Everything you need to know about prenuptial agreements

FeaturedLifestyle

Written by:

 

A prenuptial agreement is a contract that two people enter into before getting married. It defines what will happen to their assets and financial arrangements in the event of a divorce.

 

In other words, prenuptial agreements set out how a couple’s assets will be divided in the event of divorce. These documents can also cover issues such as spousal support or custody matters if children are involved.

______________________

SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.

______________________

 

 

 

 

Prenuptial agreements have been around for some time now, yet there still remain many misconceptions about prenups.

Common Misconceptions About Prenuptial Agreements

  • Prenuptial agreements can be used to hide assets during a divorce. This is not true because the agreement must be disclosed if brought up in court or requested by an attorney representing either party involved.
  • If you sign a prenuptial agreement, you cannot change your mind. This is also not true because prenups can be voided if a party fails to disclose all of their assets or debts before signing the premarital agreement.
  • Having a prenuptial agreement automatically means that one person will get more than half of everything in the event of a divorce.

This is also not true because prenuptial agreements are used to determine what would be the fairest way for both parties involved in an equitable distribution of assets, meaning that they can’t get more or less than half each.

  • A prenup will only cover money and property owned before marriage. These days, prenups can cover premarital property and even separate property received during the marriage.

Who Needs a Prenuptial Agreement?

Prenuptials are typically used by couples that have been through at least one divorce, individuals with children from other relationships, or those who want to protect their assets before getting married.

 

However, premarital agreements are not limited to people with pre-existing assets.

 

If you have a family business or your income is of significant importance, prenups can protect both parties in the event of divorce.

 

For instance, if you make less money than your partner, but your partner stays home and takes care of children, prenuptial agreements can specify the premarital and separate property.

What to Include in Prenuptial Agreements

There are several things that prenups can include, such as:

  • spousal support
  • how assets will be divided in case of divorce or death
  • whether one spouse pays alimony to another
  • child custody arrangements
  • tax consequences

Since prenups are contracts between two people, they can be modified or terminated if both parties agree that the change is best for their marriage.

 

Prenuptial agreements typically address these common issues:

  • Property division (what will happen to property acquired during the course of a relationship)
  • Alimony and support (whether one spouse will provide support for the other after a divorce)
  • Child custody (how children of the marriage will be cared for in case of divorce or death)
  • Division of premarital property (what happens to premarital assets not acquired during the course of a relationship. This could include separate property received by inheritance, prenuptial, or premarital assets)
  • Protection of pre-existing separate property (what happens to pre-existing assets before the marriage, such as inheritance and gifts).

Benefits of Having a Prenup

While some people are reluctant to sign a prenuptial because they believe it is an indication that their marriage might not last, prenups are beneficial for both parties involved in the event of a divorce.

 

Premarital agreements protect your pre-existing assets or property that you don’t want to get into someone else’s hands if things go sour between you and your partner during the marriage.

 

The prenuptial agreement can also put pre-existing financial obligations such as child support or alimony payments in writing.

 

If you don’t have a prenup, the court is likely to grant spousal support if one of the partners has significantly greater assets than the other and needs assistance getting back on their feet after divorce.

 

A prenuptial agreement can also protect premarital property if your spouse attempts to claim it as their own or demands a share of pre-existing separate property after marriage.

 

Prenuptial agreements can also protect each partner by specifying pre-existing financial obligations such as alimony or child support payments required in case of divorce.

Final Thoughts

Weighing your options in premarital agreements is not easy, but it doesn’t have to be a decision that causes unnecessary stress.

 

Before signing any prenuptial agreement, consider the following:

  • Be sure you know why you want a prenup and how it will benefit both parties when things go south between spouses.
  • Don’t let prenups become a source of contention and distrust. Don’t sign a prenuptial agreement if you think it will make your partner insecure or cause problems.
  • Finally, if you decide to move forward with premarital agreements, be sure both parties have their own lawyers to ensure that the prenuptial agreement is valid and enforceable. You can use the Finance Strategists estate planner search tool to find a qualified attorney in your area.

Do prenups have to be in writing for them to be valid?

It is important that prenuptial agreements are legally binding and valid. This means that a prenuptial agreement should be in writing, include consideration (a financial exchange), and have a witness present during its signing. Both parties must be advised by their own lawyer before they sign the prenup.

Can same-gender couples create a prenuptial agreement?

A prenuptial agreement can be valid for any legally binding marriage. According to the IRS, the terms “spouse,” “husband,” and “wife” includes individuals of the same gender who were lawfully married under the laws of a state whose laws authorize the marriage of two individuals of the same gender. In case of divorce or death of either party, they will both be entitled to premarital assets as well as pre-existing separate property, so it’s important to have a prenuptial agreement in place. In the case of same-gender marriages, a prenup will protect your existing personal and real property before you get married. Prenuptial agreements are also enforceable if they meet the requirements of prenups.

Can prenups be used to protect pre-existing debts?

Yes, prenuptial agreements can also protect premarital debt. Suppose you are marrying someone who has a significant pre-existing credit card or other personal debt. In that case, it’s important to have an explicit agreement regarding what will happen if your spouse transfers that debt onto their credit cards after the wedding. In a prenuptial agreement, you can state that pre-existing debt will remain the responsibility of only one spouse, and in case your marriage ends, it won’t be considered a joint liability.

How can prenups be invalidated?

There are several ways prenuptial agreements may become invalid. A prenuptial agreement is considered illegal if it was signed under duress, coercion, or influence of alcohol. One party did not understand the consequences of signing a premarital agreement due to mental incapacity (i.e., a prenuptial agreement was signed while a person was under the influence of drugs or alcohol). A prenuptial agreement can also be invalidated if one party has concealed pre-existing assets, failed to provide full disclosure (i.e., hiding accounts), or did not consult with an independent lawyer before signing the prenup. If any of the above prenuptial agreement clauses are discovered after a premarital breakup, a prenuptial agreement will be terminated and assets divided according to the prenup.

What happens if a prenup is invalidated?

If a prenuptial agreement becomes void or unenforceable, assets will be divided according to state law. For example, in California, community property laws are applied during the division of assets upon divorce, which means that all marital income and property acquired after marriage shall be considered joint property, regardless of a prenuptial agreement.

 

This article originally appeared on FinanceStrategists.com and was syndicated by MediaFeed.org.

More from MediaFeed:

Here’s what happens to your debt when you die

 

Do you know what will happen to your debt when you die? Some debts are forgiven while others may be passed down to heirs. Read on for the answers to some of the most frequently asked questions related to death and debt.

 

SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

 

panida wijitpanya / istockphoto

 

In order to accurately answer this question, we need to examine the most common types of debt people accumulate. In other words: Not all debt is equal. The type of debt you have and when you accumulated the debt will determine how and if your debt is passed on to others when you die.

The Most Common Types Of Debt

 

DepositPhotos.com

 

If you die with credit card debt, there are two things that may happen:

  1. Your debt may be forgiven and written off by the credit card company
  2. The debt will be passed on and the responsibility of a survivor

 

DepositPhotos.com

 

If you are the sole owner of the debt when you die, (not married or a cosigner) the credit card companies will be involved in the probate process. The money left in your estate, any retirement accounts, or other items worth money will be sold and the outstanding debts will be paid.

If there is not enough money in your estate to pay off the remaining credit card balance, your children or beneficiaries will not be required to pay the remaining balance. The outstanding debt will be “forgiven” by the credit card company.

 

Farknot_Architect / istockphoto

 

If the credit card is a joint account with a living spouse or a cosigner, the other account holder will be responsible for the debt. If you have authorized users on the account but they are not the account owner, the users will not be responsible for the debt.

 

bernardbodo / istockphoto

 

This is one of those myths that continues to live on. Credit card debt does not go away after seven years. The confusion with the seven-year time frame comes from the credit report time requirement.

After seven years, old debts begin to fall off of your credit report. Your debt, however, is still very much alive and owed. Lenders can and will continue to pursue the amount owed until it is paid, settled, or charged off. Do not be fooled into thinking your credit card debt will go away after seven years.

 

Farknot_Architect / istockphoto

 

The quick answer? It depends. There are several factors that determine if a deceased spouse’s credit card debt will be passed along to the surviving spouse. If the credit card debt was incurred before marriage and the deceased spouse was the sole owner of the account, in most cases, the debt will not be the responsibility of the surviving spouse.

If the credit card debt was incurred after marriage and the deceased spouse was the sole owner of the account, the state you live in determines the surviving spouse’s responsibility. If you live in one of these community property states and the debt was incurred after marriage, the surviving spouse is responsible for the credit card debt of their spouse regardless of the account ownership:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

If you do not live in one of these states, generally the surviving spouse will not be responsible for the credit card debt if they were not a joint owner of the account. If you are a joint owner on the account, you are now solely responsible for the debt.

 

DepositPhotos.com

 

Again, where you live determines what can happen to your medical bills when you die. Generally speaking, children and heirs will not be required to pay back the outstanding medical bills of their parents. With that being said, there are a couple of instances where a child could be responsible for the medical debt of their parents.

 

DepositPhotos.com

 

When a child cosigns admission paperwork acknowledging financial responsibility if the adult is unable to pay their bills, this debt may be passed down to the child.

 

gorodenkoff / istockphoto

 

There are 26 states that have filial responsibility laws that state a child may be responsible for a deceased parent’s medical debt in certain situations. The states that have filial responsibility laws are:

  • Alaska
  • Kentucky
  • New Jersey
  • Tennessee
  • Arkansas
  • Louisiana
  • North Carolina
  • Utah
  • Indiana
  • Nevada
  • California
  • Maryland
  • North Dakota
  • Vermont
  • Connecticut
  • Massachusetts
  • Ohio
  • Virginia
  • Iowa
  • New Hampshire
  • Delaware
  • Mississippi
  • Oregon
  • West Virginia
  • Georgia
  • Montana
  • Pennsylvania
  • South Dakota
  • Rhode Island

Now, before you become overly concerned about living in one of these states, understand that the enforcement of filial responsibility laws is extremely rare. If you have significant medical debt, consult with an attorney in your state to see exactly what responsibility your adult children may be required to pay back.

 

Rawpixel / istockphoto

 

Student loan debt may or may not be passed on to survivors when the borrower dies. What happens to the loan depends on what type of loan was taken out and when it was established.

SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

 

Ta Nu/ istockphoto

 

If you have federal student loans, they will be forgiven upon death. Federal student loans do not pass on to others as long as a death certificate is presented to the lender. Federal student loans that fall into this category are:

  • Direct Subsidized Loans
  • Direct Consolidation Loans
  • Direct Unsubsidized Loans
  • Federal Perkins Loans

 

zimmytws / istockphoto

 

On Nov. 20, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was amended. The added section releases cosigners of a private student loan from financial responsibility if the primary borrower dies. Due to this, all new private student loans with cosigners are not required to repay the loan upon the student’s death.

However, student loans with cosigners taken out before Nov. 20, 2018, may still require the cosigner to be held responsible for the debt.

 

istockphoto

 

Federal Direct PLUS Loans are also forgiven upon the student’s death. In the past, the parent who signed for the PLUS loan was required to bear the burden of the tax responsibility and file the forgiveness as “income” after a child’s death.

Currently, The Tax Cuts and Jobs Act of 2017, is in effect and releases parents from this tax responsibility. This tax stipulation remains in effect until the year 2025.

 

designer491 / istockphoto

 

There is several different scenarios involving vehicle loan debt upon the borrower’s death. If the auto loan has a cosigner or the vehicle was purchased in a community property state after a couple was married, the cosigner or spouse is responsible to repay the auto loan.

If the loan was obtained before marriage and is only in the deceased spouse’s name, generally the surviving spouse is not held responsible for the debt. The bank will take possession of the vehicle to settle the outstanding debt or the surviving spouse can pay off the vehicle loan.

If the borrower is not married, the survivors can either pay off the vehicle loan and keep the vehicle, sell the vehicle and pay off the loan or return the vehicle to the bank. Heirs do not inherit vehicle loan debt.

 

DepositPhotos.com

 

Payday loan debt is very similar to credit card debt when you die. If there was not a cosigner or someone else listed as jointly responsible for the loan, then the company writes off the debt as a loss. Payday loan debt is not transferred to heirs but may be the responsibility of a surviving spouse if the debt was incurred after marriage in a community property state.

 

relif / istockphoto

 

In probate, the home must be paid off with the funds from the estate or the mortgage company must agree to let someone else inherit the loan. If you still owe money on your home, your spouse or heirs usually have three separate options:

Option 1: Sell the home to pay off the outstanding mortgage. The executor of the will can initiate a home sale to fulfill the outstanding debt obligations. If the home is not worth what is owed, additional money from the estate will be used to pay off the mortgage. If additional money is still required, the bank can take possession of the property.

Option 2: If there is enough money in your estate, your heirs can use that money to pay off the mortgage. Or the beneficiaries can use their own money to pay off the loan in full.

Option 3: If there is not enough money in the estate to pay off the loan, an heir may elect to contact the lender in an attempt to take over the loan. The loan would need to be transferred into the new borrower’s name which would require the heir to meet the credit obligations for a loan.

 

PRImageFactory / istockphoto

 

Lenders can force the sale of a property to fulfill the outstanding equity loan balance if the estate does not have enough capital to pay it off. This is another scenario where the heir may be able to apply with the lender to take over the payments.

 

 

Depositphotos

 

If you have federal tax debt when you die, the IRS gets the first chance at your estate. Legally, the executor of the state is unable to pay any other debt or obligation until the federal tax debt is settled.

If a substantial amount is owed, the IRS will quickly put a lien on any property owned by the deceased in an attempt to satisfy the debt. The federal government will get their money one way or another – but the heirs will not personally be liable for the outstanding tax debt.

 

supawat bursuk / istockphoto

 

There is not an automatic notification process when a person dies. The next of kin or executor of the state is required to contact the bank and provide a copy of the descendant’s death certificate.

When the death certificate is presented, the financial institution will freeze all of the associated accounts until the probate process is completed. If money is not owed to other lenders, the beneficiaries will be given access to any monies left in the deceased person’s accounts.

 

marchmeena29 / istockphoto

 

Even though most debts will not be passed on to your heirs when you die, you may not want them to deal with the hassle of paying off all your debt with your estate – only to be left with nothing.

If you have struggled with debt your entire life, a cheap term life insurance policy may be an option to leave a small inheritance to your heirs. Most life insurance policies are dispersed tax-free and are not accessible to creditors.

 

sturti

 

Leaving debt behind is a fear many seniors face. On the bright side, your heirs will usually not be personally responsible for paying off your outstanding debts. However, the sooner you can clean up your own financial mess, the better.

Do your best to start paying off your debt so your executor is not faced with a long probate process. If you need help getting started, check out this related post The Debt Payoff Playbook.

This article originally appeared on Arrest Your Debt and was syndicated by MediaFeed.org.

 

Deposit Photos

 

 

tumsasedgars/istock

 

Featured Image Credit: DepositPhotos.com.

AlertMe