Everything you need to know about Prenuptial Agreements

“I’m scared to bring up the notion of prenuptials.” 

“Why should I be thinking of divorce already?” 

“Won’t she/he take this as an insult?” 

These thoughts commonly rush to the minds of people considering prenuptial agreements. Don’t worry, it’s natural to think this way. But, you should instead be thinking like this: protection of preexisting personal assets can have many advantages for both partners. For example, keeping assets beyond the reach of your creditors.

In fact, there are quite a few more really good reasons to have a prenup that go far beyond “in preparation of divorce.” 

The first step is to view the prenuptial agreement with logic and not emotion. Love (emotion) may have inspired your decision to get married. But the act of legal marriage should also be part logical, since contracts are involved (Yes, marriage is a contract). A “prenup” is simply a natural extension of the marriage contract. It should not and does not imply that you love someone more or less. Distrustful parties may want to explore whether or not they should be getting married in the first place. 

So what are prenups then?

Prenuptial Agreements (“Prenuptials” or “prenups”) are tools to structure, classify, and control assets, which are particularly useful in California as once you are married, everything is by default “Community Property.” Prenuptials can help reduce both yours and your wife’s exposure to creditor liability.

Imagine being a business owner who, for whatever reason, defaults on a business loan. Many business owners in 2020 don’t have to imagine this scenario, as COVID has forced a lot of us to actually deal with this exact situation. Although you are the only one that personally guarantees a loan, the Creditor may still go after your spouse’s assets as you have community property interest in his/her assets. 

Prenuptial Myth #1: What’s Mine is Mine! 

A common false-belief associated with prenuptials is that the parties will maintain their assets separately, forever, and can keep a spouse in a vulnerable position. That is simply not true. 

What are the benefits of having a prenup?

Prenuptial Benefit #1: Incentivizing the Marriage 

Prenuptials can still provide terms in cases of divorce or milestones in the marriage. As an example, our president (at the time of writing this) Donald Trump, with one of his previous wives, had a sliding scale in his prenup: the longer the marriage, the more property she would share in the entire estate. In the case of divorce, certain assets can already be agreed upon to be shared or divided. Otherwise, prenups can provide for separation of both assets and debts during marriage to protect against creditors. 

Prenuptial Benefit #2: Taking Advantage of the Law

Sometimes a prenup is actually about trust. Take this example, husband and wife get married. Wife runs a laundromat business under a corporation, but needs to personally guarantee a corporate loan. Husband and Wife agree that they will opt out of California Community Property laws and keep all assets separate. Husband gets assigned title to the house. Wife only opens credit cards in her name. Unfortunately, Wife’s business fails due to a pandemic and she is forced to file bankruptcy; all her debts may be discharged, while the Husband retains title to the assets beyond the bankruptcy and creditor’s reach. (This is a specific example from experience. Unfortunately, they didn’t plan for separation of assets ahead of time. In the real-life situation, the creditor put a lien on their second home, forcing them to pay back a substantial amount of the corporate loan or risk foreclosure).  

Prenuptial Benefit #3: The Truth about “Quitclaim” Deeds

People will sometimes (incorrectly) believe a “Quitclaim – Interspousal Deed” is enough to disclaim one spouse’s interest to another (example: Spouse 1 signs a quitclaim saying House is Spouse 2’s separate property). (Read about Quitclaim Deeds)

However, if there is a mortgage on that “separate property,” how is it being paid? Is there a prenup stating the income that Spouse 2 earns (from the house) is also separate property? Relying on only the quitclaim means no. It further means the mortgage payment is being paid by community income; a creditor can come back and say that even though that is separate property, Spouse 1’s  community interest in Spouse 2’s income was being put into Spouse 2’s separate property home. That amount can be both reimbursed by Spouse 1 in a divorce or in a bankruptcy, by Spouse 1’s creditors of the Bankruptcy Trustee depending on how aggressive and how much value there is.

Should we get a prenuptial agreement or not? 

Love and prenups involve both emotions and logic. Our opinion at CN Law is that “yes,” a prenup is always a good idea with respect to conscientious money management. In the same manner as one would plan for a vacation, your future child’s college fund, or your retirement savings– prenuptial agreements fall under the category of “planning for the future.” 

We (CN Law) simply want to educate so that you can make a more informed decision. Matters can become much more complicated than we have described. Nonetheless, we have listed above just a few benefits of prenuptial agreements that go beyond “preparing for divorce.” 

As always, these blogs and videos should not be taken as legal advice. Should you have any additional questions, we recommend you contact an attorney. 

Also, if you are planning to get married soon, you might want to check out: Why Should I File for Bankruptcy before Getting Married?

Chat with an attorney now.