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Drafting Your Happily Ever After
October 14, 2020
When most couples get engaged, they begin dreaming of their future life together and planning their wedding. They are not typically thinking about writing up a premarital or prenuptial agreement, also known more informally as a prenup. For many, there is the attitude that a prenup will create a negative self-fulfilling prophecy and inevitably lead to divorce; but in fact, such agreements may serve as a roadmap for a healthy financial relationship in marriage.
A more positive way to look at the prenup process is to view it as an opportunity to discuss and develop a mutual understanding of the important topic of shared personal finances. Discussing this along with applicable state laws before marriage can lead to a more thorough understanding of any potential issues or concerns, at a time when your relationship is likely at its best.
The process of deciding whether to have a prenup, and if so, what it will include, involves understanding the law. The prenup drafting process can also benefit from various financial plan modeling to ensure all financial goals and milestones will be addressed in the prenup. At Sand Hill Global Advisors, we frequently consult with individuals and couples, in tandem with family law counsel, on this type of modeling.
Using California as an example, anyone getting married in this state effectively has the equivalent of a complementary prenup because California law defines what property is separate, what property is community, and how earnings are treated in marriage, as well as what rights each spouse will have in the event of divorce or death. However, there are some circumstances where a formal prenup may still be helpful, such as:
• A second marriage
• One spouse has significant family wealth
• A lopsided income component, for example, one spouse lives on trust income while the other relies on earned income
• Couples who philosophically prefer to keep their finances separate
When drafting your prenuptial agreement, a financial planner’s role is to help assess and quantify different scenarios—or benchmarks—that could occur during a typical marriage, with realistic assumptions about portfolio returns, inflation, and life expectancy. Sand Hill’s divorce financial planning team has helped many couples in the drafting stage with modeling different hypothetical scenarios in conjunction with their family law attorney. Some examples of what couples’ modeling includes:
• Support for children*
• Longevity of the marriage
• Whether the lower earning spouse would receive support or not
• A potential liquidity/wealth event
Cash flow planning can help illustrate what each spouse’s standard of living might look like if the marriage ended after each of these benchmarks. The objective for these upfront discussions is fairness and to prevent an overly lopsided outcome for either spouse (i.e. one living in a cramped apartment while the other lives in a mansion). Such planning will be of the most value to the spouse with fewer financial resources going into the marriage. The most successful prenups are those where both parties’ wishes are honored.
If you are unsure whether a prenup is right for you and your future spouse, the first step is to educate yourselves about marriage law by consulting with a family law attorney whose practice includes the preparation of premarital agreements. Ideally, you should start this research at least six months before the wedding. You may very well conclude that you do not need a prenup, but at least you will have made an educated decision before your big day. Feel free to contact your Sand Hill Wealth Manager if you have any questions about prenups.
*Although California law will not enforce agreements about child custody and support in a premarital agreement, couples can still include provisions for a child’s future security, such as the creation of a college savings account, as part of an overall financial plan.
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