Should I Get a Prenuptial Agreement?
Engaged couples should think about getting a prenuptial agreement (“prenup”) if:
- Either partner owns their own assets;
- One or both partners owns a business;
- There is an earning disparity between the partners; or
- They wish to reduce uncertainty and risk in the future
In New York, and particularly in NYC and the surrounding metropolitan area, more and more couples are deciding to enter into a prenuptial agreement than ever before. In part, this reflects the trend of people deciding to marry later in life than they would have in decades past. As such, these young people are entering marriages with more of their own assets. Having assets of one’s own is the primary reason to execute a prenuptial agreement, though not the only one. In this post, we’ll answer the question many individuals about to get married find themselves asking: Should I get a prenuptial agreement?
Prenuptial agreements introduce a measure of certainty to a divorce proceeding, which absent an agreement are often full of uncertainty and risk. While there are specific life circumstances that more strongly argue for a prenuptial agreement than others, in point of fact, anyone wishing to reduce risk in a possible divorce should consider a prenuptial agreement.
As to those life circumstances in which a prenuptial agreement is particularly appropriate: An individual entering a marriage should give serious thought to a prenuptial agreement if they have their own assets prior to the marriage, have a business, actively manage their own assets, or if they expect that there will be a large disparity in income between them and their spouse.
Entering a Marriage with Assets
In the case of someone who already possesses significant assets pre-marriage, a prenuptial agreement may be a wise choice because property that is separate – that is, belonging to only one spouse – can become “marital” – belonging to both spouses – if certain actions are undertaken by the parties, inadvertently or with purpose. Thus an apartment belonging to one spouse pre-marriage can wind up, years later, being halved between the spouses in divorce if during the marriage, the parties (for example) used marital funds to renovate the apartment, or altered the names on the deed.
Additionally, there are presumptions that exist in the law regarding the appreciation of so-called “separate property.” This can become an issue for pieces of property that may be expected to gain significantly in value, such as homes and apartments, or financial instruments like trusts and stock portfolios. In these cases, even if the underlying asset is itself separate property and thus not available for division in a divorce, its appreciated value can be marital if the appreciation occurred during a marriage.
This ties in to why those who actively manage their assets are particularly appropriate prenuptial agreement cases. Active management of an asset to make it grow – rather than passive growth, like a house appreciating in value because of the real estate market – is a sort of signal in the law that the asset growth is marital, not separate. Basically, this is because if one spouse was able to dedicate time to that asset’s growth, the law presumes that the other spouse’s efforts as a wage earner, homemaker, parent, or otherwise, allowed the managing spouse time and resources to grow their assets. Thus, that asset becomes marital.
Prenuptial agreements guard against these possibilities by specifying that separate property is to remain separate throughout the marriage, typically absent another agreement between the parties in writing. Further, prenuptial agreements will often specify that if separate property gains in value, those gains will also remain the separate property of one spouse.
Income Disparity and Owning a Business
Individuals who foresee a large difference in income between them and their soon-to-be spouse should also give thought to a prenuptial agreement. Prenuptial agreements not only spell out property division upon divorce, they also can set the amount of “maintenance” (also known as alimony) that the lesser earning spouse may be entitled to. In New York, maintenance is calculated based in part on a strict statutory formula. As such, when one spouse earns a lot more than the other, without a prenuptial agreement, the monied spouse can be on the hook for massive maintenance amounts.
As to spouses who own their own business before marriage, or who foresee starting a business during the marriage, prenuptial agreements are crucial because divorce can, frankly, wreak havoc on a business. On occasion, absent an agreement, courts will order one spouse to “buy out” the other spouse’s interest in the business. If the business-owning spouse does not have the available funds, he or she may be forced to sell the entire business. Courts try to avoid this result if possible, but sometimes it is the only realistic method of dividing assets. The only way to guard against this with certainty is a marital contract: either a prenuptial or postnuptial agreement.
There are other, more specific scenarios that also argue for a prenuptial agreement. For example, if you believe your parents or family will be gifting you significant assets, it may be wise to spell out these assets are your own in a prenup. But perhaps the strongest argument for getting a prenuptial agreement is it reduces the uncertainty and chaos of what can be one of the most chaotic processes in life: divorce. So if your question is, should I get a prenuptial agreement, the answer is: quite possibly!
If you would like to discuss whether a prenuptial agreement is right for you, contact Berkman Bottger Newman & Schein LLP.