Q&A: Should I Get a Pre-Nup?

Question: I’m planning to get married soon. It will be the second marriage for both of us. My fiancé is retired. I have four children, and I have my own business. He has two children. We’ll maintain our finances separately, at least for the first year. I’ll be moving into his house, but I also own a small house that’s worth only about what I paid for it — $82,500. Should I rent it or sell it? Either is fine with me. Also, we weren’t planning to have a pre-nuptial agreement, but should we?

Ric: You asked two questions, and the second is more important.

You should get and sign a pre-nuptial agreement, for several reasons. Each of you has assets and children from prior marriages. You want to make sure your money goes to your children, and he wants to make sure his money goes to his. Second, you have a business, and you want to ensure that it remains solely yours. A pre-nup can take care of these issues. There are additional reasons to get a pre-nup, which I’ll explain in a moment.

But let’s consider your other question — whether to rent or sell the house you own. You’re falling victim to a psychological bias called anchoring. Let’s pretend that you didn’t own this house but instead discovered $82,500 in your purse. Would you use that money to buy this house so that you could rent it?

If not, you should not consider keeping and renting it. You are considering that only because you’re “anchored” by the fact that you already own it. If you drop the anchor, I’m sure you’d never contemplate buying it to be a landlord.

So, sell the house and move into his. But that returns us to your prenuptial agreement: ownership of the marital residence. If he’s going to keep his house in his name only (not necessarily a bad idea), then he must be the one to pay for it. You should not make any contributions toward the mortgage, property taxes, repairs or maintenance of the property. The reason: If you two divorce, you’ll lose all the money you’ve contributed.

If he isn’t comfortable with paying all of the costs or if he can’t afford to, then he needs to share the ownership with you. This requires the two of you to determine how much of the house you will own, and you would contribute that same percentage toward the financial support of the house. You’ll both need your lawyers to help, and the results need to be stipulated in the pre-nup.

If you don’t reach agreement on these issues prior to the wedding, you’ll have to deal with them afterward. It’s better to do it now, because it’s easier to walk away before you are married than afterward. As you might know all too well, money is a leading cause of divorce.

But wait. There’s more!

If you have any retirement accounts at work (including old dormant ones left with former employers) and you want that money to go to your children, you have more work to do. Here’s why:

Even though you’ve named your children as primary beneficiaries, federal law says your surviving spouse will receive the money in your workplace retirement plan. This occurs even if you state in your pre-nup that you each waive rights to the other’s 401(k) accounts so the money goes to your respective children.

The only way for your retirement accounts to pass to your children is for your new spouse to sign a waiver provided by your plan administrator — and you then need the administrator to confirm in writing that it has received and accepts the waiver. Otherwise, you can expect lawsuits to be filed after one of you dies. (And your spouse needs to sign the waiver after you’re married — ‘til then, he’s not your spouse! And if he refuses to sign? Ask your lawyer.)

You’ll also need to update your beneficiary designations on IRA accounts, life insurance policies and annuity contracts in addition to revising your will. Otherwise, your new husband — and his children — could receive all your money, leaving your kids with nothing.

As you can see, the two of you need to engage in some serious financial planning, and you need legal advice long before the wedding (pre-nups signed the day before the ceremony, for example, are often later declared invalid on grounds that they were signed under duress — as in, “Sign this or the wedding’s off”).

It sure was easier getting married the first time, wasn’t it? Back then, you were both young and broke and neither of you had children.

But it’s different now, so you need to make sure you, your kids and your money are protected.

Originally published in Inside Personal Finance January 2014

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