When two people get engaged to be married, probably the last thing they want to contemplate is divorce. A prenup (or prenuptial agreement) is a legal contract entered into prior to marriage that does exactly that. It contemplates divorce, and spells out how the parties will divide the assets and liabilities each partner brings to the marriage should they later decide to go their separate ways.
Why should this matter? Well, in California it matters quite a lot. California follows the community model for property division in a divorce.
This means that anything earned or purchased during the marriage is considered marital property (or community property), equally owned by both spouses, to be divided 50/50 if the marriage ends. Having an agreement in place guards against distortions that might be unfairly imposed on either spouse if the parties do not part amicably.
Separate property is that which was owned prior to the marriage, or gifts or inheritances given to either spouse during the marriage.
At first glance, separate property is separate; it’s not marital or community property. But here’s the rub: if separate property over time becomes mixed with the community property, so much so that it’s impossible to discern where separate stops and community begins, then upon dissolution of the marriage, a court may label the separate property as community property.
So, clarification ahead of time helps. A prenup can specify that certain property will be treated as separate in the event of a divorce.
These days, people enter marriages later than in previous eras. Many people think of prenups as a form of insurance. If the marriage later ends in divorce, the prenup lets them parachute to a soft landing and keep the haggling and fighting to a minimum.
But is this insurance really needed?
Prenups can be good for all types of couples, but some individuals may need a prenuptial agreement more than others. A prenup may be an especially good idea for you if any of the following conditions apply:
- You own real estate
- You have more than $50,000 in assets
- You earn more than $100,000 per year
- You are a business owner, or you own some part of a business
- You have more than one year’s worth of retirement benefits
- You have employment benefits such as stock options or profit sharing
- You are going to school for an advanced degree while your partner works
- A part of your estate names beneficiaries other than your spouse
Finances are all too often the cause of marital discord and divorce. By taking stock ahead of time and doing this due diligence, the couple sets up a framework of communication and understanding regarding their finances. The spouses begin their marital journey with better assets and liabilities management in place. Thus, they may well be better equipped to think through and deal with challenges later.