The Particulars of a Prenuptial Agreement

A professional breakdown of this pre-wedding contract.

Premarital agreements – also known as “prenuptial contracts,” or “prenups” for short – aren’t just for the rich and famous. In fact, thousands of ordinary couples sign them each year.

Photo: Ventana Photography

Many celebrities have one -- and I'm not refering to the latest Prada handbag. It’s something less glamorous, but so much more important. It’s a premarital agreement.

But premarital agreements -- also known as “prenuptial contracts,” or “prenups” for short -- aren’t just for the rich and famous. In fact, thousands of ordinary couples sign them each year.

Premarital Agreements Defined
So, what is a premarital agreement, anyway? If you looked it up in a legal dictionary, the definition would go something like this: A premarital agreement is an agreement between two prospective spouses to alter the rules that would generally govern property division and spousal support in the event of divorce or death.

Of course, absent such an agreement, state law governs the division of property between spouses. In California and a minority of other states, this means that any property acquired by either you or your spouse during the marriage will be deemed “community property” and split evenly between you. Thus, your salaries, 401K plans, and any real estate you buy will all be considered community property. However, gifts and inheritances are the exception to this rule -- those remain the separate property of the recipient. In other words, you keep your gifts and inheritances, but everything else is split fifty-fifty -- even if you’re the one who worked overtime for it. Meanwhile, most other states have “equitable distribution” systems, meaning that while property is generally divided evenly upon death or divorce, a judge can choose to divide it differently based on factors such as greater need or fault on the part of either spouse.

Benefits and Pitfalls
According to Lisa Ikemoto, a professor at Loyola Law School in Los Angeles, premarital agreements can serve a variety of purposes. “The popular media, of course, has focused on agreements made to protect the income of a spouse who earns substantially more than the other.” That’s why you might be surprised to learn that protecting a wealthy spouse is often not the primary purpose of a prenup. “Traditionally, couples have used premarital agreements as estate planning devices,” Ikemoto says. “Many couples also use them to shelter one income stream from potential liability or debt incurred by the other spouse.”

So how do you know whether you should get a premarital agreement? Some people -- especially if they happen to be divorce lawyers -- would say that every couple should have one. Indeed, if you have children from a previous marriage, own a business, or have a lucrative career and simply want to keep your earnings separate, a premarital agreement may be an absolute necessity for you. For instance, if you want to make sure that your children inherit your assets when you pass away, you may want to sign a premarital agreement to that effect -- even if you already have a will. Otherwise, any assets you acquire during your new marriage could be deemed “community property,” leaving your children with a smaller share than you intended.

On the other hand, not all brides-to-be would benefit from a premarital agreement. Professor Ikemoto cautions “some premarital provisions can leave one spouse financially worse off than if he or she had never married at all.” For instance, a woman who gives up her job to become a homemaker, then gets divorced, could be left with nothing if she signed away her community property and spousal support rights in a prenup. Consider, for instance, the case of Sun, the Swedish ex-wife of San Francisco Giants slugger Barry Bonds. Bonds’ attorneys asked Sun, who spoke very little English at the time, to sign a premarital agreement. She did so – and thus signed away her rights to community property and spousal support. When the couple divorced several years later, Sun received nothing, even though she was a stay-at-home mother with no income, while her husband made millions as a professional athlete.

After the Bonds case, the California legislature altered the applicable state laws to prevent similar results in future cases. Still, Ikemoto warns that “those whose marital decisions -- such as the decision to become a home-maker -- will harm their ability to be self-supporting should be wary of agreements to give up their community property or spousal support rights.”

Procedures and Requirements
Keeping all this in mind, if you do decide to sign a prenup, there are several requirements you will have to meet for the agreement to be valid. First and most importantly, you and your future spouse will need separate lawyers -- otherwise, your agreement will be unenforceable. Most states also require a “waiting period” between the signing of the prenup and the date you actually get married.

There are a host of other requirements as well -- which is why Ikemoto and other experts urge anyone considering a prenup to consult an attorney. While it is possible to do it yourself using forms from a self-help legal book or internet service, premarital agreements are complex legal documents that are best left to experts to create. Legal help may be expensive, but it won’t cost you nearly as much as a botched prenup would.

In the end, whether or not to enter into a premarital agreement is a very personal decision and may be one of the most important that you and your future spouse ever make. Thus, it is best to go forward with your choice, whatever it may be, only after gathering as much information as possible and carefully weighing your options.

Opening photograph by Ventana Photography