High-net-worth clients getting married might consider a life insurance policy along with their prenuptial agreements.
No, this isn’t the set up for a 1950s’ film noir. Death benefit proceeds can provide future money to a spouse who gets alimony due to a divorce, says Benjamin C. Sullivan, a financial planner with Palisades Hudson Financial Group in Scarsdale, N.Y.
A life insurance policy also can make a break-up more palatable for clients who have children from a first marriage. Not only can it help avert family feuds, but the purchase of life insurance for the children in an irrevocable life insurance trust also can help minimize the impact of federal estate taxes.
A prenuptial agreement is a written contract prior to marriage that overrides state marital laws. It outlines how assets and earnings will be divided in the event of a divorce or death. A prenup can help avoid unpleasant surprises as well as big legal fees.
“A prenup isn’t emotionally appealing, but it is proper planning,” Sullivan says. “People usually marry later in life than they used to, which gives them more time to accumulate assets. Today, there’s often more to lose if a relationship goes sour.”
For younger clients, Sullivan recommends low-cost term insurance as part of a prenup.
Leonard Witman, a Florham Park, N.J. estate and tax attorney and Seton Hall University law professor, says an advisor should create a list of each individual’s assets, projected income and potential gifts or inheritances. Then, each person should consider how he or she would divide these items in the event of a divorce and consider any other provisions to include in the written agreement.
The advisor needs to coordinate with an estate and marital law attorney to draft the agreement. Each partner should be represented by a separate lawyer to strengthen the contract’s legal standing. The agreement should be reviewed by both parties and their lawyers.
“In many prenuptial instances we have family waive each other’s assets in full and provide, for example, a million dollars to the surviving spouse funded with life insurance,” Witman says.
Witman recommends that younger clients get 20 to 30-year term insurance coverage as part of the prenuptial agreement. Term insurance is cheaper than whole life insurance and does not terminate early in a marriage. Older individuals should buy permanent no-lapse guarantee universal life insurance.
“The problem is that some people buy five-year term insurance and don’t renew the coverage,” Witman says. “Death occurs and they don’t have coverage. One solution is to make the beneficiary the owner. So when there is a nonpayment of a premium, the owner gets notified by the insurance company.”
Witman also cautions against using a group life insurance policy obtained through an employer in a prenup. That policy may not be portable if the person leaves his or her job.
Twenty-eight states have adopted the 1983 Uniform Agreements Act (UPAA), which is the predecessor to the 2012 Uniform Premarital and Marital Agreements Act (UPMAA). Two states have adopted the UPMAA, including North Dakota, where the UPMAA replaced the UPAA.
These rules provide some consistency in prenuptial arrangements. For a premarital agreement to be enforceable, the rules specify that each party must enter into the agreement voluntarily, and that the contract must not be grossly unfair when it is signed.
The couple should sign the agreement well in advance of the wedding day. If the agreement is presented to the bride or groom practically on the way to the altar, a court may determine that the contract was not voluntary, Sullivan warns.
Couples should also avoid frivolous provisions, such as forbidding a spouse to cut his or her hair, or requiring a spouse to do housework with certain frequency. Such language can lead a judge to reject the entire document.
The document should have a clear “trigger,” so that the provisions begin to apply at an easily identifiable point. Is the couple considered divorced when one partner files, or not until the divorce takes legal effect? If ceasing to live together is a trigger, it’s important to be clear about what that entails and how long the separation must last before the couple is considered separated for purposes of the agreement.
Life insurance, however, isn’t the only solution. Julia Swain, partner with the law firm, Fox Rothschild, Philadelphia, Pa., says retirement assets can be used in lieu of life insurance.
Meanwhile Sullivan, of Palisades Hudson, says affluent married couples without a prenuptial agreement should consider getting a postnuptial agreement. And if wealth comes principally from the family of one spouse, that family may want to set up a trust.
“If the trust is properly structured and the trustee has discretion to withhold distributions, the assets should be protected without a prenuptial agreement,” Sullivan says.