Prenuptial Agreement

DEFINITION of Prenuptial Agreement

A Prenuptial Agreement is a type of contract created by two people before entering into marriage. This contract could outline each party's responsibilities and property rights for the duration of the marriage. More commonly, prenuptial agreements outline terms and conditions associated with dividing up financial assets and responsibilities if the marriage dissolves.

BREAKING DOWN Prenuptial Agreement

Prenuptial agreements have always been a controversial topic for couples. Media portrayals of prenuptial agreements show them as devices that celebrities and other similar high net worth individuals use in order to cap the amount of wealth that an ex-spouse can claim.

However, when carefully planned and used correctly, a prenuptial agreement can be a fair way of disbursing assets and responsibilities.

How Prenups Work

Each state has rules for prenups, but the American Bar Association notes that "all mandate that such agreements be procedurally and substantively 'fair.' Determining whether an agreement is fair requires knowledge of basic principles of contract law such as capacity, duress, fraud, and undue influence."

Reasons for entering into these agreements vary, though wealthier spouses typically initiate prenuptial agreements to protect property. In addition, older couples may each want such an agreement because they may have assets or retirement income to preserve and protect and may want to see that children from prior marriages are awarded part of their estate.

Prenups can be a source of contention for couples, especially if one partner has much more wealth than the other. A percentage of prenups wind up in court when the marriage dissolves. A judge will be asked to decide whether the agreement was fair and not coerced. Courts generally take a dim view of prenups that are sprung on a spouse on or near the wedding day. 

A prenup generally contains a listing of each partner's individual assets, some indication of which individual assets will remain the property of each spouse in the event of a divorce, guidelines on how property acquired during the marriage will be divided in a divorce, language on responsibility for debts acquired before and during the marriage, and some outline of spousal support such as alimony should the marriage end.

Whether a prenup makes divorce easier or quicker is an open question. If one spouse asks the court to invalidate the prenup, that can open long and costly litigation. On the other hand, an uncontested prenup means less discovery on items listed in the agreement and therefore less acrimony all around. This means the court and attorneys will have less to do to.