecting children of high-net-worth families. These agreements provide a clear and defined framework that will eliminate uncertainty in the divorce settlement, ensuring that the intended beneficiaries receive family assets.

Though prenuptial agreements take the romance out of engagement and the promise of forever, they can provide the protection you need, especially if you have family wealth and children to protect. It's certainly worth talking about.

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