The invitations are sent, the reception hall is booked, the flowers are ordered — and your nerves are probably frayed.
Planning a wedding leaves little time for anything else, but consider this: A prenuptial agreement (also called a domestic contract or a marriage contract) may be as critical a negotiation as the price of food at the reception. Talking about finances may seem pessimistic because it presumes the possibility of a divorce.
Look at it this way: People don’t buy a home assuming it’ll fall apart, but they buy homeowners insurance. Safe drivers buy auto insurance and healthy people have health and life insurance. It just makes sense. Prenups protect both spouses.
One way to ease the potential discomfort of broaching the subject is to say that your accountant or legal counsel insists you include the agreement as part of your financial and estate plan.
So what exactly is a prenup? It’s simply a legal agreement that outlines how you’ll divide your assets in the event of a divorce. And it isn’t just for wealthy people. They work for everyone.
Even couples who live together but aren’t married should consider a cohabitation agreement. If you do marry, you can convert it to a prenup. Some couples arrange postnuptial agreements, which accomplish the same thing but are signed after the marriage — in some cases, years later. In order for these agreements to be recognized legally, both sides should have independent counsel.
Financial disagreements are one of the leading causes of marital problems. So, it’s important to consult with your tax adviser, banker and legal counsel before you tie the knot to get a handle on your financial, tax and estate planning strategies as a joint household. Here’s a checklist of important steps to consider:
1. Candidly discuss joint finances. For example, how much debt is each of you bringing to the marriage? What about savings? How is your credit rating? The older you are, the more (good and bad) financial baggage you’re likely to have.
2. Decide on joint or separate bank accounts — or both. Your banker can walk you through what will be needed to combine checking, savings and money market accounts.
Even if you decide to maintain separate accounts, it’s often helpful to have at least one joint account to pay for shared expenses, such as the costs of a mortgage or rent, household expenses and childcare. This account is meant strictly for your combined needs, and it allows you both to keep track of how you’re spending money.
A joint account can also help avoid trouble and delays in case of death. If a spouse or common-law partner dies and there are separate accounts, the survivor could be excluded from the account until the estate goes through probate. That could take months.
3. Coordinate employee benefits. You might save money by eliminating duplicate health care or life insurance coverage. And don’t forget to change beneficiary designations on retirement plans.
4. Update deeds, wills and power of attorney documents. An attorney can also discuss the full array of estate planning tools, such as various trusts, that might be relevant once you’re married.
5. Plan financial goals as a couple. Create an annual budget, as well as a contingency plan in case a spouse gets laid off or becomes disabled. Make sure you have several months’ income saved as an emergency cash reserve. Designate who’ll be responsible for paying the bills and reconciling the checkbook.
Also look beyond your current financial situation. For example, discuss what you envision your retirement will look like, and whether current retirement account contributions are sufficient to achieve your long-term goals.
6. Review beneficiaries and the amount of life insurance policies. As your marriage progresses and if you have children, remember to update the beneficiaries of the policy as well as retirement accounts. These assets will be distributed to your named beneficiaries, regardless of the terms of your estate planning documents. Coordinate designations with your estate plans. Review how much life insurance you hold. Do you need more to ensure that any children are treated fairly and equally?
7. Check property titles. Jointly owned property automatically passes to the co-owner.
People who have been previously married bring additional financial issues to the table, especially if they have children from a previous marriage or are required to pay alimony, child support or insurance premiums under the terms of a divorce settlement agreement. Consider these questions when blending your finances:
If you already remarried and have no prenup, consider a postnup to accomplish the same goals. Without proper planning, it’s possible that a family home or family business could pass to your new spouse and eventually to his or her children, rather than your own. A properly drafted prenup/postnup — as well as a change in your will — can help ensure your wishes are carried out.
If you or your spouse are stepparents, discuss plans for your estate with one another and your children and stepchildren. You don’t want your children to think that your spouse has unfairly influenced you or that you don’t care about them. Be open and honest about your estate plans to prevent disagreements and misunderstandings after your death.