The mere mention of a prenuptial agreement can be enough to send chills up the spines of most romantics and cool the ardor of even the most passionate Romeos and Juliets. However, marriage is an institution formalized by a legal contract and, to a certain segment of the population, the prenuptial agreement is simply an addendum to that basic contract. Here we explain the basics of the prenuptial agreement and explain why these contracts are being viewed increasingly as practical documents rather than cynical safety nets for non-romantics.

Many people react with disbelief when they hear that someone they know is going to sign a prenuptial agreement; however, these contracts can be designed to benefit both parties in case of divorce. Imagine the case of a woman whose fiancé has inherited the proceeds from an ongoing, closely held business valued in the billions of dollars. According to the couples' prenuptial agreement, if the marriage lasts for at least three years, this man's future wife would receive a $1-million lump-sum payment, the house, the car and all child-related expenses paid in full for life. Because her fiancé's family has spent generations building a successful business, one messy divorce could wreck everything and leave multiple families without their only source of income. (To read more about weddings, see Revealing The Hidden Costs Of Weddings.)

What Is It and How Does It Work?
At the most basic level, a prenuptial agreement is a contract that clearly defines the division of assets should the marriage end in divorce. Some agreements also address estate planning issues, alimony, asset management during the marriage and responsibility for debt. Each party to the agreement is generally represented by a separate attorney, and the agreement is signed prior to marriage. Courts often frown on agreements signed immediately prior to the marriage, so entering into the agreement at or near the time of engagement is highly recommended. (To learn more, see Getting A Divorce? Understand The Rules Of Dividing Plan Assets.)

In the United States, each state has its own laws for interpreting the agreements. According to the National Conference of Commissioners on Uniform State Laws, in 2005, 26 states had agreed to honor the Uniform Premarital Agreement Act, which encourages the enforcement of premarital agreements and permits married couples to select the specific state law under which their agreements will be interpreted. However, it should be noted that an agreement may not be required in states where community property laws assign each individual the assets he or she had prior to the marriage. (For further reading, check out The Benefits Of Having A Spouse.)

Why Do People Sign It?
It's sad but true: love doesn't always last. According to statistics compiled by Divorce Magazine, divorce rates bottom 50% in a number of countries. These statistics indicate that, in 2002 (the latest year for which statistics are available), the following countries led the pack for percentage of new marriages that end in divorce.

Country Divorce Rate
Sweden 54.9%
Belarus 52.9%
Finland 51.2%
Luxembourg 47.4%
Estonia 46.7%
Australia 46%
United States 45.8%
Denmark 44.5%
Belgium 44%
Austria 43.4%
Czech Republic 43.3%

The United States boasts a divorce rate of 49%. Although experts may debate the precision of the numbers of any particular survey, divorce rates in the solid double digits underscore the reality that marriages have an extremely high failure rate.

Furthermore, the financial implications of divorce are becoming increasingly complicated. Because many more people are marrying later in life, a large number of these people have had time to build their lives, amass assets and assume responsibilities before they decide to tie the knot. Older single people may own real estate, businesses or self-made personal fortunes, and divorced people looking for love the second time around may have more than just assets - they may also have financial obligations from their first marriages, including children or debts. (For more insight, see Kids Or Cash: The Modern Marriage Dilemma.)

Pros and Cons
The practicalities of modern life have made prenuptial agreements more acceptable than ever. These agreements can help to clearly define financial issues, reducing conflict during the marriage and preparing both parties for the consequences of dissolving their union. They can provide the less affluent spouse with the comfort of knowing that an end to the marriage doesn't necessarily mean an end to the lifestyle to which he or she has become accustomed. Furthermore, the presence of a prenuptial agreement allows a couple to make the important decision of how their assets will be divided should their relationship end in divorce, rather than allowing a divorce court to have the final say.

On the other hand, getting married is a public declaration of love and commitment and an exciting occasion for most couples. Mapping out a plan for what you'll do if things don't work out isn't exactly the most hopeful and romantic way to begin married life. Indeed, discussing a premarital agreement can cause some people to doubt the strength of their marriage.

To Sign Or Not To Sign
Discussions about a prenuptial agreement may be the first opportunity you will have to communicate with your partner about money. Like it or not, money is one of the things that most couples fight about, and financial matters will likely play a big role in your married life. These discussions can be an opportunity to lay the foundation for a secure future, or even present the chance to realize that you almost married the wrong person.

When it comes to deciding whether a prenuptial agreement is right for your relationship, it is important to set aside the emotional aspects of the issue and look at it from an objective standpoint. Get familiar with the applicable divorce laws and make sure you understand their implications before you sign on the dotted line.

Related Articles
  1. Investing

    3 Small Steps to Maximize Your Investing Goals

    Instead of starting the New Year with ambitious resolutions, why not taking smaller manageable steps that can have a real impact.
  2. Savings

    How to Save Your First $100,000

    Saving your first $100,000 requires the discipline to put money away and control your spending. But just remember – the savings get bigger as you go.
  3. Your Clients

    How to Help Single Clients Plan for Retirement

    Financial planning often focuses on married couples, but there are lots of unmarried folks who need advice from financial advisors, as well.
  4. Savings

    Building an Emergency Fund

    Do you have enough savings to cover the costs of unforeseen crises? We show you how to plan ahead.
  5. Retirement

    How Women In Transition Should Mind Their Finances

    A whopping 70% of female clients leave for a new advisor after the death of their husband or a divorce.
  6. Home & Auto

    What are The Best Ways to Save on Moving Costs?

    Because buying a house isn’t cheap, funds might be limited during your move. So, to avoid additional stress, here are seven money saving tips.
  7. Personal Finance

    Tips for Talking About Money at Every Step of a Relationship

    How much you talk about money differs, depending on the stage of the relationship.
  8. Retirement

    4 Financial Fitness Tips for 30-Somethings

    When it comes to investing, your retirement plan could be considered the core of your financial well-being. Here we tell you how.
  9. Investing

    5 Ways Technology Will Change Your Finances in 2016

    In the year to come, as billions join the online marketplace, FinTech will see continued growth and innovation which democratizes and facilitates finance.
  10. Personal Wealth & Private Banking

    5 Best iPhone Finance Apps for 2016

    Discover the best and latest iPhone apps available in the personal finance category for 2016, offering everything from basic budgeting to investing.
  1. Can mutual funds outperform savings accounts?

    A mutual fund can – and should – outperform a savings account. In most cases, it should not even be a close race. Savings ... Read Full Answer >>
  2. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  3. What are Social Security spousal benefits?

    Social Security spousal benefits are partial retirement or disability benefits granted to the spouses of qualifying taxpayers.  Qualifying ... Read Full Answer >>
  4. How soon should I start saving for retirement?

    The best answer to the question, "How soon should I start saving for retirement?", is probably, "yesterday," and the second ... Read Full Answer >>
  5. Are Social Security benefits affected by marriage?

    The amount of Social Security benefit you are eligible to collect upon retirement is not affected by marriage. Your benefit ... Read Full Answer >>
  6. Can I use my 401(k) as a collateral for a loan?

    Although federal Internal Revenue Service, or IRS, regulations prohibit using a 401(k) account as collateral for a loan, ... Read Full Answer >>
Trading Center