Last week I read a WSJ article about millennials and prenups and it reminded me of why these agreements can be so helpful, and also extremely unhelpful. I support my clients who want to negotiate prenups, but it is also crucial to understand the limit of prenups.
On the positive side, prenups generally require sharing of all pertinent financial information, assets, debts, and even anticipated inheritance or ongoing family financial support. Sharing that information with your soon to be spouse is important because it allows everyone to come into a marriage with equal knowledge and to plan accordingly. For spouses who were previously married, it is important to openly share what financial obligations someone may have to their former spouse or children from a previous marriage or relationship. Believe it or not, it is common for a new spouse not to know how much spousal or child support a new spouse is paying to, or receiving from, a former spouse. For couples who have not been previously married, there are still many financial topics to discuss, such as how to manage existing debt, or whether premarital assets will be kept separate.
I always advocate for transparency with my clients, so I do like how the prenup process provides an opportunity to gather and share information, and to try to think through future issues, such a spousal support in the case of divorce. Having these conversations allow a couple to think about how they will work together as a financial team. What is the financial baseline for the marriage starting out, where can the couple reasonably expect to be in the next five to ten years, and how will that all work? It is great to think about how bills will get paid, how taxes will be filed and how the couple can work together towards mutual financial goals, or towards family goals that need financial support. The process of drafting a prenup supports those conversations and therefore is very valuable. Of course, if a couple divorces, the prenup can also facilitate the financial separation, although how much it guides that process may vary significantly depending on where the couple divorces, how much time has elapsed since the wedding, and how life has turned out- health issues, children and financial success and crises can often impact the enforceability of a prenuptial agreement. Prenuptial agreements are a good tool, but they do not eliminate all future conflict.
Reading the WSJ article reminded me that often people think prenuptial agreements can magically eliminate future fights over assets and debts; they cannot. One quote in particular jumped out at me because it so clearly represented this misconception, "[millennials want] to live like financial roommates." Or, as the author says, "Some millennials want to keep their finances --current and future--separate and business like, which would allow them to leave a marriage, if necessary, without many strings attached." It is a mistake to think that prenuptial agreements can ensure a clean break. To begin with, many states consider all marital debt, and assets, to be shared. So, for example, if a millennial couple signs a prenup that says they will keep all accounts separate and agree to pay for certain things together, such as home mortgage, that does not mean that when they break up the only joint asset, or debt, would be the home. Even the debt on credit cards taken out in one person's name, that the other spouse may not even know about, is considered marital debt in community property states. Some states would consider that an individual debt, but the creditor has the right to look to joint marital assets in collecting that debt.
In other words, if your spouse racks up a lot of credit card debt and you know nothing about it, that doesn't mean that your joint assets are safe from creditors. This is important whether you are staying married or getting divorced. If your spouse needs to sell the family home to pay off credit card debt, that is hugely disruptive, if not traumatizing. The best way to live "like financial roommates" is to not get married. Regardless of how individuals may wish to define their financial relationship within a marriage, the state they live in will often have laws that may conflict with or supersede such agreements.
Prenuptial agreements are a good tool, in my opinion, if they promote honesty and transparency, and set expectations around separate assets that predate the marriage (such as joint ownership of a family business or property, existing investment accounts), as well as debts (student loans, credit card debt and child or spousal support). If the prenuptial agreement is intended to facilitate the continued separation of finances, and to allow spouses to remain blissfully ignorant of each other's financial choices, I think that is a destructive choice: in this case, as in most cases, ignorance is not bliss. Certainly millennials are going to have a different approach to marriage, and there are infinite ways to be married, but using prenups as a tool to create a false financial wall is not good practice, and will likely lead to messier and more complicated divorces.
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