What is a Prenup and Why Might I Need It?

In this article, we'll answer the key questions surrounding prenuptial agreements: What is a prenup, exactly? How does it work? And why would you consider one?

A good friend's daughter just got engaged. They're both in their early 30s. He's coming into the marriage with a home; she's coming into it with an investment portfolio, a significant employer sponsored compensation, and a retirement plan. After congratulating her, I asked if they were going to have a prenup—formally known as a prenuptial agreement.

Does that mean I think their relationship will not be a happily ever after? Not necessarily. I asked because I wanted to know if they had "the money conversation."

We know that talking about money is not the most romantic topic and can often be a touchy and emotional subject. But differences between money values and goals, spending and saving habits, and risk and debt tolerance can become problems in a marriage. If you don't talk about it, you could be setting yourself up for unpleasant surprises and future discord. So having the money talk before the wedding could help start your marriage with a strong financial foundation.

Here's what to keep in mind to help you decide if a prenup is right for you.

A prenup is a legally binding, written contract signed before marriage that outlines how assets, debts, and property division will be handled in the event of divorce or death. It also addresses how alimony (spousal support) will be handled. It's a proactive way to protect individual finances, clarify expectations, and reduce potential disputes.

Every prenup is tailored to individual circumstances, but all prenups typically include a list of each individual's assets and debts. Typically, assets might include:

• Personal property of value (art, jewelry, furniture, appliances, cars, etc.)
• Cash and bank accounts
• Education and retirement funds
• Investments (like stocks and bonds)
• Real estate and other separate property

In addition to listing assets, prenups include instructions for how they'll be divided in the event of a divorce. It also identifies assets you want to keep separate such as an inheritance. It can even include personal clauses like who gets to keep the pets. One thing specifically not included in a prenup is child custody and child support.

Understanding these things and coming to a mutual premarital agreement can help you avoid the "if only I'd known" laments I often hear, especially from women.

In the past, a prenup was often recommended by parents or family members who might be concerned about a family business or a future inheritance. Today, with Millennials marrying later and often coming into a marriage with a variety of assets, a prenup can make sense for a lot of reasons. And today's engaged couples are more educated about prenup agreements and open to the idea. In fact, 50% of U.S. adults are open to signing a prenup, according to a recent Axios-Harris poll.

There's no hard and fast rule about who needs a prenup. It all depends on your personal situation. Prenups are often associated with having a lot of money or fame, but not always. There are a variety of circumstances where a prenup could make sense for the average couple. For example, one or both of you may:

• Come into the marriage with significantly more money or property than the other.
• Have significant assets, such as a home, stock, or retirement funds that you want to protect.
• Own all or part of a business that you've built up over years.
• Anticipate a sizable inheritance.
• Have children from a prior marriage.
• Plan to support the other through college or graduate school.
• Have significant debt or student loans.
• Be past your child-rearing years and considering a late-in-life marriage.

In every one of these situations, a written agreement could help a couple decide together what's fair to each of them and to their families. And to me, that's the key. It's not one against the other. It's what you and your future spouse want together detailed in a legal document.

You could draft your own prenup. There are online tools for basic versions, but it's generally wiser to do it with a family law attorney who can offer legal advice. Typically, you'll each have your own attorney. Even if you create your own prenup, most states require both parties to have their own lawyer review the document for it to be valid.

In some states, you may also have to sign in front of a notary public who will ensure each person is signing without duress. Explore the rules for your state so you understand the process.

Prenups can be adapted and changed as your situation changes. And they can be built to be flexible. For instance, what if the marriage lasts five years? Ten years? Twenty? You can create the prenup to address different timeframes and situations. And even with legal counsel involved, it should be a negotiation between the two of you, something you mutually agree on.

Prenup costs can range from a few hundred dollars if you do your own to a few thousand dollars if attorneys are involved. The more complicated the agreement, the more it's likely to cost. But think of it this way: A prenup is like having some insurance for legal costs if something unfortunate happens.

You may end up not needing a prenup, but you're covered just in case. If the marriage ends in divorce, having a prenup could make it less contentious and less costly in terms of both dollars and emotional pain.

If you don't have a prenuptial agreement, you're subject to your state's laws. The state will determine how assets and debts are divided in case of divorce or death and how marital property acquired during the marriage is handled. In a community property state, assets are divided 50/50. If you don't live in a community property state, it's up to the judge.

Not having a prenup could mean a more contentious, costly, and emotionally draining situation should the marriage end in divorce. To me, having a prenup and agreeing on how you want things divided in advance doesn't mean you don't have faith in the marriage, it just means you're both prepared and protected in case things change.

No time before the wedding? You can still create a postnup. A postnuptial agreement is like a prenup, but drafted and signed after you're married. It includes the same elements as a prenup and requires the same conversation about money. But it does give you a bit more time to consider what you want. And it can be drawn up at any time during the marriage.

If a prenup is one more pressure you don't want before the wedding, consider a postnup. Whatever you choose, prenup or postnup, be fair, open, and honest in your money conversation.

Money conversations are an opportunity to explore each other's values, perceptions, and concerns when it comes to money. Determine if your thinking is aligned and if not, how to best reconcile your differences. To help you get started, consider asking each other questions about financial issues like:

• What are your must-haves, nice-to-haves, and aspirational goals?
• How is money treated in your family? Does it mean entitlement? Power? Control?
• What does money mean to you?
• How do you define success?
• What are your fears?
• What mistakes did you see your parents make that you don't want to replicate?
• Do you see money as a tool to help others?
• What challenges do you see in combining our finances?

Next, it's time to open up and share the numbers. For example, financial disclosures like your income and expenses. What are your different assets, debts, business interests, and expected inheritances? What is the value of each? How different is the value that each brings to the marriage? What, if any, family and financial commitments, obligations, and/or constraints pertain to your financial situation?

And then lastly, ask the question: Would a prenuptial agreement be mutually beneficial to each of you, and why? With more and more couples marrying later and coming into the marriage with their own wealth, the last question is becoming more and more important. But before you can answer the question, make sure you understand the ins and outs of prenups.

My friend's daughter and her fiancé ended up not getting a prenup, and that worked for them. Another friend, whose previous marriage ended in divorce, was really glad she had a prenup. Her situation was more complicated and involved her husband's family business. Having a prenup not only meant she and her husband could more amicably end their marriage, it also meant she could maintain a good relationship with the overall family both during and after her marriage.

You might decide that a prenup isn't necessary. But whatever your situation, think about it—and more importantly, have the money conversation with your future spouse. Mutually agreeing on what you want may give each of you a better sense of control, clarity, and calm as you start your life together—and that could be the greatest benefit of all.