Financial Planning For Young Adults: Prenuptial Agreements—What You Should Know Before You Get Married
Are you engaged to be married and wondering if you need a prenup? Or do you have a child who is getting ready to walk down the aisle and say “I do,” but have family assets that you want to protect?
When you’re in love and only thinking of starting your new life, “till death do us part,” it’s easy to dismiss the need for a prenuptial agreement. Divorce is probably the last thing you want to be thinking about. Or perhaps you think you don’t have enough assets to make a prenup worthwhile, especially if both you and your intended are just getting started in your careers.
However, there’s a reason why prenuptial agreements are growing in popularity, especially among the younger generations. Divorce rates are increasing, and there is heightened awareness that no matter how true your love may seem at the moment, there’s a chance that it may not stay that way forever. People can and do change over time, and so do their circumstances. In addition, people are getting married later in life, and second and even third marriages are more common.
A prenuptial agreement can be an important planning tool that can help safeguard your personal and family assets. It can protect the assets that have been created as a result of years of hard work and careful preservation in the event that what was initially meant to be “happily ever after” ends differently than anticipated.
Although a prenuptial agreement can be a difficult topic to broach with your loved one, it doesn’t necessarily have to be a romantic buzzkill. Instead, a prenuptial agreement can help strengthen a relationship by setting the stage for an open and honest dialogue about shared goals and planning for the future.
What is a prenuptial agreement?
A prenuptial agreement is part financial plan and part legal contract. It is an agreement entered into by a couple before they are married that helps protect their individual interests should they get a divorce.
A prenuptial agreement isn’t just about staking a claim on what’s yours, and it doesn’t mean that you don’t trust your significant other or vice versa. Rather, a prenuptial agreement can be an exercise in building trust. A well-designed prenuptial agreement can serve as the foundation upon which a couple can build a long-term financial plan by helping them make decisions upfront and manage expectations for the future.
How does a prenuptial agreement work?
A prenuptial agreement protects each partner’s rights and obligations to property by deciding (before marriage) which items are marital assets and which items remain separate in the event of divorce. Without a prenuptial agreement, it can be difficult to determine what is yours or your spouse’s, versus what is marital property. A prenuptial agreement can help couples lessen the impact of what can be a potentially emotionally difficult and costly process.
For couples where one or both of the individuals have significant assets, the idea of a prenuptial agreement seems very clear. But you don’t necessarily have to have a lot of money to benefit from having an agreement in place. Increasingly, couples with more modest wealth are entering into premarital contracts because such agreements can help remove ambiguity, protect assets accumulated individually or inherited from a family estate, ensure children from a previous marriage are provided for, or shield a partner from the other’s debt.
Although most prenuptial agreements are financially driven, they can include almost anything that the couple assigns monetary or sentimental value to, such as family heirlooms, artwork or collectibles. A prenuptial agreement doesn’t have to include the couple’s entire estate, but can be limited to a single asset, such as a home. At the same time, a prenuptial agreement can include hypothetical future wealth, such as an anticipated inheritance. The cost of drafting a prenuptial agreement will generally depend on the amount of assets you include and the complexity of the agreement.
Considerations when creating your prenuptial agreement
Start the conversation early. You don’t want to be rushed into decisions you aren’t comfortable with or don’t fully understand. It is important that both you and your intended have enough time to thoroughly consider all of the terms you want to include.
Be fair. Avoid a one-sided prenuptial agreement by being patient with your intended and understanding of his or her needs to ensure that the terms of your agreement are reasonable and the appropriate financial disclosures are made.
Seek individual counsel. Each person should have separate legal representation, so both you and your intended understand your rights and responsibilities. In fact, this may be a requirement in some jurisdictions for a binding prenuptial agreement.
The dream is for a lifetime of love and happiness, but sometimes you discover it’s not possible with the person you married. While it may seem cynical to start planning for divorce before you’ve even tied the knot, the consequences of not preparing for the possibility can be devastating. Having a prenuptial agreement in place can help make the separation of assets less painful and ensure that the process will be as efficient and smooth as possible in what is often a challenging time.
CIBC Private Wealth’s Wealth Your Way podcast series is an educational offering for clients and their children, and demonstrates our commitment to developing the rising generation. Listen to the podcast on prenuptial agreements here. There, you will also find other informative podcasts that are designed to help rising professionals steer through their personal financial journeys.