With warming temperatures and the Christmas and Valentine’s Day engagements announced, it can only mean one thing … wedding season is about to begin! With many decisions to make from catering to flowers and bridal party gifts, you may already feel overwhelmed. The last thing on your mind is having your soon-to-be spouse sign a document that addresses your finances and property. The superstition that it predicts the demise of your marriage before it’s even begun may also weigh heavily on your mind. Despite it being a difficult topic to discuss with your future spouse, a prenuptial agreement can be a very helpful tool for you both for reasons aside from preparing for the event of a possible divorce.
Pursuant to California’s Family Code, §1612, parties to a pre-marital agreement may contract with respect to all of the following: (1) The rights and obligations of each of the parties in any property of either or both of them whenever and wherever acquired or located; (2) The right to buy, sell, use, transfer, lease, assign, create a security interest in, mortgage, or otherwise manage and control property; (3) The disposition of property upon separation, marital dissolution, death, or the occurrence or nonoccurrence of any other event; (4) The making of a will, trust, or other arrangement to carry out the provisions of the agreement; (5) The ownership rights in and disposition of the death benefit from a life insurance policy; (6) The choice of law governing the construction of the agreement; (7) Any other matter, including their personal rights and obligations, not in violation of public policy or a statute imposing a criminal penalty, including determination of or waiver of spousal support.
But who really needs a prenuptial agreement and why? Here are five situations when you absolutely need to have a prenuptial agreement to protect your and your spouse’s interests:
1. This is not your first marriage and/or you have a pre-existing estate plan.
Prenuptial agreements are not only used when you get a divorce. They also are created to ensure if you or your future spouse can distribute your assets to any children from a previous marriage, former spouses, or anyone else you wish to provide for. If your soon-to-be spouse enters the marriage with the knowledge they will not be entitled to that property, they cannot later claim you mistakenly left them out of your will.
2. You or your soon-to-be spouse has a business ownership interest.
The day before you get married, any business interest you have is yours and yours alone. This is called your separate property. The day you get married the business itself remains your separate property, however, any profits obtained from the business become community property. Upon divorce, all community property is split jointly if you separate from your spouse. Upon your death, if you don’t have a will stating otherwise, all of the community property goes to your spouse, as well as a portion of your separate property. Not only that, but any increase in value to your portion of the business can be considered community property and be divided, possibly forcing the business to be sold to pay the spouse their share. Finally, if you use community property funds (your earnings or your spouse’s earnings) to purchase business assets or make improvements to the business, your spouse has a claim to those improvements and it may lead to you being required to sell the business and its assets.
3. There is a disparity in wealth between future spouses.
Either you or your spouse may have significant wealth, from family, earnings prior to the marriage or investments obtained for your retirement. Once you’re married, any earnings become community property of which your spouse is entitled to half. Additionally, any funds you commingle with your existing funds may become community property. There are ways to trace items back to the funds they originated from to determine what portion is community property and what portion is separate property, but this becomes increasingly difficult the longer you are married and the more times you purchase property. For instance, a wealthier spouse purchases a brand new BMW with funds from his separate property bank account for $40,000 just after the marriage. A few years later, the BMW is traded in and a Lexus is partially financed and paid for each month from the joint bank account. Then, a few years later, the Lexus is traded in and a Mercedes is purchased. After the passing of time, that $40,000 the wealthier spouse initially contributed becomes so diluted with the community funds, there’s no way to track where the funds came from when it’s time to decide who receives the Mercedes when a divorce is filed.
4. There is a disparity of outstanding debt between future spouses.
An ex-spouse is not the only person trying to obtain marital assets. A prenuptial agreement can also protect certain property from debt collectors and designate responsibilities for pre-marital debt. When community earnings are used to pay one spouse’s outstanding debts, upon divorce, the other spouse can obtain reimbursement for one-half of everything paid on those separate debts during the marriage, including payment of student loans, mortgages and vehicle payments. A prenuptial agreement can designate who pays what obligations and what funds may be used to do so.
5. There is a disparity of earnings between future spouses or a future spouse plans to take time off of work to raise children.
Spousal support may also be designated or waived in a prenuptial agreement, although this is a tricky subject which requires further explanation. A prenuptial agreement can guarantee a spouse will be financially supported for any certain period of time if he or she takes time off to raise the children of the marriage or for any other reason. A clause can be used to protect a financially weaker spouse or a spouse who opts out of their career trajectory to raise the family.
So, despite preconceived notions and superstitions, a prenuptial agreement is actually created to protect both spouses, as well as other important parties (children of prior marriages, other family members and business partners). Although it may be uncomfortable to discuss these matters while debating over the age-old question, Do we get a band or a DJ?, your financial future as a couple is much more important to resolve. If you or someone you know is planning a wedding and any of the above applies, call an attorney for a consultation in plenty of time before saying I do.
*Christine Reynolds is licensed to practice law in the state of Indiana. She currently works at The Reape-Rickett Law Firm as a law clerk.