Prenups protect more than clients' money, divorce lawyers say

Wealth advisors have long routinely advised clients to purchase and maintain appropriate insurance products — be they business, key-man, property, homeowner, auto or life — to preserve wealth in the case of misfortune or unforeseen circumstances. After all, no one expects to get into a car accident, but if a client mentioned they did not have auto insurance, their planner would immediately stress its importance. 

Likewise, financial advisors should broach the subject of prenuptial agreements in that same context, sometimes in the same conversation. 

Prenups guard against the loss of wealth in case of divorce — and such losses can be catastrophic. 

Among other things, prenups protect individual assets and their future growth from being included in the marital estate; address responsibility for individual debts; and can determine the existence, amount and duration of alimony on a temporary and/or permanent basis. 

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Prenups affect not only the divorcing client but future generations as well. They can preclude inheritances, businesses and ownership interests from being divided at divorce or after death. They can even come into play if a spouse tries to make a posthumous challenge to a decedent's carefully crafted estate plan.

Who needs the prenup talk?

For younger clients who may not yet have significant wealth, a prenup offers protection for the future growth of their assets. 

The document can protect gifts or inheritance received from relatives and can lay out an understanding of responsibilities around alimony, such as a waiver of alimony or an agreed-upon obligation. 

Moreover, a well-written prenup will limit the cost of a divorce, as litigation costs can be astronomical. 

It's important to remind clients that even in a short-lived marriage the growth of any individual assets, such as retirement and investment assets, can be split in a divorce, and that the best way to prevent that wealth from being lost is with a prenup.

READ MORE: Divorce planning for clients: A guide for financial advisors

A  prenup can also protect generational wealth in the form of closely held family businesses, trust assets, annual tax-free gifts and family homes. 

Inheritances are often considered, in one form or another, as a marital asset in a divorce — whether or not the bequest has been received. In this instance, the financial protection of a prenup offers peace of mind to the younger client as well as their parents. 

Parents, for their part, should know the wealth they plan to leave to their child can be the substance of protracted litigation in their child's divorce. Further, many wealthy parents do not realize that during such proceedings their privacy can be invaded and their testamentary plans disregarded, and that they can potentially be called as witnesses in divorce proceedings. 

Wealthy parents — indeed any parent with an asset to protect — should mandate that their children have prenuptial agreements as a condition precedent to marriage. The sooner the conversation with an adult child happens — ideally before they even meet that special someone — the less pain and potential hard feelings there will be later on.  

READ MORE: Should newly married couples combine their finances?

Older clients embarking on their second or even third marriage will also want to learn how to protect their premarital assets. 

Prenups crafted for later-in-life marriages can preserve assets for children from prior relationships as they are often used, in conjunction with estate plans, to determine how particular assets will be divided in the event of a client's death. The prenup can confirm the client's estate plan and protect the client's testamentary wishes, including how joint assets, such as the marital home, are to be divided or distributed. 

Prenups are an essential form of insurance and a crucial tool in the financial planner's toolkit, but they remain underutilized. Having "the talk" early on with pre-married clients can help change that.