By Chris J. Roe, CPA, PFS
Ah!! The dreaded prenuptial agreement. Nothing ruins the excitement of wedding planning faster than bringing up this topic. The word, when broached before marriage, reeks of distrust, betrayal, and lack of confidence the marriage will succeed.
In helping doctors with prenuptials, I always advise that they not think of it as a belief the marriage will end, although statistics show marriages have a 50/50 shot these days. Instead, think of it as a document that spells out the personal financial choices you and your fiancée plan to make. Most marriages break down over lack of communication, often about finances. Well, a prenuptial starts the marriage off on the right foot with full disclosure and discussion around finances.
If you cannot negotiate this while you are in love and on cloud nine about the pending marriage, what do you think a divorce settlement negotiation will be like? Think about it: when you are going through the emotional turmoil of a divorce, you are likely to feel betrayed, hurt, like a failure, or [insert unpleasant emotion here]. Fighting about how assets will be split or how much alimony you are on the hook for through a lengthy court battle with five to six-figure legal fees is not exactly an ideal way to settle things. Do you think going to court and you paying enormous legal fees will help your emotional toll? A prenuptial speeds up the divorce process, saving time, money, and emotional stress, not to mention your wealth.
While we strongly recommend getting a prenuptial agreement in most situations, before running and telling the fiancée you need a prenup, understand what it is and what it is not.
A prenuptial agreement is a legal agreement negotiated between the couple before marriage that determines a couple’s finances in the event of divorce or death. Generally, the agreement should address how the couple will split their money and other assets upon a divorce, what is considered separate property and not subject to marital distribution, how assets acquired during the marriage, including a home, should be split, and even debt. An important point to note is each person needs to be represented separately by an attorney to protect their best interest.
In understanding a prenuptial agreement, the following should be considered:
Marriage, like other agreements, is a contract entered into freely by two parties. The terms of the contract, while not formally written by the parties, are provided by the laws of the state in which a couple resides. Through a prenuptial agreement, couples have the opportunity to negotiate the marital contract versus relying on the one-size-fits-all laws of their state.
While you do not need to be wealthy to have a prenuptial, if you own assets, are going to inherit assets, or want to protect future assets (like your growing practice), you should consider a prenuptial.
When negotiating a prenuptial agreement, there is broad leeway for the couple. However, the agreement needs to be fair and equitable in the event of a divorce. It is still subject to a judge’s review and acceptance as part of a divorce proceeding. Moreover, a prenuptial requires transparency by both parties. Each will need to fully disclose all the assets, debts, and trusts for which they may be current or contingent beneficiaries and any potential inheritance.
As a highly compensated physician, you more than likely will be required to pay alimony to your ex-spouse. A prenuptial agreement can have your spouse waive alimony (in certain states) or set the amount and terms of any future alimony. For example, the alimony may be based on an amount to achieve a certain level of monthly income and no more, or a particular dollar amount each month adjusted over time for inflation. I have also seen a single payment based on a specific amount for each year of marriage.
Moreover, a prenuptial addresses premarital and marital debt. Should one spouse have significant debt, as most doctors do, the other spouse may not want to take it on in the event of divorce.
Furthermore, if you or your spouse have been previously married or have children, you want to make sure previous financial affairs and obligations are not mixed with your new marriage’s finances. Additionally, you can specifically address which of your assets goes to your children. However, a prenuptial agreement is not a replacement for a will.
Prenuptials do not and cannot address any future child support issues or custody. This will need to be worked out at the time of the divorce.
Finally, if you are a physician that will or does own your own practice, a prenuptial agreement may someday save you from having to give some value of your practice to an ex-spouse through a buyout.
Consider this: you are a mid-career specialty physician making, say, $650,000 per year. Early in your marriage and career, you and your spouse both worked, lived frugally, and saved diligently. You held off having children till your early 40s. The kids are now in high school and going to private school.
You and your spouse have amassed an eight-figure net worth. Your spouse currently does not work outside of the home and is taking care of the children. You decide to file for divorce.
After two years of legal battles and a lot of legal fees, you lose a large portion of your net worth to your spouse and are required to pay a substantial amount of your annual earnings in alimony to keep your spouse in the lifestyle accustomed. Additionally, you are going to pay for your children’s private school tuition.
While you still have a sizable net worth and are certainly not broke, you have just experienced a large and significant financial blow late in your medical career. More than likely, you will never recover from this sizable hit.
As you consider a prenuptial, just know getting one is not very difficult nor is it terribly expensive, especially compared to the time and cost of a contentious divorce. It is recommended the agreement be negotiated and signed well in advance of the wedding date. Do not wait till the last minute to get this done.
Getting a prenuptial may seem unnecessary at the time of your marriage and a lot more effort than you want to put in at the time, so many people just forgo it and hope things work out. Well, as I always tell my physician clients, hope is not a strategy.
Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at firstname.lastname@example.org, or on the web at rxwealthadvisors.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.