Couples are often wary to bring up the dreaded P word when discussing their nuptials. After all, who wants to ostensibly discuss a divorce when there is an impending marriage to consider. Oftentimes the desire to avoid the topic is rooted in a fundamental misunderstanding of the use and benefit of a prenuptial agreement. These agreements are not only helpful in a divorce setting, but from a planning perspective, they can be essential to carry out an effective estate plan. While some see great value in having a prenuptial agreement for themselves, many often also find value in encouraging their children to have a prenuptial agreement.
What is a Prenuptial Agreement?
A couple can enter into an agreement concerning their property and related rights and obligations thereto. Sometimes these agreements are entered into prior to marriage (prenups) and sometimes they are entered into after marriage (postnups). Either way, the form is similar: both parties to the agreement share information regarding their assets and liabilities and they together work to establish an agreement that appropriately captures their expectations for the ownership, character, and division of any property or rights related to property. Usually, both parties would be represented by independent attorneys.
What happens in the Absence of a Prenuptial Agreement?
A common misconception is that it’s somehow more romantic for a couple to not enter into any prenuptial agreement. Though we don’t know what our futures will hold, whether it is a life-long marriage or sadly, divorce, having a plan in place is both practical and thoughtful. What happens when a couple does not have a prenup in place? As for divorce, under Washington law, a court will make a “just and equitable” division of all property considering a host of facts and circumstances. See RCW 26.09.080. What this means is that a third party (the judge) will be deciding the fate of the couple and their assets. So, instead of asking “do you want a prenup” perhaps the more relevant question is: “would you rather have us decide what happens in the event of a divorce or would you rather have a third party make that binding determination for us?” As an example of the scope of a prenup, the prenuptial agreement could (for example) provide that all property owned by the couple simply be split equally upon divorce. This means that the prenup can be used to enforce the couple’s romantic ideology again rather than allowing a third party to make a different determination. Accordingly, though the term “prenup” evokes thoughts of distrust, lack of love or sharing, it can prove to be arguably more generous than is otherwise provided by a judge in a dissolution case.
How Can a Prenuptial Agreement Assist in Estate Planning?
A prenuptial agreement can be very helpful in estate planning where: (1) there is any amount of separate property; and (2) the distribution plan gives some amount to anyone other than the surviving spouse. Imagine a second marriage where each spouse has his or her own kids and came into the marriage with some assets. Imagine further that one spouse’s will says something like: “I give my spouse $100k and I give all my other assets to my children.” The difficult question is “what are all the other assets?” Oftentimes people think (read: assume) they know what assets they own. But, the issue is much more complex with community property laws. As a reminder, Washington is a community property state which simply means that all property acquired during marriage is owned one-half by each spouse (except for gifts or inheritance). Seems straightforward. But take my example above. Let’s assume that the wife brought a home into the marriage and the home had a mortgage on it. The home was considered separate property. But, now the wife is using income (acquired during marriage) to pay off the mortgage on the house. Now, when the wife dies, is the house (or a fraction of the house) included in “all the other assets?” It’s a question that leads to an answer that is not straightforward and clear. And, in planning, the preference is always for an answer that is straightforward and clear. In this case, the couple could simply provide the answer in a pre or postnuptial agreement: “we agree that the house is owned by wife and the total value of the house is wife’s notwithstanding any community property contributions to pay off the mortgage.” This is of course simplistic but helps to showcase the myriad property ownership issues that can be created when evaluating the implications of community property laws.
Must I have a Formal Agreement?
For any chance of the agreement being enforceable, the answer is a resounding YES. That being said, I think that any kind of writing might be helpful to a couple as it can more clearly articulate thoughts and expectations. For example, in the scenario above, imagine the husband dies but has a clause in his will telling his executor “I have agreed with my surviving spouse that I have no interest in her house in spite of the fact that some of the money used to pay the mortgage came from community property.” While still not necessarily enforceable, the executor now has some indication of the testator’s intent in creating the distribution plan.
Bottom Line
Sometimes planning requires difficult conversations concerning things no one wants to talk about, but in addressing all potential outcomes, you might avoid the headache and heartache that could result if those conversations did not occur.
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The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Cornerstone Wealth Strategies, Inc., a registered investment advisor and separate entity from LPL Financial.
