People often think of a prenuptial agreement as a tool to shield the assets of one spouse from the other in the event of divorce. However, prenuptial agreements can also protect earned income and keep it separate property that isn’t subject to equitable distribution if the couple splits. To accomplish this goal, not only do you need a solid prenup but you should ensure that you don’t commingle funds.
Shielding Assets in a Prenuptial Agreement
Let’s say a couple is considering a prenup. One party (W) has a trust fund; the other party (H) has a career with the potential to make a 7-figure income. W wants a prenup to keep the assets and income from the trust as separate property. Generally, trusts are considered the separate property of the beneficiary spouse and the assets in a trust are not subject to equitable distribution. This is because the trust is not owned by W so it cannot be marital property subject to equitable distribution. W is merely a beneficiary.
Income and assets paid from the trust to W are also separate property provided they are maintained in an account in W’s name and not commingled with marital funds. However, by using a prenup, the trust and its income can be designated as separate without worrying about converting the money into marital property.
Protecting Earned Income in a Prenuptial Agreement
H also wants to shield property in the prenup. In this case, however, it’s his career earnings. Generally, a spouse’s earned income from work is considered marital property. That is because even if only one spouse is collecting the paycheck, the other spouse is contributing in some way so as to enable the earning spouse to earn that income. An example of this is one spouse handling household tasks freeing up the wage earner to make the money he or she does.
In order to protect the earnings in the event of divorce, a prenup is necessary to designate those funds as separate property. Typically, the parties provide (not in the prenup) that a certain amount will be put into a joint account to pay joint expenses, while the rest remains separate.
In the above example, designating the income as separate property can be a way to equalize the parties’ finances. H cannot share in income from W’s trust and W cannot share income earned by H beyond what the parties agree to make joint funds.
A prenup is an ideal solution to help each side achieve a fair result both during their marriage and in the event of divorce. If you are considering a prenup, contact us to find out how we can tailor an agreement that fits your needs and goals.
