Marriage is an exciting time for anyone, but special considerations exist for high-net-worth individuals. Real financial concerns are common: Should you consider combining finances after marriage? What sort of debt are you each bringing into the marriage? If you have more money, how will you manage your spouse's debts?
Prenups have a variety of negative connotations surrounding their use, and many engaged couples are concerned that getting a prenup means they're somehow expecting their marriage to fail. Long story short, that isn't the case. A prenup simply means couples prepare for all potential eventualities. With proper planning, couples can get a prenup and come out stronger for it.
What Is a Prenuptial Agreement and How Does It Work?
A prenup is an important piece of family law. It's a legal document that outlines how you'll separate assets if there is a divorce. It specifically lays out how much each spouse will get, how you will divide assets, and under what circumstances a spouse may receive more or less money.
Prenups can vary depending on each couple's specific circumstances. For example, many prenups address other components commonly hammered out during contentious divorce agreements. This includes child support, alimony, the division of marital property, the management of credit card or student loan debts, and other details.
Prenups become more complicated when determining how a prenuptial agreement will impact other potential investments, such as a college savings account or stock portfolio. You also need to find out if you're in a communal property state, which requires splitting real estate, as this will alter the content of the prenup.
Finally, another important consideration: How does a prenup work? Prenups work differently according to state laws and details of the agreement, but in most cases, a prenup will be triggered by divorce or an action that would contribute to the end of the marriage, such as infidelity. The prenup will legally divide and protect assets per the agreement.
Discuss Whether a Prenup Is Right for You
For some spouses, the idea of a prenup is horrifying: How can you plan for the end of the marriage? For others, it's simply a necessary legal document to protect marital assets and prepare for every eventuality. Indeed, many individuals with a prenup have a previous marriage or have seen friends or loved ones experience a divorce without this important agreement.
That's not to say a prenup is right for everyone. However, it can be critical to a fair distribution of community property, child custody, and spousal support.
Have an Open Conversation
The question, "Should I get a prenup?" is important. However, the first person you should discuss that with is your future spouse. In the case of divorce, it will be your lives — and the lives of any children — most closely impacted. As difficult as it can be, you need to work together to determine what you would do if your marriage ended, particularly as it relates to your finances. Below are some ideas on what you'll want to cover in a conversation.
Discuss Investments and Debts
Each of you should go into the marriage with the same financial understanding. For example, you need to know what debts each of you has and how you will repay these debts. You also need to be on the same page regarding investments and general financial goals. By addressing these matters, you can better decide whether you should get a prenup, as it can ensure you and your spouse are on the same financial page. In addition, you can divide assets fairly in the event of a divorce.
Get on the Same Page for Future Goals and Spending
The best thing you can do is have a detailed discussion to ensure you're both on the same page for short-term and long-term financial goals. Finances are a common cause of conflict for couples, but avoiding the topic makes it more likely you'll argue about other important issues. It's difficult to imagine a successful marriage in which couples don't understand the need to make joint financial decisions and prevent problematic spending habits. By working together, you can get on the same page and avoid future conflicts.
Other Options: Joint Trust vs. Separate Trust
When creating a prenup agreement, estate planning must be discussed, and establishing trusts may be a worthy alternative if you should get a prenup.
You establish a trust so your heirs can access your money upon death. For example, a joint trust allows a surviving spouse to inherit assets, while a separate trust ensures that other surviving heirs can access some of these assets, even if one spouse is still living. There are various advantages and disadvantages to each type of trust.
From a prenup perspective, separate trusts may be better, as it can be more difficult for a separating spouse to access the separate trust. The challenge is that such planning may also impact other elements within your estate planning. The trust question adds significant complexity to this decision.
So, is a trust the best alternative? The answer to this question differs for everyone. Your best bet is to consult with experts in this field to ensure you make the best decision for your financial future.
Combining Finances After Marriage (or Not)
If you're still asking, "Should I get a prenup?" you should understand that the answer to this question ultimately depends on the financial circumstances in your marriage. For example, some couples don't combine finances. Others can't imagine maintaining separate financial arrangements.
Joint finances are easier to manage daily. They can also reduce friction, create transparency, and ensure a less complicated picture for estate planning. Joint finances can also allow one spouse to "offload" the management of finances to the other. Keeping finances separate means each spouse must maintain their accounting. This separation can double the workload and create conflicts over purchases. How will you split items? What items will you split? What happens if one spouse has financial trouble?
However, combined finances can get complicated in the event of a divorce. Without a prenup, you may be setting yourself up for a complicated situation with disagreements about investment, real estate, retirement accounts, and more.
Get Professional Advice
"Should I get a prenup?"
The answer to this question ultimately depends on various considerations and plans, including your net worth, family assets, relevant state law, and more. Therefore, addressing any questions with an expert financial advisor and a knowledgeable family law attorney is important.
This much is certain: Deciding if you should get a prenup is a complex decision and one you should not make on your own. There are many broad-based financial considerations to keep in mind. However, you need the best advice possible if you're a high-net-worth individual looking for holistic answers to combining finances after marriage, protecting significant assets, and handling joint accounts. At Plancorp, we have years of experience working with individuals like you and can help you determine the best way to manage your finances.
Ready to learn more? Fill out our financial goal planning worksheet, and connect with us to learn how we can help protect your finances — prenup or otherwise.