Premarital Agreements and Their Alternatives: What to Consider

Marriage, like society itself, has changed considerably over the last several generations. Couples today are more likely to enter marriage as dual earners and thus on more equal footing when it comes to income, contributing to daily living expenses, saving for the future, and other financial needs. But while growing financial equality might seem to lessen the need for a traditional premarital financial agreement, for many individuals and families, protecting wealth in case a marriage ends in divorce or death remains a high priority. Even if divorce rates are not as high as the 50% or more mythologized in popular culture, divorce happens with real frequency.¹

Premarital agreements — also known as prenuptial or antenuptial agreements or, colloquially, as “prenups” — can offer solid, legally enforceable protections covering which assets individual spouses will or will not be entitled to if the marriage ends, and what level of spousal support they can expect. By settling such matters in advance, premarital agreements may prevent lengthy and potentially contentious court disputes later on.

Yet as useful as such agreements can be, even raising the subject can be problematic. Young couples on the cusp of marriage may find such financial discussions distasteful, and parents who encourage premarital agreements to protect family wealth may face stiff resistance.  Care must be taken to communicate the reasons behind such agreements and the benefits they can offer to both spouses. In some cases, trusts, limited liability companies (LLCs), or other financial structures may be used in place of, or to supplement, premarital agreements, and vice versa.  Still, as the long history of premarital agreements — stretching back at least 2,500 years to ancient Egypt² — attests, these  documents have withstood the test of time and continue to be a useful way for individuals and families to protect wealth for future generations.

Understanding Premarital Agreements

Simply stated, a premarital agreement is a contract between prospective spouses that takes effect when the marriage occurs. One of the key functions is to draw clear distinctions between assets generated prior to, versus during, the marriage. Premarital agreements can be especially useful in cases when there is a sharp imbalance in family wealth between prospective spouses.

A classic example of an asset worth protecting is a business in which a grown child owns or stands to inherit an interest. In the absence of a premarital agreement, a divorce or estate settlement might mean an ex-spouse or surviving spouse taking part ownership of the business and having a say in how it is managed. The same might hold true of wealth that a grown child stands to inherit. Or, a family may own valuable  art or other collectibles and have a deep interest in seeing the collections handed down intact from one generation to the next. 

In case of divorce, the two primary areas covered by premarital agreements include division of property and spousal support. With no agreement in place, property will, depending on state laws, be divided as “community property” (a 50-50 split of assets acquired or earned during the marriage) or through “equitable distribution.” The latter gives the court considerable latitude in determining a fair and equitable division of property. 

Most states draw a distinction between marital property  (acquired during the marriage) and separate property  (acquired prior to the marriage or through gifts from a third party). Yet such distinctions can easily become blurred if separate property has been deposited into joint accounts or used to support the couple’s lifestyle. With a family business or real estate, the ex-spouse may have contributed time or money to improvements that might lead a court to declare all or part of the property to be marital assets. Likewise, without a premarital agreement, most states recognize the right of ex-spouses to receive spousal support, either through periodic or lump-sum payments. 

In case of death, the main issue is property rights. Without a premarital agreement, while laws vary from state to state, a surviving spouse may be able to claim up to half of the deceased spouse’s estate, regardless of the language in the will. Surviving spouses may also be entitled to cash payments from the estate in the form of a homestead allowance, an exempt property allowance of personal effects (up to a certain value), and a family allowance.

A premarital agreement designed with the possibility of divorce or death in mind might ask the spouse-to-be to voluntarily waive rights to certain property or support. To encourage couples to work hard at making a marriage last, an agreement might even stipulate that spousal support kicks in or increases based on the number of years the couple has been married. 

Yet it’s not all about protecting the wealthier spouse or family. A premarital agreement may also stipulate how the less-wealthy spouse will be taken care of if the marriage ends to ensure they can maintain the lifestyle they were accustomed to. As we’ll see later in this paper, the most successful premarital agreements (and those least likely to be overruled if challenged in court later on) are those in which the needs of both spouses have been fairly considered and represented.

While the premarital agreement offers considerable latitude with regard to spousal support, it should be noted that such agreements cannot typically address child custody and basic child support. Also, they typically may not be used to prevent claims from creditors.

Considering the Alternatives

Premarital agreements aren’t the only way to protect family wealth in marriage. Other options may take their place or work in conjunction with them:

Postnuptial agreements. As the name suggests, postnuptial agreements (or “postnups”) are signed after the wedding has occurred. These can be especially useful when an engagement and wedding occur in quick succession or when discussions around premarital agreements are delayed until very late into the wedding planning process. A premarital agreement drawn up on a tight deadline may not fully address the family’s goals or could make a spouse-to-be feel rushed or forced into signing, providing grounds for a potential challenge later.

Postnuptial agreements, while useful in such circumstances, do carry risks. The most obvious is that once a marriage has taken place, there may be less reason for spouses to feel obligated to sign. In addition, “consideration” is typically required when a postnuptial agreement is signed — if one spouse is giving something up, he or she should receive something of value in exchange. That said, if there’s insufficient time for a premarital agreement to be discussed and signed, it may be wise to raise the issue before the wedding and have everyone agree in principle to sign an agreement after the honeymoon is over.

Trusts and family vehicles such as limited liability companies (LLCs) can offer wealth protection features similar to premarital agreements. As an initial matter, trusts can be useful in keeping a family’s intergenerational wealth separate from marital assets. That’s especially true of discretionary trusts. Unlike trusts with mandatory distributions, discretionary trusts give trustees the flexibility to decide when and if distributions are made. Likewise, an LLC set up to hold family assets may specifically state that only blood relations are entitled to information or voting rights.

But it’s important to note that these vehicles are not perfect barriers. If a trust beneficiary is getting regular distributions, and those distributions enable the couple to live a lifestyle that might not be possible based just on salaries, an ex-spouse or surviving spouse may have a claim that those distributions are central to maintaining that lifestyle after a divorce or death. Some states’ courts have gone farther, even where current distributions are not being made, by valuing a beneficiary’s current or future interest in a trust and using that in determining the overall pool of assets available for division or for spousal support. As a result, rather than using trusts or LLCs in place of premarital agreements, families may wish to use them in conjunction with one another as added layers of protection.

Trusts may be drafted to include language to encourage a beneficiary to enter into a premarital or postnuptial agreement. For example, some trusts provide for a fairly limited degree of discretionary distributions for beneficiaries who are married but who do not have such an agreement in place. If the beneficiary enters into a premarital or postnuptial agreement whereby the beneficiary’s spouse agrees to waive rights to the trust, then the distribution standard is broadened and made more flexible. As an alternative, some trusts only allow the beneficiary to engage in estate planning over a family trust to benefit the beneficiary’s surviving spouse at the beneficiary’s death (by means of a power of appointment) if the couple enters into a premarital or postnuptial agreement whereby the spouse agrees to waive rights to the trust.

Having the Conversation

When a parent raises the subject of a premarital agreement, an engaged son or daughter may understandably bristle. The proposition may come off feeling not like just a financial step but as an overt and personal expression of mistrust or dissatisfaction with the person they intend to marry. And the need to bring lawyers in to represent both sides (see “Putting a Premarital Agreement Together,” below) may feel  like planning for a divorce before the couple has so much as exchanged vows.

Ideally, conversations about premarital agreements should begin years earlier, as part of age-appropriate education about the family’s traditions, its philosophy on wealth, and each member’s responsibilities as a caretaker of the family’s legacy. A young adult who learns about such agreements long before marriage is on the horizon may be likelier to see them as a natural part of the family’s approach to protecting its wealth. And, when the time comes, he or she may feel more comfortable broaching the issue with a potential spouse-to-be. 

Indeed, a premarital agreement can be part of the frank financial conversations every couple should have prior to marriage. While the subject may seem unromantic, talking about seemingly mundane matters such as household finances and bill paying, family budgeting, and investing for the future could prevent misunderstandings later on. If one person is a saver and the other a spender, they may find ways to compromise before the differences become a sore point. At a time of greater income parity, premarital agreements can be useful even beyond protecting inherited wealth. Couples may want to put in writing which finances they’ll commingle or keep separate, for example, or what level of responsibility they’ll assume for one another’s debts. In a nod to modern times, some couples are even including provisions stipulating that, in case of divorce, neither spouse will post negative content about the other on social media.³

Putting a Premarital Agreement Together  

Premarital agreements are legal documents and so best drafted by lawyers with considerable experience in family and marriage law and/or estate planning law. It’s important to take care throughout the process to ensure fairness and clarity for all involved. Evidence that one party was hurried or unduly pressured into signing or was unaware of the full extent of their spouse’s wealth — all could potentially be considered grounds for a court invalidating an agreement during a divorce proceeding.

As such, each spouse should have an attorney acting independently on his or her behalf. While one attorney will typically take the lead in drafting, the process should ultimately be a collaborative process in which both sides’ needs are considered and met. Practically speaking, if there is a great disparity in wealth between the two spouses-to-be, the wealthier individual may pay for the less propertied individual’s attorney’s fees.

A family’s trusted financial advisors can also play an important part in the process. Because they are likely to have a comprehensive understanding of the family’s assets, they may be able to advise on which assets are most important to protect in a premarital agreement and can help in putting together a schedule of assets clearly stating the scope and value of the assets to be protected. These schedules are typically included as exhibits to the agreement. As long as the schedules are comprehensive, neither party can later claim not to have had a full understanding of the wealth covered by the agreement. Included in the schedules would often be assets directly owned by the child and trusts of which the child is a current beneficiary. The family’s advisors may also be able to help in referring the family to experienced attorneys, if needed.

Challenges to Obtaining a Premarital Agreement

While there are clear benefits to using premarital agreements, they can still be difficult to obtain, especially in circumstances in which both individuals are entering their first marriage. Family education and discussions can help, but many clients often face roadblocks.

There may be strong resistance from one or both spouses-to-be. Sometimes the couple may agree in principle, but during the negotiation process, the attorneys — who are strenuously and appropriately advocating for their clients — may not be able to reach a common understanding. And in other circumstances, a family may be unwilling to make the necessary financial disclosures and choose to forgo the process entirely.

Often, entering into a premarital agreement is easier where both parties have been married before. In that situation, both spouses-to-be may see significant benefits in the premarital agreement, including the ability to make specific provisions for children from a prior marriage, as well as having a sense of clarity around their own affairs. Also, having gone through a divorce themselves, they may see greater benefit in reaching a common understanding about future outcomes prior to entering into the marriage.

Regardless of how well-conceived and fair they are, premarital agreements will always remain a sensitive subject. Yet, as with wills, advance directives, and estate planning generally, such documents underscore the importance of planning for unpredictable possibilities and can give families valuable peace of mind.

If you are interested in discussing premarital agreements further, including ways Bessemer Trust can help facilitate discussions about premarital agreements with your children, please contact your client advisor.