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What is a Prenuptial Agreement? - Definition & Examples

Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

In this lesson, we will review what a prenuptial agreement is and explore some situations that might necessitate a written legal agreement between people who are about to be married.

Prenuptial Agreements

Chris and Sally just got engaged to be married! Chris is an established medical doctor who makes $400,000 per year and Sally is an administrator for the local school system who makes $60,000 annually. Given the disparity in their income, Chris suggests that a prenuptial agreement might be wise before they get married. Sally has heard of a prenuptial agreement before but is unclear about what it would actually mean to have one. Let's take a look at what a prenuptial agreement is and how it works.

Definition

Two people who intend to marry may create a prenuptial agreement, which is a written legal contract that is made before the marriage takes place. These agreements are used by couples to define and protect each person's property rights once they are married and following a death or divorce.

In order to be enforceable, information like assets, liabilities, income sources, and income expectations for the future need to be documented. Chris and Sally must each have their own independent lawyer review the agreement and the agreement must be fair. If one spouse is from a non-English speaking country, the document must be translated. Child support cannot be affected by a prenuptial agreement. Courts and juries have the ability to impose a reasonable person standard to judge whether an agreement is fair. These considerations would include evaluating whether or not the agreement would put one person into poverty or in need of government assistance.

Some people think that a prenuptial agreement signifies a lack of trust going into the marriage or only applies to the rich but there are a number of circumstances in which an agreement could be very helpful for both parties.

Examples

So, how can a prenuptial agreement help Chris and Sally? Chris has spent the last ten years building a successful medical practice and has a net worth of over $2 million. Much of that money is tied up in tax-sheltered retirement accounts. Sally has a much smaller nest egg of only $50,000 going into the marriage. If the couple was to get a divorce after three years of marriage, Sally would normally be entitled to half of their assets as of the date of divorce. A prenuptial agreement would leave the money that Chris already had going into the marriage off limits to Sally, who would instead only get half of what they acquired together during the marriage.

Let's say Sally has two children from a prior marriage. She wants to make sure her children receive an inheritance if she were to pass away before Chris. A prenuptial agreement could provide a legal framework to ensure that her wishes are respected if she predeceases Chris; since marrying would normally result in Chris being the sole inheritor of her assets.

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