Marriage is about love, but it is also a state-based contract with laws about how things will be divided up in the event of divorce. Most couples considering marriage don’t know their financial rights and responsibilities in the marriage and its potential dissolution. If they have significant assets or high incomes, they might consult an attorney for a prenuptial agreement (“prenup”). Everyone has heard about prenups: an agreement signed before marriage where both parties agree on how assets and income would be divided up in the event of a divorce or separation. But what if circumstances have changed since the wedding? The couple may consider a postnuptial agreement (“postnup”). In a 2015 survey conducted by The American Academy of Matrimonial Lawyers, half of the divorce attorneys noted an increase in the number of spouses seeking postnuptial agreements.
What is a postnup?
A postnuptial agreement is a contract signed by a married couple that details how the couple’s assets and income would be divided in the event of a divorce or separation. The most commonly covered items in postnup agreements, as per the American Academy survey, are property division (90 percent of the postnups), alimony/spousal maintenance (73 percent), retirement accounts (45 percent), and occupancy of the marital residence (30 percent).
How a Financial Planner Can Help
When couples want to protect their rights to specific assets, the goal of the postnuptual agreement is straightforward, even if the negotiations aren’t. When the agreement addresses several assets and support, a financial advisor may help the client avoid pitfalls. First, not all equally valued assets are equal. For example, assets may produce different amounts of income at different times and the tax treatment of the assets will not necessarily be equal. As examples, an investment portfolio will contain securities with different levels of unrealized capital gains; withdrawals from IRAs are fully taxable as income while withdrawals from Roth IRAs are tax free.
In addition, assets such as homes, require cash flow to maintain. If the primary residence is sold after a divorce because of a lack of income, the capital gains exemption will now be $250,000 for a single owner instead of $500,000, for a married couple.
Long term considerations also need to be taken into account. Would the settlement be sufficient to meet the client’s goals through their retirement years, or will it support them only for the next five or ten years? How will Social Security benefits, which are not negotiable, fit into the overall plan? If a postnup does not provide for a client through retirement, then he or she may need to reassess their career plans.
When should postnups be considered?
- Roles or Circumstances Have Changed. As the marriage and the couple mature, their finances may become more sophisticated or one of them would like to take a different role at home or with their career. If one of the spouses does not want to be constrained or surprised by guidelines on division of property or support in divorce law, they may want to consider a postnup. Two examples are leaving the labor to raise children or moving to another country as an expat spouse.
- Revisions to prenups. Over the past 30 years, prenups have become much more prevalent across the United States. Circumstances change, which can lead a couple to enter into a postnup to modify prenup contract provisions. For example, at the time of marriage, one party may have felt strongly about keeping a family vacation home as a separate asset. But with the passage of time, they now want the vacation home to be a joint asset.
- Infidelity. When discovered, it can raise serious issues about whether the marriage will survive. Some couples use postnups as a healing tool. They recommit to the marriage, but do so with eyes wide open about what will happen if either party elects at some future date to end the marriage.
- Financial Infidelity. As examples, one spouse has incurred debts, mortgaged the family home, failed to pay income taxes or invested in risky ventures without the knowledge of their spouse. These actions are usually perceived as betrayals, and a postnup can provide the deceived spouse with some needed reassurance about their financial security if they choose to remain in the marriage.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results.