Prenups have a bad reputation. They shouldn't.
A prenuptial agreement is a planning tool — and both parties can benefit.
Prenups tend to be a loaded topic, in large part because a marriage can only end in one of two ways: divorce or death. Prenuptial agreements are meant to define and protect non-marital property in either event. And since all marriages must come to an end, every engaged couple should consider whether a prenup is appropriate for them.
Understandably, many couples and their families are uncomfortable with the thought of planning for the end of a marriage, especially one they have yet to celebrate. For example, some fear that asking for a prenup will offend a loved one or have a chilling effect on family relations. Others find the financial disclosure requirement is too much to ask.
Notwithstanding the discomfort, it’s always wise to make important decisions when things are good, as opposed to in times of crisis. Here are some points to consider:
State law matters
Absent a prenuptial agreement, the laws of the state where the parties are domiciled at the time of divorce (or death) will dictate what happens to their incomes, assets and liabilities. Laws vary from state to state with respect to:
- The definition of marital versus non-marital property
- How and when to value and distribute marital property
- The treatment of income derived from and appreciation in value of non-marital property
- A surviving spouse’s rights to the decedent’s estate at death.
Even if the laws of the state where a couple is domiciled at the time of marriage are favorable to one or both spouses, life moves on and ZIP codes change. The laws of another state may be less favorable.
A prenuptial agreement allows two people to contract around state law to better control the outcome in the event of divorce (or death while happily married), regardless of where they land on the map.
Yes, the big reveal can be scary
Some parents are not ready to share inheritance details with their children, engaged or not. Other people may worry that disclosing their balance sheets to their fiancés will somehow change the nature of the relationship.
It’s helpful to expect some discomfort. Then again, transparency builds trust, and promotes open and honest communication. Perhaps the response will be better than expected!
It’s best to introduce the topic long before the wedding takes place, and to proceed slowly. Be clear on your own reasons for wanting the prenup; be open to hearing concerns you may not have anticipated; and work toward a result that both parties, with full knowledge, agree is reasonable.
Each party to a prenuptial agreement must disclose their income, assets and liabilities, valued as of the date of execution of the agreement (or as close in time to the date of signing as possible). Beneficial interests in trusts must also be disclosed, whether revocable or irrevocable, funded or not. While not every state requires full and frank written financial disclosures, it is best practice no matter where one resides.
A prenuptial agreement supplements an estate plan
Careful review of a family’s estate plan is crucial to determine what rights, if any, a spouse may have with respect to existing trusts. This will inform the couple’s decisions around how their respective property will pass upon death.
For example, if a wife passes away having been married for 20 years, does she want her separate property to pass to her husband for his benefit during his lifetime? What if she has three children from a prior marriage? What other family funds will the surviving spouse have access to?
The prenup is a floor, not a ceiling, when it comes to gifting
A spouse must ensure the terms of any prenuptial agreement are incorporated into their will. However, one may always give more to a spouse than what is called for under the prenuptial agreement, either during lifetime or upon death.
Information is power
It is important to know what a prenuptial agreement can and cannot do. For example, a couple cannot contract for custody and child support in a prenuptial agreement, regardless of jurisdiction.
To complicate matters, every state has its own public policies, so what may fly in one state may not in another. For example, only some states allow for the waiver of temporary alimony in a prenup. Thus, such a provision may be valid in one state, but invalid in another for reasons related to public policy
Timing is everything
When deciding whether to proceed with a prenup, each party should consult with independent, local legal counsel. Seek guidance from both trusts and estates and matrimonial lawyers well in advance of the wedding date to allow for plenty of time to draft, negotiate, review and sign.
A conversation with benefits to last a lifetime
Most importantly, consider the timing, tone and substance of premarital planning conversations between both family members and future spouses. While the terms of a prenup may ultimately favor one spouse over the other, the terms should benefit both parties. (Terms that are entirely one-sided in a prenup could be said to ‘shock the conscience’ and result in the prenup being set aside).
A truly collaborative process allows for all parties to feel heard. Open communication and solution-focused discussions are touchstones of any healthy relationship, regardless of whether a prenup is signed. Clarity around how each party sees the future can only help smooth the road ahead.
We can help
For more in-depth information about premarital agreements, please reach out to your J.P. Morgan team. Your advisors can offer guidance on the financial and other aspects of planning for an upcoming marriage.
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