5 Financial Items to Consider Before Saying “I Do”

Marriage, whether it’s 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, as two people make an enduring commitment to one another. However, given the reality of modern-day divorce rates, we offer some general advice on five key ways to consider structuring financial assets at the outset of a relationship, whether it’s you or a family member who’s getting married.

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 prenups 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 (UPMAA), which standardizes the premises of prenuptial agreements. Importantly, both parties must engage independent legal counsel to review the agreement before signing it. While the decision to have a prenuptial agreement is strictly personal, based on our experience, we typically recommend that clients with significant assets enter into one to help avoid future disagreements and financial complications.

2. Asset protection trust

Another way to protect assets from a marriage dissolution is to establish an asset protection trust in one of the 21 states that currently have asset protection legislation.¹ These irrevocable trusts (combined with an independent trustee) provide some protection from future ex-spouses, assuming the trust was set up prior to the marriage. The downside of this approach includes annual trust expenses, ceding control to a third-party trustee, the irrevocability of the trust and that the trust must be set up and funded before the marriage.

3. Marital vs. separate property

There’s a big difference between marital property and separate property (or “non-marital property,” as it’s called in some states). Separate property generally includes property owned by one of the spouses before marriage, inheritance(s) 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 in a divorce proceeding than marital property (i.e., property that is shared by the spouses and subject to division in a divorce).

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’s 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, dated note (kept in a safe place) along the lines of, “This gift is for a down payment on a house for our son John Doe.” Having a simple written record helps ensure gifts that are intended to stay within the family actually do stay there and 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’re in a relationship and live together but are not married, especially if one of the parties in the relationship owned the property before the relationship started. 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. Possible changes can include (but are not limited to):

• 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

There are a host of other issues to consider, especially in second or subsequent marriages with children from previous relationships. As you can imagine, the legal ramifications stemming from multiple marriages with children involved can be extensive and highly complex.

Laws governing marriage and property vary from state to state. Currently, there are nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin).² In these nine states, the laws are quite different regarding marital property ownership than for the rest of the nation, as all marital assets and debts taken on during the marriage by either spouse will be divided 50-50. In contrast, in non-community property states, a judge will determine how to divide the marital assets equitably if the couple cannot agree. This “equitable distribution” will consider each partner’s income, earning potential and financial requirements, among other factors. The law in Alaska is a bit of a hybrid, with an opt-in community property law for couples who reside in this state.

So, no matter where you live, it’s a good idea to seek sound legal and financial advice before entering a marriage, whether it’s your first or third trip down the aisle. If a child or grandchild is getting married, consider giving a pre-wedding gift of a consultation with a family lawyer to review pre-marriage planning. The soon-to-be-wed couple will likely appreciate the financial clarity and peace of mind that such a consultation may provide.

¹ https://www.ifcreview.com/articles/2024/january/the-usa-as-an-asset-protection-jurisdiction/
² https://www.businessinsider.com/personal-finance/investing/which-states-are-community-property-states-in-divorce