People often think the purpose of prenuptial agreements is for a wealthy spouse to limit how much they would have to pay the less wealthy spouse in the event of divorce. However, a prenuptial agreement benefits both parties. It provides an opportunity to discuss not just your respective financial situations but also your expectations for the marriage. The result should be a prenup that takes into account your unique circumstances and designs a financial settlement that is fair to both of you. That was the case in a recent client matter where the parties wanted to negotiate a prenuptial agreement that addressed the fact that the future wife had a trust fund but the couple’s plan was that the wife would quit her job when they had children.
Generally, a trust fund in one party’s name only is considered separate property in a marriage. Separate property is a property that is either acquired before the parties’ wedding date or through inheritance or gift during the marriage. It is not divided in divorce absent special circumstances so the husband likely would not have any rights to his wife’s trust fund if they divorced. He and his future wife would both have rights to marital property, which is property that is acquired after the parties’ wedding date. Most, if not all, marital property is divided between the parties in a divorce, and income from the trust used to support the marital lifestyle is considered income for spousal support purposes.
A prenuptial agreement, however, can set forth what property is considered separate and marital, and how it should be split in the event of divorce. Spousal support can also be addressed.
In this situation, it was anticipated that the wife would leave her job in the future to be a stay-at-home mom. As a result, her employment income would drop during this period and her future earning potential would also be affected because of the years that she would be out of the workforce. Normally, this would be a consideration in determining the amount of spousal support she would be awarded in divorce. However, the husband wanted a prenuptial agreement that took into account the fact that she would have a sizable trust fund and income therefrom while he would only have his share of the marital assets if the default law applied.
The solution was to develop a sliding scale with a different allocation of spousal support and asset division depending on the age of the husband and how many years the wife had been out of the workforce at the time of the divorce to the extent she was not returning to employment that would be similar to what she had when she stopped working. Accordingly, as the husband aged, the asset distribution would skew in his favor but would also vary according to the number of years the wife had been a stay-at-home mom. This would create a fairer result in terms of the value of the marital and separate assets at the time the divorce was finalized than what would generally apply under New York’s equitable distribution and spousal support laws.
Finances are a frequent source of marital problems. Having these discussions before you get married can make your relationship stronger and help avoid conflicts.