Irina Anissimova, CPA, CFF
Forensic Accountant
Pre-nuptial Agreements
I am regularly asked how to preserve separate (pre-marital) assets. An attorney would recommend a pre-nup. The problems with a pre-nup are: 1) it is very hard to amend/change and 2) it may backfire. It is impossible to guess when a pre-nup can hurt more than it can help. Very often these documents complicate divorce litigation instead of making it easier. My general attitude is that they should only be used as a last resort to protect the pre-marital assets and certainly not as a financial roadmap for the marriage ahead.
Think of how "pre-nup" translates into plain English: “I love you, honey, BUT…” In psychological terms it introduces a confusion of a commercial agreement with an emotional commitment, which is bound to create some distrust, suspicion and related behavior if (when) a serious conflict of interests arises during marriage.
In a long term relationship conflicts of interests inevitably happen just because the relationship lasts long enough for them to develop and occur. Conflicts can be resolved in various ways and a pre-nup sometimes may preclude a successful resolution and trigger a divorce instead. Here is an example: if the pre-nup defines parties’ earnings as their separate property, a relocation that is beneficial for one party’s career and detrimental to the other’s is a serious conflict of interests. It is impossible to predict the future, even relatively short term. Pre-nups are usually based on assumptions which may prove to be wrong. The more deviations from the current law a pre-nup covers, the more dangerous it becomes in the long run.
Essentially, the questions one should ask oneself are: 1) Can I preserve my separate pre-marital assets WITHOUT a pre-nup? and 2) Are these assets worth protecting at the expense of creating a potential time bomb and of challenging my partner’s trust?
True, there are some kinds of assets that without doubt need a pre-nup protection. Think about income stream derived from one party's assets and used by his/her siblings or ageing parents. An already profitable business can be another example. Real estate can be another, especially in situations where there are legal complications related to the ownership (TIC). If one party wants to reserve a portion from his/her income stream for some risky ventures or for his/her relatives, it may be worth a pre-nup. In any event one should at least discuss all of these issues and intentions with the future spouse.
What is not worth the pre-nup trouble is the money in bank/retirement/brokerage accounts and other liquid investments. These assets seldom remain in the same accounts and in the same form for 10 or 20 years, in all likelihood they will need to be traced in any event, so the best way to keep them separate is to accumulate a complete collection of account statements starting with the month prior to the wedding AND NOT TO COMMINGLE the money.