You think you've done everything right: Built your career, worked hard and accumulated substantial wealth. When you got married, you and your spouse did the responsible thing and signed a prenuptial agreement.
But what many people find out—too late—is that not every prenup is ironclad. While we are used to hearing about celebrities and ultra-high-net-worth individuals falling into a financial hole after their marriages end, a lot of other people are surprised to find the legal protections they put in place don't hold up once they get divorced.
While no soon-to-be spouse wants to plan for a marriage to collapse, the fact is divorce happens. Making sure your prenup is right for you, and drawn up correctly, can help protect your wealth.
Why use a prenup?
A good prenuptial agreement can help protect your assets and protect you from debts incurred by your former spouse before marriage, said Nichole Walker, a senior wealth planner at City National Bank's office in San Francisco.
These agreements can also protect a spouse's rights to wealth built during the course of the marriage, as well as protect children from previous marriages or future marriages. They can also cover “legacy assets" that have been in one spouse's family for generations.
Why problems arise
Usually, problems with prenuptial agreements arise when those agreements don't follow the formalities required by state laws to ensure their validity, Walker said. Maybe the agreement was entered into under duress: If one party presented the agreement and demanded that the other party sign it close to the date of the wedding, the court may interpret that as evidence of duress or a one-sided agreement, she said.
A prenup could be ruled invalid if it doesn't fully reveal all of a person's assets or property, so the spouse doesn't have a full picture of the true financial assets or holdings. The agreement could also be ruled invalid if both people don't sign or notarize it or if they don't each have independent legal representation.
How to make it stick
“There is no such thing as a totally bulletproof agreement," Walker said, but there are steps you can take to help ensure your prenup will stand up.
1. Openly discuss financial expectations and assumptions
Sit down with your soon-to-be spouse and your legal counsel and discuss these things candidly. Which assets will be held serarately and which assets will be treated as marital property, and why?
Fully disclose each party's assets and debts. Decide how property will be purchased and titled during marriage. Are you willing to commingle marital funds to purchase assets? How will joint property be divided in case of divorce? How will household expenses be paid? How will you deal with personal debts incurred before the marriage?
2. Create a trust
Even if you don't create a legal prenup, you can create a Domestic Asset Protection Trust (DAPT) with a divorce clause that will split into two separate trusts to effectively split assets between ex-spouses.
Other trusts, such as a Credit Shelter Trust and Marital Trust (Qualified Terminable Interest Property Trust), are triggered after one spouse dies. They can be set up to provide a surviving spouse with income for his or her lifetime and then ensure the remaining assets go to the first spouse's children.
“These trusts are technically not prenuptial tools, but they can ensure that the assets remain in the original family following the death of the first spouse," Walker said. “If the surviving spouse remarries, it prevents the surviving spouse from distributing assets to his or her new spouse and family."
3. Design an explicit plan
This plan should preserve wealth, protect assets and clarify the financial rights of both spouses. It should establish and clarify the couple's financial relationship and intentions regarding separate property, inheritances and property acquired during marriage.
It should also delineate how assets will be divided, whether and how spousal support will be paid and how future earnings will be handled. This plan should explain the process and treatment of specific assets such as those set aside for children or assets that have been in the family for generations.