It's not hard to understand why many people attach negative connotations to a prenuptial agreement. They're a decidedly unromantic part of what should otherwise be a joyful preparation for marriage, and many assume they represent a lack of trust of someone marrying into an affluent family.
But a prenup can be an important and useful document for marriages involving families with significant assets.
“Most prenups are created by families who want to preserve and protect the family's money, not because of any animosity towards the person their family member wants to marry," said Alan Wolberg, a senior wealth planner with City National Bank. “A prenup states what was brought into the marriage on both sides and what would happen if the couple divorces."
While the term “prenup" can sometimes trigger emotional conversations between an engaged couple and their families, calling it a “separation of property agreement" may ease the tension, suggested Wolberg.
Understanding how a prenuptial agreement works, when to discuss it, who can help you navigate the terms and what happens without one may clear a path for a more positive discussion about mingling finances during a marriage.
Prenups are often motivated by concerns about protecting family wealth, inheritances and businesses but, like wealth planning, if done right and discussed early, they can be an effective solution for all parties involved.
“Divorcing without a prenuptial agreement can be extremely messy," said Wolberg. “How the couple's property is divided depends on the state where they live. For example, in California, which is a community property state, you essentially have a separate property agreement for anything owned prior to the marriage. Inheritances or gifts received during the marriage belong to the individual, not the couple."
If you live in a state with equitable distribution laws, such as New York, and don't have a prenup, everything is considered shared property, Wolberg said. That can result in a lengthy and complicated divorce process.
But bringing up the idea of a prenup with a potential spouse can be a delicate matter.
Brian C. Adams learned this the hard way when he was newly engaged and working to finish law school. He had a sense he would be expected to sign a prenuptial agreement but was still caught off guard when, in the middle of exams, a lengthy document and disclosure agreement appeared in his email from an outside law firm.
“I was not prepared at all for what was in that disclosure document, nor what the process was going to be," said Adams, now the president and founder of Excelsior Capital in Nashville, TN. He shared his experience at a virtual seminar hosted by RBC and Campden Wealth for the next generation of wealth holders.
Adams ultimately worked through the process, got married, and later helped other family members go through it when they married into the family. But at the time, it was a difficult way to begin a new and happy phase of life.
The first step for multi-generation wealth holders is to have the conversation early with their children around the expectation that their future partner will be asked to enter into a prenuptial agreement.
When families have a prenup conversation early—perhaps even before the child has met their future partner—it reduces the emotion attached to the topic. The focus should be on how a prenup can protect the family's wealth and legacy, and not an emotional reaction to the person joining the family.
“It's best to tell kids at 18 or as soon as they start dating seriously so they're aware early that a prenup is a smart way to protect the family," said Wolberg. “It should be broached when the kids start dating to avoid the idea of a prenup being about an individual."
As soon as a relationship gets serious and there's a possibility of marriage in the future, the partner whose family will want a prenuptial agreement should mention it, said Wolberg.
“There's less of a chance of anger if there's no surprise involved when asking for a prenup before the marriage," Wolberg said.
In Adams' case, there was a period of negotiation involving lawyers for his fiancé's family. “You want plenty of time between the initial conversation and actually signing these things versus when you tie the knot," he said.
Leaving it too late could lead to a scenario where one spouse feels pressured to sign an agreement just days before the wedding date. If this happens, the agreement could be challenged in court.
“Mentioning a prenup at the last second can be a mess," said Wolberg. “The longer you wait to talk about it, the likelier it could lead to the end of a relationship because you risk the reaction of someone believing you don't trust them."
To avoid this, it's important to broach the subject both well ahead of time and in a sensitive manner. Adams believes sending in a lawyer or future in-law as a messenger is not the right approach.
“Sending in the prospective in-laws or a third-party representative to talk about a prenup is never a good idea," said Wolberg. “In a perfect world, talking about a prenup should be a conversation between a couple before they get engaged."
Adams suggests communicating the message that the prenup is simply part of the family culture and one that all new members are expected to sign.
“It's important to be clear that this a family decision, not a personal one," said Wolberg. “It's about protecting a legacy for generations."
Prenuptial agreements should be a talking point for a wealth manager to discuss with a high-net-worth family or individual, said Wolberg.
“We can't make anyone agree to a prenuptial agreement, but we can explain why they're an important part of any wealth plan," said Wolberg. “If their child won't push for a prenuptial agreement or the partner balks, we can work with the family to protect their assets through estate planning."
Lawyers have an important role to play by drafting a prenuptial agreement, said Wolberg.
“A prenup works best if both parties are there with their lawyers to negotiate the agreement," said Wolberg.
One way to ease someone into the idea of a prenup is to bring up the idea of a cohabitation agreement, which can be appropriate for a couple that's serious but not yet—or perhaps never—contemplating marriage.
The agreement can cover many of the same elements of a prenup for couples in a common-law relationship, such as establishing who has rights to what property and end-of-relationship issues, such as debt and financial support.
If the relationship doesn't last long enough to reach common-law status, it could still be helpful by establishing which partner is responsible for which expenses and who moves out and in what timeframe when the relationship ends.
“A separate property agreement can work for couples who live together without being married to establish who owns what, since they can't do a prenuptial agreement," said Wolberg.
After the marriage takes place, there's also the option of updating or replacing a prenup with a postnuptial agreement. This can be used to make changes brought on by significant life events or to amend a prenup if it was hastily entered into before the marriage.
“Renegotiating a prenuptial agreement is possible if both sides agree to make changes," said Wolberg. “It's far more common though for a couple who's been married for 20 years or longer to terminate the prenup with a notarized statement and then use a will and trusts to manage their finances."
While there may never be a perfect time to broach the subject, doing it early, honestly and sensitively can help remove a lot of the emotion and maintain family harmony going into what should be a happy occasion.
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This article is a republication of content originally published by RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. © 2020, Royal Bank of Canada, used with permission. This article may not be reproduced, distributed or further published by any person without the written consent of RBC Wealth Management. Please cite source when quoting.
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