Prenup 101: Protection from Creditors - a Good Reason for a Prenuptial Agreement?
Carlson & Burnett recommends prenuptial agreements to educate couples about marital property rights before entering the marriage and establish an arrangement tailored to the particular couple by determining issues such as property rights, spousal support, and surviving spouse rights. This series' first two blog articles focused on how prenuptials benefit separate inherited wealth, family businesses, and separate wealth. This installment centers on how a prenuptial agreement protects an individual from a future spouse's existing debt risks.
Debt & Future Debt
When a future spouse enters a marriage with debt, those creditors can later go after assets that are acquired during the marriage. For example, if one person has $25,000 in debt and the other person puts $25,000 in savings during the first year of marriage, a court could require the debtor to use the spouse's savings to repay the creditor.
Oftentimes people do not have debts prior to a marriage, but there may still be warning signs that debt is in one spouse's future. For example, someone involved in risky business ventures, such as new and unestablished industries or fields with high volatility, is a potential future debtor. So is someone who comes from a family that lives beyond their means.
Impact of the Prenup
With a prenup, a married couple has the power to separate property. Couples can separate income as belonging to and benefiting only the person who earned the income or designate percentages of their collective income to each individual. For example, if one party earns $75,000 and the other earns $25,000, the couple could decide that one person owns $60,000 and the other owns $40,000. Couples can also establish separate personal or real property. For example, if one party enters the marriage with real estate a prenup can designate the real estate as belonging to one party, even if the other party's income is used to pay the mortgage or improve the real property. Prenups allow couples to create guidelines that represent their desires and values.
Designating funds or property as separate will limit creditors to collecting only from the designated owner. One exception is that a debtor cannot designate income as the other party's to escape paying debts. Designations will also allow a nondebtor to save and not be negatively impacted by the risks and debts of a spouse. While we hope that such designations will help decrease the financial disagreements that often lead to divorce, when a couple with a prenup divorces any designations make dividing the marital estate easier.
Carlson & Burnett recommends couples consider each person's debts and business risks and how to manage those with a prenup established prior to marriage. Keep in mind that the law varies based upon where the parties reside in the past and present. Some states have community property laws allowing assets to be reached by the either party's creditors.
Carlson & Burnett attorney, Laura Inns addresses issues of family law and encourages rational discussion and negotiated solutions that minimize the strain on families whenever possible. Ms. Inns' experience spans all workable paths to family law solutions, including mediation and collaborative law.