Do I Need a Prenup? What to Know About If a Prenup Is a Good Investment Strategy

24 Nov

5:58

Updated on Tuesday, November 24, 2020

While a prenup may not seem romantic, getting a prenuptial agreement — which details how you’ll divide money and property if you get divorced or one spouse dies — can be an important financial move for some. In general, young couples without children who don’t have many assets likely don’t need a prenup. People who are older, have significant assets and/or want to protect the inheritance of children from a previous relationship stand to benefit more from a prenup.

Here are the specifics of prenups, including pros and cons to consider and how to get one.

What is a prenup?

A prenup is a legally binding document signed by both spouses-to-be that outlines how assets owned and debt accumulated before a marriage will be treated in the case of death or divorce.

If you don’t have a prenup in place, the laws of the state in which you live will determine what happens to your assets and debts. That said, a prenup alone is not enough to ensure a healthy estate plan; you’ll also want to make sure you have documents such as wills and living trusts in place.

Areas a prenup can cover include:

Property
Joint bank accounts
Debt, such as student loans, credit card bills and other outstanding balances
Children from previous relationships
Family businesses
Responsibilities (e.g., how household bills and expenses will be handled)

A prenup doesn’t include child support or custody decisions. Additionally, a prenup also may not contain any kind of incentive for divorce, and it cannot dictate how matters like who is going to wash the dishes or where you’ll spend which holidays will be handled.

How long can a prenup last? In general, prenups are good for the lifetime of a marriage. Some provisions, however, may be more specific. For example, a prenup may state that, if you don’t stay married for at least 10 years, you won’t receive spousal support, and others set provisions that a prenup will expire altogether after a certain date.

Should I get a prenup? Who can benefit from a prenuptial agreement

Melissa Sotudeh, director of advisory services at Halpern Financial in Rockville, Md., said there are several compelling reasons to pursue a prenup. For example, a premarital agreement may protect a debt-free spouse from having to assume the debt of the other, she said.

Additionally, Sotudeh said, “if you plan to give up a lucrative career after the marriage, a premarital agreement can ensure that you will be compensated for that sacrifice if the marriage does not last. Conversely, a premarital agreement can limit the spousal support one spouse would have to pay the other in alimony after a divorce.”

Is a prenup a good investment strategy though? Charles C. Weeks, founding partner of Barrister Wealth Management in Philadelphia, said, from an investing standpoint, a prenup is important because it lets the wealthier person know what kind of risk they can take with assets that are deemed “protected” from divorce. “You may not want to take a ton of risk if you could potentially lose half of your net worth through divorce,” Weeks said.

In general, you may benefit from a prenup if you:

Have significant wealth or assets
Have a relationship in which one partner has significantly more money and income than the other
Have children and/or grandchildren from a previous marriage
Are marrying someone with significant debt
Plan to give up a lucrative career to support your your life with your new partner

You probably don’t stand to gain much from a prenup if you:

Don’t have children and don’t intend to have them
Don’t have much wealth or many assets
Have a relationship that is on an equal financial plane
Feel the cost of the prenup would outweigh the benefits for you and your spouse
Prefer that your state’s laws will apply in the event of a divorce

Prenup pros and cons to consider

Do prenups start your marriage off on the premise that it’s not likely to last? Not necessarily, but every couple has to weigh the pros and cons for themselves.

Pros

Protection of wealth: If you go into a marriage with significantly more wealth than your spouse, a prenup allows you to avoid losing those assets should you divorce. If someone is marrying you for your money, this prohibits them from getting those funds should you divorce.
Protect inheritance rights of children or grandchildren from a previous marriage: If you have children and grandchildren from a previous marriage and you want certain assets to go to them, you can dictate this in a prenup. This prohibits your spouse from taking part of those assets in a divorce, or going against your wishes if you should die.
Protection from loss of income: In some cases, one spouse gives up a lucrative career to stay home with children, because of a move or for other reasons, and it seems like a good plan at the time. Then divorce hits and that spouse is left without an income and has lost years of experience in the workforce. You can include a provision in a prenup that would compensate that person for such loss in the case of a divorce.
Protection from debt: If one party has more debt than the other, such as exorbitant student loan bills, a prenup can protect the spouse without the large debt from having to take it, or a portion of it, in the case of divorce. Divorce is difficult and expensive enough without taking on your ex’s debt.
Savings on legal costs down the road: The price of divorce can be high, and the more litigation required, the more expensive it gets. Setting parameters upfront with a prenup can save on the legal fees of a litigated divorce.

Cons

It can be expensive: While a prenup may save you money down the line, the upfront costs can be pricey.
It can be uncomfortable: The emotional labor of a prenup can be intense. No one wants their future spouse to think they’re questioning their motives. Also, because they may be in love at the time, some people may agree to things in a prenup that aren’t in their best interest — and that they may regret down the line.
Inheritance interference: In most states, you’re entitled to at least a portion of your spouse’s estate when they die, even if it’s not written in their will. If a prenup states otherwise, however, then you may not receive as much as you would have under the law, and you may not receive anything at all.

How to get a prenup

Once you decide to get a prenup, you have to decide whether you’re going to do it yourself or hire an attorney to do it for you. If you choose to do it yourself, there are forms available online to help with the process. Either way, you’ll need to make lists of each spouse’s assets, debts and other financial information, and discuss how they should be handled in the case of divorce or the death of one spouse.

Provisions may address the following topics:

Property
Debts
Financial support
Marital home
Handling of finances and taxes

Again, the legal requirements for prenups vary by state, but in most cases, to ensure it’s valid, you’ll need to make sure the document is in writing and signed and dated by both parties. In some cases, you’ll need witnesses to sign it in addition to having the document notarized.

Should you hire a prenup lawyer?

You don’t need an attorney to get a valid prenup. As noted, there are DIY forms readily available online, and as long as you follow the instructions thoroughly, the prenup should stand. However, most financial experts say hiring a lawyer to draft a prenup is the safest way to go.

Michael D. Whitty, a partner at Freeborn law firm in Chicago, said he would always advise using attorneys — one for each spouse — to be sure the prenup is properly and thoroughly designed and executed. In particular, if the less-wealthy person is not independently represented, the agreement can be set aside later.

“It’s essential that the agreement be fundamentally fair, that full disclosures be made and that both spouses have independent representation,” he said. “It can’t be rushed.”

How much does a prenup cost?

The cost of a prenup is extremely variable depending on the couple, their respective assets and liabilities and how extensive their negotiations are.

While the nationwide average cost for a prenup is around $2,500, the costs can be less if the estate is smaller and less complicated. On the other hand, Whitty said he’s seen prenups cost as much as $25,000.

Can you get a prenup after marriage?

In short, yes, you can get a prenup after you’re married, though in that case, it’s called a postnuptial (postnup).

A postnuptial can cover the same items as prenup. In some cases, couples who didn’t get a prenup later decide it would be a good idea and get one after they say “I do.” In other cases, circumstances may change after the marriage, such as one spouse inheriting money or taking on more debt. Other couples may choose to get one if they’re considering getting a divorce, in order to help streamline the process.

The steps and considerations to get a postnup are largely the same as for a prenup. While you can handle the process yourself, most financial professionals suggest employing the help of an attorney.

Source: https://www.magnifymoney.com/blog/investing/should-i-get-a-prenup/