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Thinking of Remarrying? Think Prenup

Prenuptial agreements make people nervous.  They seem like a measure of mistrust at the beginning of a union that should be built on trust.  Especially for those who’ve been married before, though, a prenup is a pragmatic way to address more than just splitting the assets in the event of a divorce.  Good prenuptial planning, which can result not only in a prenup but also one more trusts and other vehicles, covers a range of financial and estate issues that could arise from the dissolution of a marriage or the death of a spouse.
A prenup is a legal agreement formed prior to marriage that provides detailed instructions about what happens to a couple’s assets if the marriage ends.  Typically the agreement will address what the spouses bring to the marriage as well as money and property acquired during the union.  Each soon-to-be spouse must have his or her own attorney, and each party has to disclose all assets and liabilities fully and honestly.  If a information is held back, the prenup could be voided, with assets divided according to state law or a court ruling.
Prenups can be useful to older couples entering second or third marriages.  Their financial lives tend to be complex, with children from previous marriages and significant wealth.  Often, a chief goal is to make sure your kids—and not those your spouse may have from an earlier marriage—get their fair share of your estate. 
Prenuptial planning often uses trusts as well as a prenup, and in some cases a trust alone may be sufficient, particularly if estate planning is your top priority.  Establishing a qualified terminable investment property (QTIP) trust, for example, could make use of the unlimited marital deduction at your death to postpone estate taxes, provide ongoing support for your surviving spouse, and make sure the assets that remain when your spouse dies go to beneficiaries you specify—typically, your children from a previous marriage.  The trust can put responsibility for trust assets in the hands of a trustee and could include a spendthrift clause to prevent the spouse from exhausting trust assets.
One advantage of this and other trusts is that they can help you avoid disclosing the value of your assets, normally required when creating a prenuptial agreement.  Also, in most cases, a trust lets you set aside money or property for your children that will no longer be considered a marital asset and so should be off-limits to a divorcing spouse. 
Even after the wedding, a couple can implement a measure of asset protection and create instructions for distributing wealth if the marriage ends.  Postnuptial agreements function much like prenups, and often are created when circumstances have changed since the beginning of the marriage.  Maybe you and your new wife have had children of your own, and one of you has decided to give up a high-paying job to stay home with them.  That could change the financial dynamics of the marriage, and you could use a postnup to provide for the new kids and compensate the stay-at-home spouse for lost earning power. 
A postnup could also be used to resolve marital conflicts.  A spendthrift spouse, for example, while promising to reform, might also agree to a postnup clause transferring more assets to the other spouse in case of divorce.  Yet while a spouse may have considerable leverage when negotiating a prenup—if you can’t agree, the wedding may be called off—few spouses will be inclined to give up anything in a postnup.  If divorce seems inevitable, however, striking an agreement about asset division in a postnup may be preferable to fighting things out in court.  Keep in mind, though, that most states hold postnups to a higher standard of fairness than applies to prenuptial agreements.  The stricter burden is intended to prevent one spouse from compelling the other to sign a lopsided postnup.
As useful as trusts and postnuptial agreements may be in some circumstances, they’re seldom as effective as a well-crafted prenup.  And while discussing a prenup may be uncomfortable, the end result could be greater peace of mind for both you and your new spouse.  Keep in mind that if one or both of you has adult children from previous marriages, they may not want to be consulted about provisions that could affect their inheritance.  As your financial advisors, we can work with you and your attorneys to make sure the agreement you strike makes financial as well as legal sense.  

This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.


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