Premarital agreements (also known as prenuptial agreements, or “prenups” for short) involve elements of estate planning and divorce law. And because such agreements can center on finances and taxes, accountants should be aware of how they operate.
WHEN A PRENUP MAY BE NEEDED
Prenups aren’t just for rich people—they are for anyone who is concerned about losing control of his or her property as a result of marriage. They may be especially helpful when:
R One or both spouses have significant assets. The parties might need what is referred to as a “yours is yours, mine is mine” prenup. Under it, each party, upon dissolution of the marriage, would retain property owned in his or her sole name prior to the marriage. In addition, neither party has the right to the other’s property upon the death of one spouse. Co-owned property, which may include property acquired during marriage, is usually divided equally or based on the parties’ respective ownership interests. In most cases, the parties will choose to opt out of the default state laws, which can vary widely on equal or equitable distribution of community or marital property upon death, divorce or annulment.
R One or both spouses have children from prior to the marriage. A prenup can preserve lines of inheritance for each spouse separately.
R Assets from a family business are owned by one spouse. A spouse may agree to waive certain rights in return for a payment, with the amount often tied to the length of the marriage.
SITUATIONS COVERED BY A PRENUP
While articles concerning prenups—usually about the marriage or divorce of some celebrity—appear regularly in the media, not much is written about what prenups actually accomplish. They can help spouses:
R Manage ownership of assets and responsibility for liabilities during marriage. The parties can address issues such as taxes (will they file joint returns?) and use of property. For instance, if they plan to reside in a house owned by Wife, will Husband be required to pay any house-related expenses? If so, should such payments give Husband an ownership interest in the house?
R Decide in advance how to divide property in the event of divorce. This is the most well-known aspect of prenups.
R Plan estates. State laws grant spouses certain estate and inheritance rights, which prenups can adjust. For instance, a prenup might eliminate or limit a surviving spouse’s inheritance rights or prevent a surviving spouse from administering the estate of the first spouse to die.
KEYS TO AN EFFECTIVE PRENUP
Where a prenup is needed, the only thing worse than having no prenup is having an ineffective prenup. An ineffective prenup
is one that is poorly drafted or is unenforceable. This latter problem can cause real headaches for all involved. In general, judges don’t like prenups—they view them as unfair to the less-wealthy spouse. Thus, the parties and the professionals they hire need to follow all formalities, including:
R Ensure effective representation. Each party must have his or her own attorney, even if they agree on what the prenup should say.
R Make full disclosure. Each party must fully disclose the nature and extent of his or her property, preferably in writing. This makes sense—if you are agreeing to give up rights to another person’s property, you should know exactly what it is that you’re giving up.
R Allow a seemly and prudent interval before wedding bells ring. An appearance of unfairness should be avoided at all costs. Typically, such situations involve timing, such as where one party learns that the other wants a prenup— or is signing it—while getting ready to walk down the aisle. The process should be started well before the marriage date, to allow cooperation in negotiating and drafting the document, so neither party feels forced to sign.
—By Joel A. Schoenmeyer, Esq., an attorney in private practice in Oak Park, Ill. He specializes in estate planning, estate and trust administration, and residential real estate, and blogs about them at www.deathandtaxesblog.com. His e-mail address is firstname.lastname@example.org.