Growing up in the South, premarital agreements, also called prenuptial agreements, or prenups for short, have always been treated as a taboo topic. People's initial reaction is usually that premarital agreements are only for the rich and famous OR for couples who don't trust each other. We at Carruthers & Roth understand why people assume this, however, we want to share with you why these assumptions are false and rather how premarital agreements can be used as a tool, and not just of the axe variety.
What is a premarital agreement?
A premarital agreement is essentially a contract entered into between two soon-to-be spouses that outlines how the parties' assets, debts, business interests, inheritances, and/or other financial matters should be handled upon divorce, separation, and/or death. To be valid in North Carolina, premarital agreements must be (a) conscionable (b) in writing, and (c) signed by both parties. Conscionability of the agreement generally indicates there were fair and reasonable financial disclosures (unless voluntarily and expressly waived in writing) between the parties before the agreement was signed.
What can a premarital agreement cover?
Premarital agreements are highly customizable to meet the parties' unique circumstances. However, premarital agreements typically cover one or more of the following:
A. Marital Property vs. Separate Property. Often times couples enter marriages with some assets of their own whether that be real property, cash, investments, and/or tangible personal property. The beauty of a premarital agreement is that such accounts, items, or property can be specifically named and excluded from future divisions of assets given their identified “separate property” status. While all property brought into a marriage is supposed to be separate property, lines are easily blurred when assets are brought and sold, used for martial purposes, transferred to a joint bank account, or otherwise converted to what the courts call “marital property” (typically divided equally upon divorce).
B. Business Interests. In situations where one party owns an interest in a business prior to marriage, we highly recommend a premarital agreement. Whether the party is an entrepreneur or part of a family business, the provisions of a premarital agreement can be the difference between (a) the business staying intact and wholly separate property, and (b) the business becoming a marital asset subject to liquidation upon divorce. A premarital agreement can serve to clearly define business ownership and protect a business interest from passing on to an unintended party. For example, say you are an up-and-coming entrepreneur who has invested substantial amounts of time and money into starting a website design business. You feel this business is wholly your own. However, you form the LLC after you married your college sweetheart. Is the business sperate property or marital property? Well, now the line is blurry. Your attorney may claim it is separate property, but it may take a lot of legal fees to prove that, if even possible. Continuing, lines get even more fuzzy when say your college sweetheart, now spouse, works for the business and did some occasional marketing for the tech company before you were married. Was your now spouse actually part of the business from the beginning? As you can see, and as you likely know from life, things overlap, and aren't always black and white. That is where premarital agreements can come in and make the lines between assets stark.
C. Marital Debt vs. Separate Debt. More often than not, couples enter marriage with preexisting debt, whether it be credit card debt, student loan debt, a mortgage, or otherwise. A premarital agreement provides couples with the opportunity to delineate between joint vs. individual debt obligations.
D. Inheritance. Whether a party has already inherited property or is on course to inherit, outlining whether inherited property should remain separate property can be invaluable to protecting family legacies. Premarital agreements can also be an important tool for estate planning purposes. For example, say you are a widower who has children from your prior marriage. When your wife died, she left you everything, including the inheritance she got from her parents. It was understood that the property she inherited would eventually fall to your children. Now you plan to remarry. Without a premarital agreement, you may run the risk of converting your deceased wife's inherited property into martial property, which could be subject to division upon divorce. However, with a premarital agreement you could clearly delineate your deceased wife's inherited property as separate property and eliminate the risk that it would be divided during divorce proceedings. Worse, say you die after getting remarried and you don't have a will, in that case, a portion of the property your deceased spouse wanted to pass to your children may instead pass to your second wife. And, your second wife may or may not see the inherited property as her own. In such a situation, a premarital agreement could have been used to waive the second spouse's right to inherit certain property after your death (discussed further below), i.e. the property you inherited from your deceased wife. These are just two prime examples of how premarital agreements can make a world of difference in situations involving inheritance, second marriages, and blended families.
E. Waiving Rights. Lastly, it is not uncommon for parties to also use premarital agreements to waive their rights to (a) moneys which they would be entitled to in situations of divorce, i.e. spousal support or alimony and/or (b) spousal rights in situations of death of a spouse, i.e. elective share, spousal allowance, intestate rights. It is very common for blended families or older couples to waive their rights to inherit from the other spouse's estate to ensure certain property passes to the deceased spouse's intended beneficiaries, free from claims by the surviving spouse.
How can a premarital agreement be used as a tool?
As one can see through the examples discussed above, premarital agreements can be used as a tool to prevent property from becoming “martial property,” to protect your children's inheritance rights, and ensure businesses stay intact—all needs which are not exclusive to the rich and famous. Rather, almost all people deal with these situations, which is why we encourage our clients to consider obtaining a premarital agreement.
However, it should be noted that in addition to the above benefits, premarital agreements are a great way to start a marriage with clear and honest communication about finances and expectations. By sitting down and talking through your assets, debts, and special circumstances, the parties can confirm that the other is fully aware of the situation which is about to become a permanent part of their life. And, in addition to starting your marriage with open communication, you are each giving each other peace of mind regarding family and personal assets. To know that your partner agrees the family business should remain in the family or to confirm your soon-to-be spouse understands that your children from a prior marriage should inherit your estate, provides a level of comfort that ignoring such important conversations can't offer.
Therefore, whether the premarital agreement is used as a safeguard, handbook, escape route, or just a restatement of general understandings, having such things written down and discussed can be invaluable when the inevitable hard times in marriage arrive. During those time, the premarital agreement can be pulled from the shed and used as the tool it is designed to be.
Who do I talk to about a premarital agreement?
If you or someone you care about would like to discuss whether a premarital agreement would be right for them, we would be happy to meet with them. We at Carruthers & Roth are well versed in drafting premarital agreements for our clients and are honored to help new couples outline their wishes before they embark on their journey as a married couple.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
