[This article was written by Julia Rodgers, CEO and co-founder of HelloPrenup, the premier platform for prenuptial agreements.]
Don't you think that the property purchased prior to marriage should remain separate? You may be interested to learn that, depending on the state you live in, that is not always the case. As a former family law attorney and CEO of HelloPrenup, I have found that most people feel that ‘fair’ entails keeping pre-marital assets separate while allowing assets that accumulate during marriage to be considered at least in part as marital assets. Sounds reasonable, right? Luckily, by entering into a prenuptial agreement, you and your partner can make your own rules as to what is fair. Many couples today are deciding that they do not necessarily feel like their state’s divorce laws are in line with how they view their partnership. That’s where a prenup comes in.
Let’s take a look at some examples of couples using their prenups to keep things fair in their marriages.
Example #1: I own a house prior to marriage, how do I keep it separate property?
Emily and Mark are in their late 20’s, have been dating for 4 years, and are engaged to be married. Emily purchased a condo that she loved in San Francisco a year before she met Mark. Since she and Mark have been dating, he moved in and now he pays his rent to Emily.
Emily wants to protect her investment and would like to keep the condo off the marital table. After all, she found the perfect place and made the down payment. She wants to make sure that she alone is entitled to any appreciation in value that may accrue during the marriage.
In their prenup, Emily and Mark can specify that the condo is, and will remain, Emily’s separate property. She can also go one step further and specify that the initial investment and any appreciation in value are also hers alone. Eventually, Emily may want to sell the condo and purchase a home with Mark. The prenup can help in that scenario as well. The proceeds from the sale of Emily’s separate condo can be designated as separate property in the prenup. Even if she uses those funds to buy a joint marital home, the prenup can list that investment as separate property. So, if Emily and Mark divorce down the road, Emily would be entitled to the value of her down payment.
Why does this matter? Depending on the state you live in, property that is owned by one spouse prior to marriage can become marital property and subject to division upon divorce. However, a prenup can protect separately owned, premarital assets.
Example #2: Buying a property together but keeping initial investments separate
Lisa and John, who are in their early 30’s, have been dating for a few years and are now engaged to be married. After they get married, they plan to purchase a home together. Because Lisa’s savings are much more significant than John’s, she will contribute more towards the down payment, specifically $100,000. John will contribute $10,000.
They both want to protect their hard-earned down payment contributions. To do so, they can agree in their prenup that each of their initial investments can be considered separate property. This will allow Lisa and John to regain their investments should the home sell in the future.
Why does this matter? If Lisa and John did not have a prenup, their investments in the marital home would lose their status as separate funds and become indivisibly mixed into the marital pot. States may vary on the details of this issue but generally, if the home were sold, the spouse’s contributions would not be returned to them based on the value of their contributions. You can see how this can lead to potentially unfair results based on the disparity of contributions.
Example #3: One spouse has significant student debt
Susannah and Scott got engaged after finishing graduate school. Scott racked up over $200,00 in student debt from his undergrad and graduate programs, and he’s not done yet. After the wedding, he plans to enroll in a post-doctorate program. To do so, he will likely need to take out even more loans. Susannah, on the other hand, made it through school without taking out any student loans. Naturally, Susannah was a little leery about the significant debt. However, the couple entered into a prenup in which they agreed that Scott’s personal debt is separate/non-marital debt. They even specified that any future debt accrued by Scott, like the potential student debt from his post-doctorate program, will be separate debt.
Why does this matter? Debt, like other property and assets, may be considered either separate or marital. If you don’t have a prenup, you could end up on the hook for part of your partner’s debt, especially if you derived some sort of benefit from the result of that debt. In many states, divorce judges have significant discretion when it comes to allocating debt to a divorcing couple. Just because one spouse racked it up, doesn’t necessarily mean that they alone will be responsible for the repayment.
Example #4: Financial gifts
College sweethearts Shelby and Drew are engaged to be married. Shelby’s parents have always doted on her and often provide her with monetary gifts. Marriage isn’t deterring her parents’ continued gifting, and Drew is totally on board. He could really use a vacation. However, Shelby thinks that these gifts should be her separate/non-marital property. Shelby and Drew can use their prenuptial agreement to decide how they would like to treat gifts and whether they should be considered marital or non-marital property.
Why does this matter? Generally, monetary gifts received during marriage are considered marital, or community property. However, a prenup allows couples to take control and make decisions on their own terms. So long as the couple agrees, they can specify that certain monetary gifts, like the gifts from Shelby’s family, should remain separate property.
Example #5: Inheritance
Kathryn and Will are a newly engaged couple in full wedding planning mode. Part of that wedding planning includes the creation of their prenup. Kathryn’s family plans to provide her with a significant inheritance. While they love Will, they caution Kathryn to protect her inheritance. Luckily, Kathryn and Will are totally on the same page and agree that Kathryn’s inheritance should remain her separate property – as should any inheritance that Will receives. They include these terms in the prenuptial agreement.
Why does this matter? Depending on what state you live in, your inheritance may or may not be considered marital property. In most states, however, it is generally considered separate property. But, even if your state considers inheritance to be separate property, you can undo that designation by commingling the funds with marital funds. So, it is a good idea to come to an agreement as to how you would like any potential inheritance to be treated and include it in your prenup.
Addressing inheritance is becoming more and more common as many parents and families fear inheritance being split during a potential divorce. In some cases, families even require a couple to get a prenup or risk disinheritance.
Example #6: The business owner
Conservative Ben and risk-taker Emily are engaged to be married. Ben holds down a 9-5 and plays it safe with his finances. Emily, on the other hand, is an entrepreneur and is willing to put more on the line. This presents some collective risk for their finances. They elect to mitigate the risk with a prenup. Specifically, the couple agrees that any debt accumulated by Emily’s business ventures is her separate debt. They also agree that any income from the business will also be Emily’s separate property.
Why does this matter? If Ben and Emily didn’t have a prenup, Ben could either be responsible for some of Emily’s business debt or entitled to an interest in the business. Where business successes and failures are large, so is the need for a prenup. Divorces that involve business interests quickly become complex (i.e. expensive). In order to avoid the headache, you should designate how any potential business should be treated in your prenup.
Keeping things fair for women
While thinking about fairness in the context of prenups, it’s specifically important to consider fairness for women. Women have traditionally gotten the short end of the stick when it comes to prenups and divorce. It’s no secret that women’s finances are more negatively impacted by divorce than that of their husband’s, especially when children are born.
Luckily, prenups can help mitigate these unfair scenarios. For example, a prenup can specify that should a mother elect to forego her career to stay home with the couple’s children, she is entitled to alimony upon divorce or a certain percentage of the husband’s assets. This ensures that the woman’s unpaid marital labor is acknowledged and valued. It also ensures that women are not subjected to an unfair wealth gap simply for leaving the workforce for a few years to care for their children.
How can HelloPrenup help?
HelloPrenup allows you and your fiancé to create a collaborative prenup online without ever leaving your couch. You will each fill out a questionnaire to determine what should be included in your prenup, resolve any differences in your answers, complete a financial disclosure, and print out a final agreement to sign and notarize. Simple!
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Trust & Will is an online service providing legal forms and information. We are not a law firm and we do not provide legal advice.
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