April 15, 2011

The Prenup: Should you or shouldn't you?

Ah, the prenuptial agreement. A potential land-mine for loved-up couples who may have differing opinions on whether drawing up a contract to protect hard-earned assets and future fortunes is the ultimate romance killer. But this is a modern trend clearly gaining popularity, with celebrities easily leading the way.

By all reports, Michael Douglas and Catherine Zeta-Jones have one, as do Tom Cruise and Katie Holmes, and Ben Afflleck and Jennifer Garner. Donald Trump swears by his – all three of them.

It's already come in handy for the failed unions of Britney Spears/Kevin Federline, Heather Locklear/Richie Sambora and Jessica Simpson/Nick Lachey.

While the rest of us may not have quite the vast fortunes to protect, it still pays to be practical.

“Writing up a prenuptial agreement may not sound very romantic, but it is very smart,” says MSN Money columnist Terry Savage. "Prenups aren't just for the wealthy. Forget the stereotype – even young couples who have already embarked on their careers could benefit from a legal agreement about the financial consequences of divorce.”

Here are a few financial issues to consider dealing with in your prenuptial agreement.

Premarital assets: "If you agree that any assets owned before marriage will be kept separate, you might want to set up separate, revocable living trusts and transfer title to the assets into the name of your trust," says Savage. 

Marital assets: "You’ll have to decide on how to deal with assets acquired by joint purchase during your marriage and any assets and earnings you acquire separately during your marriage," says Savage. "You may want to discuss how to divide marital property in the event of a divorce, or make an advance agreement on ownership of assets acquired during the marriage."

Retirement assets: "Although retirement plans are considered separate property, in many states a non-working spouse is entitled to a share of the working spouse’s retirement assets. You’ll definitely want to see how the law applies in your situation," warns Savage.

Inheritances: "If inherited property is kept separate from marital property, most courts do not consider it part of the marital estate in case of a divorce," says Savage. "But if you take a portion of your inheritance and use it for a down payment on a house owned jointly, you’ll convert this portion of your inheritance into marital property. In any case, if you’re expecting to inherit money, your prenup should spell out your intentions to keep the assets separate."

Financial lifestyle and support: "Your prenup can outline your intentions for contributing to the financial lifestyle of the marriage, during the marriage," says Savage. "For example, non-financial contributions such as child rearing should be taken into consideration. One spouse may limit career prospects to build the family lifestyle. Courts take these contributions into consideration, and so should your prenuptial agreement."

Terms: "Many prenups for support and property division in the event of divorce include a scaled agreement. That is, if the marriage lasts only one or two years, the couple could agree to no support," Savage says. "If a marriage lasts for a longer period, then either larger support or a lump-sum payment could be agreed upon. Or the agreement might 'vest' like a pension plan – with a portion of the payout dependent on the longevity of the marriage."

Life insurance: "Financial circumstances can change during the course of a marriage. Many prenups call for both parties to maintain life insurance – with each spouse owning the policy on the other’s life," says Savage. "This won’t pay off in the case of a divorce, but as long as each has an 'insurable interest' in the other’s future, the owner can continue paying premiums and maintain the coverage."

So in the end, signing a prenup is a smart move – and once you've signed on the dotted line, you can put it out of your mind and get busy living happily ever after.

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