Young couples going into their first marriage with barely enough money between them to pay the rent don’t usually have much to lose by combining their assets as they build a family and plan for the future.
But marriages can be more complicated when they occur later in life. That’s when both spouses may have children from past relationships as well as separate assets they’ve acquired over the years. And, it could get more complicated if one spouse has significantly more assets than the other.
The question is, do couples in a second or third marriage throw all their assets into the same pot because they are in love and trust each other to do the right thing? Or do they separate their assets and risk potential alienation by holding back?
Some financial planners say the phrase “prenuptial agreement” shouldn’t be a deal-breaker.
“When you start out early and you have very little and you acquire your assets together, then justifiably, they should be shared. But that’s not true when you come to the marriage with assets,” said Robert Fragasso, chairman and CEO of Fragasso Financial Advisors in Pittsburgh.
“When you come to the marriage with assets, those assets that you come with should be held separately,” Fragasso said. “However, those assets built during the marriage should be put together. That’s my feeling.”
The scenario comes up often in his work, he said. As a financial adviser he recommends keeping assets going into the marriage separate in order to protect the heirs of both spouses. One case he is familiar with, he said, is a perfect illustration of that point.
The couple remarried when the man was in his early 60s and the woman was in her late 50s. They combined their assets and neither took advantage of the other, so things worked fine. The man, who had substantial assets, died first and all of his assets went to his surviving wife. She lived for another decade and when she died, she left everything to her own children, leaving the man’s children in the cold.
“Most of that money was (the deceased husband’s) and it should have been shared among all of the children from both families,” Fragasso said.
An analysis by the Washington, D.C.-based Pew Research Center in 2013 found four in 10 new marriages included at least one partner that had been married before.
Pew researchers concluded there are two reasons for the increase in remarriage. Divorce rates in the U.S. have climbed since 1960, which means more divorcees are on the market for remarriage. Americans also are living longer, which gives divorcees, widowers and widows more time to get in and out of more marriages.
Joseph R. Williams, a partner at the Pollock Begg law firm in Pittsburgh, said he drafts a lot of prenuptial agreements, especially for people going into second and third marriages because they are more established and financially secure. A prenuptial agreement allows both parties to identify exactly what each of their assets are at the time of marriage, that way they can prove what they brought in if a divorce becomes necessary.
“The law says for a prenuptial agreement to be enforceable there needs to be a full and fair disclosure of all assets and liabilities, which means if one spouse has a Swiss bank account and it gets found out, it could invalidate the prenup,” said Williams, who specializes in family law. “Also there can be no duress, meaning you can’t ask someone to sign a prenup 10 minutes before the wedding and you can’t threaten them with violence if they don’t sign.
“As a matter of best practices when I’m drafting a prenuptial agreement I advise my client that his or her fiancee should receive independent legal advice, and in some cases I’ve even provided a list of other attorneys who can work with their fiancee on the document I prepare.”
One of the benefits of a prenuptial agreement is that it often works hand in hand with an individual’s estate planning instruments, such as life insurance, wills, trusts, retirement plans and beneficiary designations. When assets are kept separately in a marriage, the prenuptial agreement can protect surviving spouses as well as the heirs of the deceased spouse.
A spouse who comes into a second marriage with more assets than the other spouse can use a prenuptial agreement to set up a trust that will pay interest income to the surviving dependent spouse for as long as he or she lives. When the surviving spouse dies, the money from the trust is then distributed to the children of the first spouse who passed away, said Lisa Turbeville, a divorce financial analyst and owner of Watermark Financial in suburban Pittsburgh.
“This type of strategy is more commonly used with higher net worth couples where at least one of them have been married before,” Turbeville said.
The same type of strategy to provide protection to heirs can also be done through a will, Turbeville said. However, a will is restricted to death while a prenuptial agreement covers the possibility of a divorce as well as estate planning.
“Prenuptial agreements have a negative connotation,” she said. “I try to approach prenuptial agreements as an estate planning tool rather than a divorce planning tool. That makes it more palatable to people understanding the importance of it and agreeing to sign one, particularly in second marriages.”
Fragasso said he is aware of situations where a couple, both with substantial assets, put everything they have together and it worked out. But, from what he has personally seen over four decades of managing wealth, those are unique cases. “More so,” he said. “I’ve seen it not work out.
“Prenuptial agreements have been accused of taking the romance out of a relationship,” he said. “But I’ll tell you what really takes the romance out is when somebody tries to take advantage of the other spouse who comes in with more assets. I would say they are better off taking the risk of a little initial romance lost.”