Rethinking the Prenup: Planning for Happily Ever After

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Stacie Jacobsen: [00:00:00] Thanks so much for joining us today on the Pulse by Bernstein, where we bring you insights on the economy, global markets, and all the complexities of wealth management. I'm your host, Stacie Jacobsen.

On today's show, we'll take a deep dive into marital agreements. You may be surprised to learn that marital agreements are not only for divorce.

Done the right way, with each partner's goals taken into account, they can set a precedent for transparency and open communication. My guest for this episode is Jennifer Goode, Director for the Institute on Trust and Estates.

First, let's take a pulse of the market. It's been more than two years since we've been able to say that the U.S. consumer price inflation is in the 3% range.

But that is what we saw in the mid July data release. A stark contrast from the eye watering 9% level hit last summer.

So does this mean that the Fed can declare victory in its fight [00:01:00] against price pressures? Without a doubt, the continued downward trajectory in inflation is encouraging.

But under the hood, core inflation, which strips out the effects of volatile food and energy prices, remains higher than the headline figure at 4. 8%.

And both figures exceed the Fed's comfort level of around that 2% mark. And lower inflation means rising real incomes. This is good news because it means consumption can continue to fuel economic growth.

But it also means that the Fed needs to remain vigilant.

If growth remains too hot, it will be more difficult for the Fed to meet its inflation goal. For now, we think that the Fed could put down its pencils after one more rate increase at the July meeting this week.

But the unfolding data will ultimately determine where rates plateau.

In movies and TV shows, prenuptial agreements are often portrayed with a negative stereotype.

It goes something like this, one party to a marriage is wealthy, and the other, who may not be, is strongly [00:02:00] encouraged to sign a prenup so they can't use the marriage to get rich. In reality, marital agreements can benefit both parties.

They can help a couple embrace the excitement of marriage while shedding any anxiety about future financial needs. When everyone understands the rules of the road in advance, it makes for a healthier and less stressful dynamic.

These agreements typically have a broad mandate to address a variety of financial matters, including property rights and support obligations during and at the end of a marriage.

As we'll learn from our guest, there's a difference between what these agreements can include and what they should include. The hardest part of a prenup process is probably the beginning.

How do you bring it up in the first place without seeming crass or insensitive? Every couple knows that they're likely to have difficult conversations during their time together and discussing money can be especially tricky.

But with the right attitude and clear goals, a marital agreement can help a couple avoid unnecessary conflict over financial issues.

After the break, we'll explore these issues and more with my guest. Stay with us. [00:03:00]

Clare Golla: I'm Clare Golla, host of Bernstein's Inspired Investing, a podcast for those engaged in the nonprofit, philanthropy, and broader social sectors.

Tune in to our next episode as we challenge the conventional wisdom surrounding this year's GivingUSA report. Listen and subscribe to Inspired Investing on your favorite podcast platform.

Stacie Jacobsen: Welcome back to The Pulse by Bernstein. I'm pleased to have my colleague, Jennifer Goode, back with us today.

As a reminder, she's the director for the Institute on Trust and Estates. Hi, Jennifer.

Jennifer Goode: Hi, Stacie. Glad to be back.

Stacie Jacobsen: Let's start with the word prenup. It often comes with this negative connotation. Can you help us turn that idea around?

How can a prenuptial be beneficial to both parties?

Jennifer Goode: One thing I want to note up front is that I do think that attitudes towards prenuptial agreements are changing.

There are a couple different ways that prenuptial agreements can be beneficial for a couple that have nothing to do with [00:04:00] effectively pre planning their divorce, I'd say the biggest one is that it can really serve as a way to start learning how to have conversations about finances.

As a married person, I can tell you that conversations about money do come up and being able to embrace that part of the relationship and be honest about it and start from a good place from a place of kind of imagining your future together and then reverse engineering how you plan to finance it.

I think that creates a really stable base, but I think that's how some folks are now viewing the prenuptial negotiation process that, um, you know, they're looking to kind of create those healthy habits up front.

The idea behind prenuptial agreements in large part is to remove uncertainty from what might happen.

Stacie Jacobsen: I think one of the trickiest parts can actually be bringing it up. Even when there are good intentions from both parties.

So, in your practice, how have you know experienced individuals? Who want to talk about prenup or how have you guided them into talking about that with their future [00:05:00] spouse?

Jennifer Goode: I think it's important to identify that it can be an exercise in dreaming about the future and thinking about, do you want to have children?

If you have children, does one of you want to stay home? What do your careers look like?

Do you plan to move from one of your careers? Um, where do you want to live?

What kind of house do you want to live in?

So it can be this exercise of thinking about, hopefully the marriage is long, and their lives together will go through many stages and, like I mentioned earlier, taking that vision and then figuring out how it's going to be financed, where you're going to pull from in terms of pools of money, and who's going to be responsible for what.

So I try and emphasize that because I think that is ideally the right context. To enter into the negotiation process.

Stacie Jacobsen: So, thinking through that, right. Somebody who's just starting out on this process, what are some of the things that you would recommend that they do discuss and even put into an agreement?

Jennifer Goode: If we're sort of [00:06:00] thinking about this, what does the future look like? Where do you want to live? Um, and where you think you might, your work or your travels might take you.

I think you want to think about sort of what is the lifestyle that you want to support. And this is when a financial advisor can sometimes be helpful.

An idea of what your spending needs might look like. I think you want to think about children and but also maybe the larger family as well.

So um, if we think about what would happen if say one spouse passed away, making sure that the other spouse feels comfortable that they will be sufficiently provided for.

For example, let's say you have a situation in which one spouse has a trust from their family and that trust doesn't provide for spouses. Maybe it just provides for descendants.

I think that's a point that you then kind of uncover and identify and say, okay, this might be a point of uncertainty or discomfort for the other spouse.

Let's figure out what it is that we need to do to make sure that that [00:07:00] other spouse is financially taken care of.

So, I think that's how you can kind of think of this agreement as a way of providing for not just restricting or taking away from one of the parties.

And how you want to create a sense of equity, which I think is really at the heart of a lot of these agreements.

Stacie Jacobsen: Thinking about this more as providing comfort for both spouses versus one trying to protect their assets, I think is a great way to kind of lay that foundation for these open conversations.

Jennifer Goode: That's actually, it raises a good point in terms of the comfort these agreements can provide for family members outside of the married couple.

So a lot of times we'll see one spouse, soon to be spouse has a trust, maybe comes from a family that has some wealth.

There may be concern about the unknown between the other family members and the soon to be spouse.

And so creating kind of a sense of like everybody knows what the plan is, how they plan to support their marital union, what the limitations [00:08:00] are, that can create comfort and kind of an established understanding amongst all the family members.

And I think the same could be said for especially if you've got like a second marriage situation in which maybe there are children from a prior marriage, making sure that those kids know that, listen, I love this person.

They're part of our family. They're part of my life.

But that doesn't mean that, you know, your inheritance is at risk.

So I don't want you to feel uncomfortable about that. I want you to feel comfort.

I want you to be open and welcoming to this person. So I do think there's a space and room for these agreements to be leveraged to create better connection actually amongst the greater family than just that marital unit.

Stacie Jacobsen: Yeah, I love that. Cause so often you think about prenups as young couples getting married for the first time, or maybe there's an, um, uneven amount of wealth in the union.

But it's also for those that are getting married a second time or third time. Right. And they're bringing a lot more to the table and they may have different beneficiaries.[00:09:00]

Um, so I think it can create a lot of comfort too, for the beneficiaries to know that, you know, a certain spouse may be taken care of, but that ultimately the, the wealth may go to the children or whomever it is guided towards.

Jennifer Goode: That's right. And my background, um, as an estate planning attorney, we would deal with that a lot in terms of trying to figure out how do I provide for.

That spouse if it's a second spouse situation, um, and trying to thread the needle between I want to make sure that the person I'm sharing my home, my life with is going to be okay, but I also want my kids to be okay as well.

And so, um, you know, there are some ways that you can do that through estate planning, but a prenuptial agreement really creates an additional level of protection and certainty and they can really actually work together quite nicely.

Stacie Jacobsen: Okay. So in our conversation, you had mentioned that a financial advisor would be helpful when you were in a state planning attorney, you were involved as well.

So what all professionals should a couple get involved in this type of discussion?

Jennifer Goode: Typically, [00:10:00] and I think it's pretty advisable that each individual have their own family law attorney.

So an attorney that is going to help to draft that agreement, or sometimes that a state planning attorney will be, um, the drafter they want an attorney who's familiar with the legal concepts under the agreement.

You can help them identify what they want to include and what are the implications of those provisions.

But I think financial advisor plays a really big role in this as well, or can play a big role. Um, you know, one of the things that goes into making the agreement.

Effective and binding is that the couple needs to understand the terms of the agreement and what it means. What are the implications? What are they giving up?

What are they asking for? And how is this going to play out over time?

And so, for example, if you have a financial advisor that has modeling capabilities, they can really take the numbers and bring it to life for the couple so they can better understand, you know, going back to my example of the individual who had the trust, [00:11:00] let's say the trust doesn't really provide for, um, the other spouse in the event that the, the trust spouse passes away.

So what if we then put in place a life insurance policy or we look for other ways to make sure that the surviving spouse is going to be financially okay.

So if we've identified that area of concern, we've identified that need, that's really where the financial advisor can come in and can help quantify what's going to solve for that.

Like we know what the problem is, what's the answer? And the financial advisor can play a really significant role in determining that.

Okay. So you had mentioned what needs to happen in order to make this legally sound, um, that there needs to be a mutual understanding by both parties that are entering the agreement.

What else needs to happen in order to make a prenuptial agreement?

Jennifer Goode: Well, um, this is going to sound really silly, but you need to not be married already.

There’s a concept of common law marriage where individuals don't really [00:12:00] affirmatively take the step to get legally married.

They may actually kind of adopt sort of this marital relationship.

And by virtue of just, sort of being together for a long period of time. They're recognized under state law as being married. That's only available in a few states.

But prenuptial agreements typically only apply to folks who have not yet married their spouse.

So we want to make sure that we are in that category, in that camp.

And then from there, and I should really note that family law on the whole, and especially premarital agreements, is super state specific. The provisions of the, the statutes that apply, the case law that applies, it's going to vary a little bit state by state, um, but there's some kind of overreaching principles.

So we want to make sure that the couple typically needs to be in writing, another kind of no brainer.

But we also want to make sure that the couple, they understand, again, they understand the terms, but they also understand what's at stake, so usually what goes along with the, and I keep saying negotiation, and I [00:13:00] don't want that to be confused as, um, sort of a really aggressive process.

I just mean that talking about the provisions and making sure everybody's voice is heard and everybody understands what's going into the agreement.

When they're talking about the process alongside that has to typically come a financial disclosure.

Everybody needs to understand what are the assets that exist for the couple now and are likely to exist for them in the future.

So a lot of times it'll also include income, liabilities, pesky student loans, things of that nature.

And then you have to understand again what the terms are. So what does the agreement say? Rights are being impacted by those terms.

And then as a last component, and hopefully this wouldn't be an issue, but the agreement has to be reasonable in a way that it can't be, it's referred to as unconscionable, meaning that no reasonable person would enter into this agreement.

So we don't want an agreement that's so one sided, so aggressive that it's going to veer into [00:14:00] that territory.

We want an agreement that's going to, on some level, deliver a reasonable result for the parties. And then the last thing is that it has to be entered into voluntarily and free from duress.

Typically that kind of covers this idea of disclosure. It can also cover sort of a situation in which one party you know, it doesn't necessarily understand the terms due to language discrepancy, things of that nature.

But typically, if you've got a little bit of notice, it's best to give as much notice as possible.

Those are all things that are going to bode well for the enforceability of the agreement.

Stacie Jacobsen: You just talked about a lot of the things that should be included in a prenuptial, but what are some of those things that actually can't be included?

Jennifer Goode: Well, there's a couple things that can't be included. I would say the most notable one is that you really can't determine, custody and child support.

So typically, those are rights that apply to the children, [00:15:00] and they can be rights of the children, so you can't waive that and decide that ahead of time.

Um, that's something that's going to be decided by the court in the event of a divorce. We really think of prenuptial agreements as applying to property.

Finances, you know, that's really more of where we see the agreement applying.

Stacie Jacobsen: I'm thinking about like a, you know, if there's two high earning individuals joining a marriage and then one of them steps out of the workforce to take care of future children at some point in time.

And, you know, look, if they're out of the workforce for 5, 7, 10 years, you know, they're going to be behind the scale in the case of divorce and they have to go back to work.

Right. So is that something that should be addressed ahead of time?

Jennifer Goode: It can be, it really depends on the state statutes. So it depends on state law.

Um, if we think about something like a community property state, so if we're thinking about California or Washington state, a lot of times the prenuptial agreement, we'll talk about the characterization of property.

So is it going to be community property? If it is, [00:16:00] it's typically split 50 50. Is it separate property?

So something that I brought into the marriage with me or that I inherited, then that may just kind of go with me.

Um, so it really, the premarital agreement can address division of property in terms of its characterization.

It can also address what we would think of as spousal support, spousal maintenance, um, sometimes referred to as alimony, although I think that's kind of fallen out of fashion.

And so those provisions can also be addressed under the agreement.

My personal preference, I think, is to, to talk about the possibility that one individual might step back from the workforce to further the family, whether that be to take care of small children to support the other spouse and their ventures.

And I think if it's important to the couple in terms of equity and making sure that each party is rewarded or in some term, some fashion compensated for their efforts, then that's [00:17:00] something that you'd want to think about it and addressing under the agreement.

Stacie Jacobsen: All right, Jennifer, you talked about couples who, if one comes into a marriage with a family trust, a prenuptial can potentially help equalize any issues in the case of death or divorce.

How can a prenuptial agreement really be integrated into a family governance structure?

Jennifer Goode: Great question. And ideally you would integrate it into a family governance structure.

One nice thing about having a family adopt this concept of a prenup is that they are talking to their children early about it.

So they have the ability to form their thoughts about the process and really key it to family values.

So it becomes a lot less about the person being brought into the family.

So it's not a personal reaction to their future spouse.

Instead, it's tied into This is who we are as a family. This is what we envisioned for the family wealth.

Um, you know, this is how we want to steward it, [00:18:00] shepherd it over time. And so the prenuptial agreement becomes about protecting that and about Explaining that.

Um, and so I think that is very helpful and then it destigmatizes the agreement for the family member who's signing it and for their partner, right?

It's a lot easier to say, listen, everybody signs it or everybody not even signs it, but everybody engages in this process because the family, this is part of our Yeah.

Yeah.

And so, you know, that's why we're doing this and we're going to use this as a really beneficial experience as opposed to like, so mom and dad just met you and now they'd really like for you to sign a brain up, it's going to be a very different reaction, depending on how you're presenting that idea.

Stacie Jacobsen: All right.

I also do want to clarify some of the terms here that we've used.

Right. So we've said, Marital agreements, premarital agreements, prenuptial agreements.

We haven't actually used the word postnuptial agreements, but that too is a [00:19:00] thing, right? So can you, um, just, just do a quick, uh, clarifying on all of these different terms that we've been using.

Jennifer Goode: Let's start from the top.

So marital agreements really just deal with any agreement that deals with the property of a married couple.

So we're identifying kind of property interests between the spouses.

So premarital agreement and also known as a prenuptial agreement is a marital agreement that deals with the property interest of spouses that is executed before the marriage.

A postnuptial agreement is an agreement that deals with property interest between spouses that's executed after the marriage.

After you're married, there's more concern that you don't have the ability to act freely and voluntarily because you're already part of this marital unit and there might be

And so post nuptial agreements have historically taken more to be legally effective, and they in fact, in some states are not even recognized, but post nups are just, they're less [00:20:00] popular typically, and they're just a little bit trickier to actually put in place and make effective.

Stacie Jacobsen: Okay. Because we're talking about post nups now, just real quick, why would somebody have a post nup?

Jennifer Goode: So a post nup, it can come up in a couple different ways.

Uh, one is that you... So if you intended to put in place a prenuptial agreement and then you got caught up and for whatever reason just didn't get it executed prior to the wedding, uh, in which case then you would sign it as a postnuptial agreement.

It can also come up if there is a change in circumstances where there's going to be an asset that you want to identify how it's going to be treated in the event of death or divorce.

I have written about it in the context of estate planning transfers. So right now people are creating sizable trusts in light of changes in the state tax law.

And so if we are creating a trust of which our spouse is the beneficiary, maybe we want to think about how that's going to be treated in the event that things don't go the way that you plan.

Stacie Jacobsen: One last question for you here.

It sounds like this could be a cumbersome process. Right. But I'd imagine [00:21:00] there are ways to get this done without, you know, this massive negotiation and all of these long conversations.

So do you have any tools that you can recommend for a couple of that's looking to do this without a whole team of professionals behind them?

Jennifer Goode: I think a lot of this comes down to them engaging in some really meaningful, thoughtful conversations before they get into the attorney's office, before they're talking to their financial advisor.

And there are some tools to help that happen and help it be a little bit more productive.

You know, like everything, it's sort of like half of, half of success is preparation, right?

So making sure that this process is one that's beneficial, that brings a couple together, that doesn't create conflict.

Some of that is going to be figuring out what matters to you and figuring out how you're going to address it.

Through your own education and through conversation with your partner.

Stacie Jacobsen: All right. I love it.

Thanks so much for being with us today. Anytime. Thanks to everyone for tuning in. Please join us for our next episode and to ensure you never miss a beat, subscribe to The Pulse by [00:22:00] Bernstein, wherever you get your podcasts.

I'm your host, Stacie Jacobsen, wishing you a great rest of the week.