What type of “investment” can grow almost 120 times in just four years? Surprisingly, it is not the type of financial planning tool you want your clients to have. This tremendous investment growth actually resulted from an unprepared marriage agreement between Paul McCartney and his bride of just four years, Heather Mills. While the
couple’s wedding cost “just” $3.2 million in 2002, their pending divorce, as reported by NBC News, is estimated to bring the wife of the former Beatle approximately $375 million.
Without the benefit of a prenuptial agreement, the estimated settlement represents one-quarter of Sir Paul’s net worth, putting a new twist on his past hit, “Baby You’re a Rich Man.” This reported payout is not only a financial win for Ms. Mills, but may become a catalyst for a run on prenuptial agreements.
While “prenups” are not a new concept, the recent spurt of break-ups by British royalty and Hollywood couples has brought renewed interest in this asset protection vehicle. Although a number of financial planning aspects are key to a marriage, the prenup may be moving higher on some of your wealthier clients’ priority lists.
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Not the Most Romantic Valentine
As your wealthy clients buy flowers, candy or diamonds to celebrate Valentine’s Day, you may not think a “financial planning” discussion is appropriate. However, a prenuptial agreement, despite its unromantic connotation, may be just the ticket to a happy marriage–and wealth preservation for your clients. Thoughts of love on Valentine’s Day are not necessarily accurate barometers of long-term success. While the U.S. divorce rate has declined in the last two decades, so have the number of marriages. In 2005, for every 1000 U.S. residents, there were 7.5 new marriages and 3.6 divorces; a decrease from 9.8 and 4.7, respectively, in 1990, according the National Marriage Project.
While the mention of a prenuptial agreement may seem negative or too personal, bringing up the topic with your wealthy clients may open a healthy exchange about their financial goals while also strengthening their impending marriage. Most people would imagine that negotiating a prenup is potentially divisive, but, in fact, it may be the best way to evaluate a couple’s goals on money and property while eliminating misunderstandings that could cause a future conflict. It also complements a couple’s estate planning efforts.
What Exactly Is a Prenup?
A prenuptial agreement is a legally binding contract signed by spouses-to-be that governs how their assets will be divided in the event a marriage is terminated by death, divorce, separation, or annulment. In particular, it spells out in precise detail who owns which assets, which assets are held jointly, and the rights and obligations of each partner. In some cases, related issues, such as alimony, child support, and the provisions of inheritance, may also be covered.
For the agreement to hold up in court, both partners must be represented by legal counsel–in fact, by separate legal counsel. Each partner must fully disclose all financial assets and liabilities to ensure the agreement is not legally voided in the future.
Providing Unemotional Counsel
So who among your client base should consider a prenup? When asked whether they recommend prenups to those with substantial assets, many financial advisors reply that it depends upon the circumstances of each couple. In particular, they cite age and marital history of the future spouses. If both parties have money, have been married before, and have children from those marriages, they are more likely to view a prenup as a practical planning tool that protects all involved.
Despite its negative reputation, there are times when a prenuptial agreement may be advisable–for example, when husband and wife are marrying late in life and each brings substantial assets to the relationship. A spouse who owns a business or may be expecting an inheritance might use a prenup to direct those assets to his or her children or grandchildren in the event that the marriage is cut short by divorce or death.
Keeping in mind that divorce and death would put each individual’s assets at risk, it is reasonable to suggest that divorcing without a prenup is somewhat akin to dying without a will. If explicit instructions from each spouse are absent, the courts will apply their own formulas for deciding who gets what–formulas that will probably not sit well with either party or their heirs.
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