5 financial items to consider before saying “I do”
Marriage, whether your own, a child’s or grandchild’s, has always been one of life’s big milestones. Starting a life together is an exciting time and the beginning of two people making an enduring commitment to one another. However, given the reality of modern-day divorce rates, here is general advice on five key ways to consider structuring financial assets at the outset of a relationship.
1. Prenuptial Agreement
The first line of pre-marriage planning is usually a prenuptial agreement (prenup) which is a legal contract that outlines the rights and responsibilities of each party. These agreements include most financial matters related to a marriage. While they are primarily used to spell out how to divide property in the event of a divorce or separation (including spousal support in the case of dissolution), they may also set provisions for financial responsibility during the marriage. They can even contain a sunset provision, meaning conditions in the prenup expire after a certain length of time. Many states have adopted the Uniform Premarital and Marital Agreements Act (UPPA), which standardizes the premises of prenuptial agreements. Importantly, both parties must have independent legal counsel review the agreement before signing it. While the decision to have a prenuptial agreement is a personal one, based on our experience, we typically recommend that clients with significant assets enter into one.
2. Asset Protection Trust
Another way to protect assets from a marriage dissolution is to establish an asset protection trust in a jurisdiction such as Delaware or one of the other 18 states that have asset protection legislation. These irrevocable trusts (combined with an independent trustee) can provide some protection from future ex-spouses, if set up prior to the marriage. The downside of this approach includes annual trust expenses, ceding control to a third-party trustee, irrevocability of the trust, and that the trust must be set up and funded prior to marriage.
3. Marital Versus Separate Property
There is a big difference between marital property and separate property (or “non-marital property” as it is called in some states). Separate property generally includes property owned by one of the spouses before marriage, inheritance received either before or during the marriage, and gifts received by one of the spouses during the marriage. We encourage our clients to plan for as many outcomes as possible. In our opinion, these assets should be kept in separate accounts titled “separate property,” as they are treated differently than marital property (property that is shared by the spouses and subject to division in a divorce) in divorce proceedings.
One of the biggest pre- or post-marriage mistakes we see is the retitling of separate property into joint ownership, thus converting separate property into marital property. We believe, therefore, that it is important for parents and grandparents of adult children to memorialize their gifts in the event of a marriage dissolution. This can be a simple handwritten note (kept in a safe place) along the lines of “This gift is for a down payment for a house for our son, John Doe.” Having a simple written record helps ensure that gifts intended to stay within the family do not end up entangled in divorce proceedings.
4. Cohabitation Agreements
Living together but not married? Consider a cohabitation agreement. This is a contract you may consider if you are in a relationship and live together but are not married, especially if one of the parties to the relationship owned the property prior to the start of the relationship. These agreements deal with property ownership and can safeguard a property owner should the relationship end.
5. Estate Planning
Estate planning often revolves around the marital estate, so updating your estate plan before the marriage may make sense—specially in second or subsequent marriages where there are children from previous relationships. Possible changes can include:
- How to handle obligations from a previous relationship
- How to handle children from prior relationships for both partners (e.g., do children have to wait until a stepparent dies before inheriting anything from their parents?)
- Revising beneficiary designations on life insurance and retirement plans
Laws governing marriage and property vary from state to state. In the case of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), the laws are quite different on marital property ownership than for the rest of the nation. Alaska law is a bit of a hybrid, with an opt-in community property law. So, no matter where you live, it’s a good idea to seek sound legal and financial advice prior to entering a marriage, whether it’s your first or third trip down the aisle. If a child or grandchild is getting married, consider giving the gift of a consultation with a family lawyer to review pre-marriage planning.
ABOUT THE AUTHOR
Founded in 1994, Segall Bryant & Hamill (SBH) provides professional portfolio management of domestic and international equity, fixed income, and balanced portfolios, as well as alternative investments to institutional, intermediary, and private wealth clients. Our clients benefit from the expertise of our professionals, who have navigated diverse and challenging market environments and are experienced with all aspects of wealth planning. We understand the complexities that can come with managing your wealth. That’s why we take a comprehensive approach to the advice we give and the assets we manage on your behalf. This approach includes a personalized financial plan and tailored portfolio of individual stocks and bonds researched by our institutional investment team.
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