Silver Lining: COVID-19 Engagements Allow More Time for Premarital Financial Planning
The effects of COVID-19 have been felt across the globe in almost all aspects of life. From the transition to remote work and virtual learning for students, to the shuttering of businesses and recreational activities, to increased concerns regarding the health and safety of one’s self and family, the pandemic has forced everyone to adapt to a new way of life. For some people, the shift has helped bring families closer together; for others, it has been a catalyst to make much-needed changes.
One positive aspect of the widespread shutdowns and social distancing orders is that many people now have additional time at home with their families. Many couples have found their relationships progressing faster due to the long hours spent together. According to the Washington Post, engagements during 2020 surged compared to previous years. Inquiries into proposal packages at the Grand Canyon have doubled since 2019. And during the third quarter of 2020, major jewelry retailers Kay, Zales and Peoples reported a double-digit percentage growth in the sale of engagement rings compared to the same time frame in 2019. While many more couples are engaged, the difficulty in planning a COVID-19-era wedding may prompt some to have an extended engagement. This additional time can be beneficial to some couples, giving them a longer runway to discuss their financial future, including prenuptial agreements.
Prenuptial Agreements as Financial Planning
Failure to discuss finances prior to a marriage can create an enormous amount of discord, particularly when the parties are not on the same page regarding their financial expectations. A prenuptial agreement provides an excellent opportunity for couples to discuss their financial expectations and how those items will be handled during the course of, and following, a marriage. It allows parties to agree in advance to a customized framework addressing each party’s rights and obligations that arise as a result of their marriage instead of relying on the statutory framework that has already been put in place by a state’s legislature, which may not meet the specific needs of a couple in the event their marriage is terminated by a dissolution or the death of either party.
Couples can tailor an agreement to meet their specific and unique needs while:
Protecting generational family wealth.
Recognizing each party’s contributions to the accumulation of their individual assets prior to the marriage.
Preserving business ownership interests and control of business management during the marriage.
Addressing those issues in the event that the marriage terminates by dissolution or the death of either party.
Determining Treatment of Assets
As part of a prenuptial agreement, the parties can decide on the classification of their assets, including what assets will be considered nonmarital versus marital and how any increases in value will be treated. Also, of importance, the parties will be able to agree in advance on the treatment of their various income streams earned during the marriage and how any income earned from nonmarital sources will be classified. Without a prenuptial agreement, courts have significant discretion to equitably allocate the property of the parties, which can often lead to unpredictable results in a divorce proceeding and can lead to property that a party assumed would be classified as nonmarital being treated as marital and subject to distribution between the parties.
Additionally, a prenuptial agreement can address the parties’ expectations and formulate a customized agreement regarding spousal support should the parties’ marriage terminate by dissolution. Spousal support is often the most hotly contested issue in a dissolution of marriage action and can significantly prolong the litigation, increase the animosity in the proceeding, and greatly increase the attorneys’ fees and costs. Having discussions prior to the marriage and including contractual provisions regarding spousal support will allow the couple to determine whether spousal support is appropriate. It can also protect a party’s nonmarital assets, which are often considered by a court in spousal support awards.
Advantages on the Estate Planning Front
While most people focus on the dissolution aspects of a prenuptial agreement, an equally important reason to consider entering into such an agreement is the control it can give both parties regarding the disposition of their assets in the event that the marriage ends by death. Without a prenuptial agreement, the parties will be limited in their estate planning because any planning will be subject to statutory rights that a spouse has acquired by virtue of the parties’ marriage. While there are many death rights that can be addressed in a prenuptial agreement, the most significant right that generally impacts a party’s estate planning is the statutory elective share right (if elective share rights are applicable in the state of domicile). Without an agreement, a surviving spouse will be entitled to elect against the deceased party’s will and is entitled to a statutorily prescribed percentage of the deceased party’s estate, which is paid outright to the surviving spouse. This could provide significant problems for a couple with inherited family assets, children from previous relationships and a need to protect succession of business interests. By tailoring the terms of an agreement to address the unique circumstances that are present in every party’s relationship, the parties may provide that the surviving spouse is entitled to receive a lump sum payment or a percentage of the deceased spouse’s estate in lieu of any elective share rights. In doing so, the prenuptial agreement may also permit the deceased spouse to satisfy any share due the surviving spouse by directing assets to a trust for the benefit of the surviving spouse during his or her lifetime, rather than to the surviving spouse outright, which may:
Provide creditor protection to the surviving spouse.
Reduce estate taxes owed.
Protect and preserve assets for descendants or other intended beneficiaries, thereby protecting generational wealth.
These are sensitive subjects. But the reality is that marriage calls on parties to address difficult matters directly, with empathy, grace and practicality. Prenuptial agreements can serve as a proactive step in that exercise. And with COVID-19 complicating, and in some cases protracting, wedding planning efforts, couples have the benefit of added time to work through and reach consensus on financial issues, including the finer points of such an agreement.