Prenup 101: Is Separate Wealth a Reason For a Prenuptial Agreement?

Carlson & Burnett recommends prenuptial agreements to educate couples about marital property rights before entering the marriage and establish an agreement tailored to each couple determining issues such as property rights, spousal support, and surviving spouse rights. This series' first blog article focused on how prenuptials protect separate inherited wealth and family businesses. Another benefit to prenuptials is managing separate wealth.

SEPARATE WEALTH

1. Assets & Managing Expectations

It's common for couples to own assets such as a home, investment portfolios, retirement plans, or other investment properties. It's also common for people to not understand how their marriage can affect their property rights or what records they should keep in order to protect property rights.

Generally, each party owns all of what they acquire prior to the marriage, but half of what they acquire together during the marriage. To illustrate, Person A has a $250,000 retirement portfolio and a house with $50,000 in equity. Person A marries Person B, who has a $50,000 retirement portfolio as of the date of the marriage. The couple moves into Person A's house. They put on a new roof, remodel the kitchen, and do all that fun stuff. Fast forward 10 years and the marriage ends. Person A continues to invest in the retirement portfolio and it has increased from $250,000 to $500,000. Person B has continue to invest in the retirement portfolio and it has increased from $50,000 to $100,000. The house now has $125,000 in equity .Understand that in order for a court to fairly divide the property, the couple needs to prove the value of their assets at the time of marriage. Assuming this can be done, here is how a court would likely divide the assets:

Person A

Person B

• $250,000 for Person A's original retirement investment

• $150,000 for the growth in Person A's retirement during the marriage

• $25,000 for half of Person B's retirement

• $50,000 for the original equity in the house

• $50,000 for the increase in equity in the house

• $150,000 for the growth in Person A's retirement during the marriage

• $50,000 for Person B's original retirement investment

• $25,000 for half of Person B's retirement growth

• $50,000 for the increase in equity in the house

In summary, Person A receives $525,000 and Person B receives $275,000. But remember, this assumes that someone can prove the values of the assets as of the date of marriage. If no one can prove investments prior to the marriage, then the court will likely presume everything is a marital asset and each person will receive $400,000. Prenuptial agreement negotiations uncover miscommunications that couples may not be aware of and provide them an opportunity to resolve these issues.

Although it is not possible to see into the future and know how assets will increase in the future, Carlson and Burnett helps clients understand how marriage will impact property rights and implement alternative solutions for the future. A prenuptial agreement can state how property will be managed and who is and will be the owner of the property, even if both parties make contributions to the assets. Using the example above, a prenuptial agreement could state that Person A owns the house and all present and future equity in the house. In which case, Person A would receive the original equity in the house and all of the increase in equity. Or a prenuptial agreement could divide the future equity in the house based upon some other proportion, such as income, rather than a 50/50 split. Prenuptial agreements give the power to the couple to decide how their rights will be decided.

2. Mutual Wealth

When both parties are wealthy, a prenuptial agreement can describe them as economically independent, expected to remain so, and maintain all property as separate property. This prevents marital property law from complicating the couple's economic relationship. As long as both parties are honest about their financial circumstances, it will keep their property separate.

3. Ownership of a Business

When an entrepreneur marries, the spouse has an interest in the entrepreneur's business. Generally, the spouse's interest is half of the business's growth during the marriage. Because the spouse has a legal interest in the business, the spouse also has a right to determine management and operation of the business.

A prenuptial agreement can alter the spouse's rights to the control or finances of the business. It can also expressly state the parties agreed value of the business as of the date of marriage. If the spouse will be working for the business, the prenuptial could determine that the spouse's interest is limited to reasonable compensation, basically limiting the spouse to the value of the services the spouse provides as opposed to additional growth in the business. Keep in mind that any such compensation must set a standard for determining reasonable compensation. If not, a court could find the provision, or possibly the entire agreement, unenforceable.

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