The royal couple may have opted to go without one, but many couples who wed this season ought to consider a prenuptial agreement.
Despite the common misperception that prenuptial agreements are only for aging tycoons aiming to cut their younger spouses out of the family fortune, they can be a valuable tool to get into the nitty-gritty of a couple's financial goals, says Vivian Groman, a certified public accountant with Starmont Asset Management in San Ramon, Calif.
"I see a prenuptial as the start of an ongoing conversation about money, finances and ultimately the values that you hold that get expressed financially," Groman says. "It's not that everybody needs a formal legal agreement. But everyone needs to have the conversation."
Prenuptial agreements are legal documents that spell out what each individual had before marriage and what he or she would get if the marriage ended as the result of either death or divorce. Depending on the couple and their financial situation, the document can be either complex or simple.
Groman says she considers them pivotal in six situations:
Disparate assets: If one party is coming into the marriage with a home and an investment account, the agreement can spell out whether those assets will be kept separate or how they'd be taken into account in the event of a split.
Disparate debts: Young couples may have fewer assets to split than they have debts. If one party has significant obligations, the deal can keep the debts separate too. Beware, however, if one partner owes money to the federal government in the form of student loans or back taxes. In some cases, marriage can make the new partner liable for those debts regardless of a prenuptial agreement, a liability that can continue after a divorce. If one person has such debts, the rules should be understood before marriage.
Vastly disparate income: Earning more or less than your spouse generally isn't an issue while you're married, because there's a presumption that both people share and share alike. But in the event of a split, a prenuptial agreement can set a limit — either a minimum or a maximum — on the amount the higher-wage earner pays or the lower-wage earner would get. One caveat is that state court judges have been known to toss out prenuptial agreements that appear patently unfair to the lower-wage earner, particularly in long-term marriages, according to PrenuptialAgreements.org. You can write an agreement that says "no alimony under any circumstances," but enforcing it could be another issue.
Second marriages: Prenups can also dictate who pays which expenses for children from previous marriages. They also can outline how both partners' assets will be split at death (as well as in a divorce). Two things to consider, though. A prenup does not replace an estate plan. A prenuptial agreement holds no sway if your children are applying for college financial aid. Federal financial aid formulas expect married couples to be jointly responsible for their children's school expenses. If a couple divorce and the custodial parent remarries, the new spouse's income will be included in financial aid calculations — even if that new spouse won't help with the college bills.
Business ownership: If one or both parties have a small business, a prenuptial agreement is warranted. It protects the business' assets and protects the non-owner spouse from potential business liabilities, Groman says.
Inheritances: An inheritance isn't considered community property, even in community-property states. If you know you are going to come into some money or other inheritance assets, be prepared for questions and complications. Why? Because the heir needs to prevent the assets from being commingled with the marital assets to keep his or her ownership intact. It's relatively easy to do this if you inherit cash, stocks or bonds. But the situation quickly becomes complicated if you inherit an interest in a home that you subsequently live in. A prenuptial agreement can spell out how you maintain your separate interest in that home, even if you both contribute to the mortgage.
What if you don't fall into any of those categories? At the very least, Groman suggests couples swap financial information, spelling out their assets and debts, and talk through how they want to handle shared financial responsibilities. The conversation should include a discussion of long-term goals and how each person would like to reach them. If a couple are planning to have children and one spouse may stop working in order to be the stay-at-home parent, the talk should outline how the non-working spouse won't lose out on spending, savings and a retirement plan.
"Failing to having a conversation about money when you get into a partnership can lead to serious problems later," Groman says. "And marriage is probably the biggest partnership of your life."