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A prenuptial agreement, commonly called a prenup, can serve as a valuable tool to outline asset division and financial responsibilities within a marriage. A prenup can address not only assets and debts each party brings into the marriage but also establish terms around wealth accumulated in the future. This might include investment returns, business interests, real estate or even anticipated inheritances. However, it’s worth noting that specific regulations vary by state, and future asset clauses may require careful wording to be legally enforceable.
Marriage and other major life events can be good times to create a financial plan or examine your current plan. Connect with a financial advisor to see how they can help.
What Is a Prenup and What Does It Include?
A prenup is a legal contract signed before marriage that outlines each spouse’s financial rights and obligations during and after the marriage. Designed to provide clarity around financial matters, a prenup sets parameters for how assets, debts, income and financial responsibilities will be handled, both within the marriage and in the event of divorce. The agreement can cover a range of topics, including ownership of property, division of income and responsibility for debts.
Additionally, a well-constructed prenup can simplify divorce proceedings, often reducing potential conflicts and legal costs by establishing pre-agreed terms. In certain cases, the agreement might include guidelines for spousal support, clarifying financial expectations in the event the marriage ends.
While prenups are most commonly associated with wealth protection, they can also address non-financial aspects. For instance, a prenup may preemptively set roles or decisions in family finances, offering a proactive approach to managing complex financial dynamics within marriage.
Can a Prenup Include Future Assets?
One of the primary functions of a prenup is to protect individual assets, ensuring that property or funds acquired before marriage remain with the original owner. However, prenups can also specify terms for wealth gained during the marriage, such as business growth or investment gains, if both parties agree.
To include future assets in a prenup, both parties must agree on specific terms that outline how these assets would be divided or retained in case of divorce. Legal enforcement of future asset provisions varies by state, however, and some jurisdictions may not fully recognize clauses regarding assets that don’t yet exist.
Courts typically uphold clearly defined agreements, so vague or overly broad language might render certain sections unenforceable. Additionally, future asset clauses must reflect fair consideration, meaning they cannot overly favor one spouse. Because of these complexities, it’s common for individuals to consult legal experts when crafting a prenup that includes future assets, ensuring that the agreement aligns with state laws and remains fair.
Drafting a Prenup to Protect Future Assets
The key to protecting future assets with a prenup is to describe the future assets in specific detail. Vague, general language describing some future unknown asset is less likely to be effective.
For example, one spouse may anticipate that a trust set up by parents will come under their control at some future date. A full description of the trust, along with specifics on who will own it, might be enough for a future divorce court judge to allow it to be kept separate as individual property rather than lumping it in with other marital assets. This is particularly relevant if you live in a community property state.
Just as a future asset can be protected by a prenup if adequately described, future income can also be treated as individual rather than marital property. This can be useful if one partner operates a business that initially generates only a small amount of income but is forecasted to provide significantly more income in the future. Similarly, if one partner will inherit a family enterprise that generates income, they can keep this income separate if that is carefully spelled out in the prenup.
Future debt can also be handled this way in a prenup. If one of the partners anticipates taking on a large amount of debt down the road, the prenup can specify that this debt will not become part of the marital estate. Instead, it will be the sole responsibility of the partner who incurred it.
Strategies to Protect Future Assets
In addition to a well-written prenup, partners can use some after-the-ceremony strategies to keep future assets from being treated as marital property. The guiding principle is to keep everything separate.
Partners who have their own savings accounts, checking accounts and retirement accounts, and who also own real estate and other assets separately, are more likely to be able to keep those assets outside of the marital pool. Filing tax returns separately instead of jointly can be another way to maintain the distinction between individual and joint ownership.
Another strategy that can protect future assets is to use a postnup, which serves the same purpose as a prenup but is drafted and signed after the couple is already married. A postnup is often used to update a prenup due to a major change in the financial circumstances of one or both members of the couple. If a future asset can’t be defined adequately before the marriage, a postnup may be the only way to ensure that an asset that one partner acquires during the marriage remains under the control of that partner.
When Does a Prenup Make Sense?
A prenup can make sense when one or both partners brings significant assets or debts into the marriage. For example, if one person owns a business or holds valuable real estate, a prenup can set clear rules on what would happen to those assets in a divorce. The same applies if one partner has large student loans or other personal debts—with a prenup, those obligations can remain separate instead of becoming a joint responsibility.
Future wealth is another reason to consider a prenup. If one spouse expects an inheritance, family trust or business ownership, a prenup can protect those assets from being divided later. Entrepreneurs who anticipate that a small business may grow into a much larger venture often use prenups to define ownership in advance.
Blended families are also common cases for prenups. If either spouse has children from a prior relationship, a prenup can protect inheritances and make sure those children’s rights remain secure. Without one, state law may determine how assets are divided, which may not match the couple’s wishes.
Even couples with similar finances may benefit from a prenup if they live in a community property state. In those states, most property gained during marriage is split equally by default. A prenup allows spouses to create their own rules, giving them control instead of relying on state law.
Bottom Line
Prenuptial agreements can help couples contemplating marriage decide how financial assets and obligations would be split up in the event of divorce or one spouse’s death. Assets acquired after the ceremony are ordinarily considered jointly owned marital property, with a disposition to be decided during the divorce process. However, a prenup can be used to address future assets if written correctly.
Tips for Financial Planning
- Drafting a prenup is a job requiring financial as well as legal expertise. Before signing a prenup, consider talking it over with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Since prenups don’t normally address child support. Be sure you know how child support payments affect your income tax. Also, it’s important to understand how a divorce can affect your taxes.
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