Tis' the Season for Prenuptial Agreements!

Suzi Orman. Photo Credit: Marc Royce

About to get married? A #prenuptialagreement is probably not on the list of things you want to plan before the big date – but it should be!

California is one of 6 community property states. What this means is that everything a couple has – income, assets and debts – is divided 50/50 between the date of marriage and date of separation.

But the money I earn is my money, right? Wrong! Your income and everything you do with it during the marriage is split 50/50. So if you put $100,000 of your income into a 401k during the marriage, your spouse gets 50%.

But we kept our money in separate accounts during the marriage! That doesn’t matter. It is all part of the community pot. Your spouse gets half, even what is held in your name only.

What about the house I had before the marriage? If the couple paid for the mortgage or any remodeling during the marriage with joint money, the community acquires an interest in the home – at least a reimbursement of what was contributed and a share of the appreciation in the value of the home.

But we earn the same amount of money now! I won’t owe my fiancé any money in the future, right? Wrong! Spousal support is calculated at the end of the marriage. A couple may be financial equals now, but things change over time. One person may lose a job, become disabled or stay at home to raise the kids. For marriages of less than 10 years support may last for half the length of the marriage; for longer divorces, support may last significantly longer, based on 23 factors balanced by the Court (see Family Code section 4320). There is a lot of uncertainty in guessing at what one’s spousal support obligation may be in the future.

What a disaster, right?

A prenuptial agreement is so essential for protecting the income you earn and what you do with it – whether you earn $40,000 per year or $40 million. It is also key to protect the assets you bring to the marriage and to reduce debt. Finally, a prenuptial agreement can dissolve the uncertainty over spousal support.

How?

A prenuptial agreement identifies what is separate property and how it will be treated during the marriage. It also identifies how community property will be formed, if at all, and how it will be divided. You can also identify what happens to debt – community or separate. Finally, a couple can either waive spousal support or set the terms for an amount and duration. It should be noted that a prenuptial agreement spousal support provision will be enforced in a divorce if it is not “unconscionable” or grossly unfair.

There are a few things a prenuptial agreement can’t do. The most important restrictions relate to children. You can’t define child custody or waive the right to child support.

Want to read more about prenuptial agreements? #SuziOrman is a big fan. She draws from her own life as well as her common sense. She started out earning $400 per month as a waitress 30 years ago and now runs a financial advice empire. Would she want that all squandered in a divorce? See what she has to say. https://tinyurl.com/y48vtud5

Getting a prenuptial agreement could be the smartest move you make with your finances. Contact a professional and get started with one now!