Due to the popularity of my posts on marriage and divorce, I get one question lodged at my anonymous online persona far more than any other:
“What’s in your prenup?”
The question has come from many sources, each with a varying level of tact. Questions ranging from: “That’s a neat idea! How did you make it fair for both of you?” to “Great job! No man should get married without a prenup! Rabble rabble!”1 to “You’re fucking her over! She should have left you and you should be ashamed! Rabble rabble!”2 A public flogging may have been suggested once. (Which may be deserved, but for reasons entirely unrelated to prenups.)
But regardless of tact or proposed punishment, The Vigilante’s keen eye for cutting to the chase always finds that the same core concern is behind every comment:
How can a prenuptial agreement be fair for a couple with asymmetrical earning potential?
There’s a flaw in this question. The question presupposes that Mrs. Vigilante and I wrote a fair prenuptial agreement. The trouble should be obvious: We didn’t write a fair prenup!
“Fair” is the wrong F-word to strive for when drafting a prenup. “Fair” conjures up images of the mighty scales of justice weighing each spouse’s legal, moral, ethical, spiritual, and all other “-al” rights against the other’s. “Fair” encourages spouses to start comparing how hard they each work, how much time they each spend on managing the home, and how many times each has left the toilet seat up.3
Rather than the transient concept of “fair,” a prenup should be about collaborating to develop a flexible plan for an uncertain future. A good prenup isn’t a simple promise to give up all of your rights as a spouse or a promise to “pay up” in the event of divorce; instead, a good prenup adjusts to the scenario you are in at the time of your divorce.4 It accommodates both spouses, to help each survive and thrive through pretty much any planned – and foreseeable but unplanned – lifestyle changes that might happen before or during a divorce.5
But what does such a flexible prenuptial agreement for a financially independent couple with different earning potential actually look like? Sometimes, even when you know the theory, it helps to see an example.
As usual, The Vigilante provides. I bring you The Prenup: A long-anticipated glimpse into the minds of The Vigilante Family as we explain our vision of how to treat one another fairly if, one day, she finally realizes she’s too good for me:6
Part 1: Dividing the Investments and Cash
As of 4Q 2016, Mrs. Vigilante is out-investing me by a few thousand dollars. I’m quickly catching up, and I expect to pass her by the end of 2017. Of course, it’s not a race…But that doesn’t make the taste of victory any less sweet.
As my salary increases and I am able to assume payment of the mortgage – or, put another way, as I begin repaying her for advancing more of the costs of the house – it is likely that she will pass me again, with perhaps an insurmountable lead.7 But, thanks to our prenup, it most likely won’t matter to either of us!
Determining how much we’re worth
Our default position is that we keep our own savings. Most likely, that’s how it would turn out. But we do have a method of splitting our savings. The goal is to help each of us go forward with a reasonable approximation of the same lifestyle we would have had if married.
The analysis starts by looking at titled ownership. We each keep our own accounts that are titled to us individually, including IRAs, 401(k)s, 457(b)s, HSAs, defined benefit plans, employer and employee contribution plans, taxable brokerage accounts, CDs, savings accounts, checking accounts…basically everything. We split joint accounts 50/50, and there are some safeguards in place to make sure that neither of us devalue joint accounts through trades, withdrawals, etc. in separation or shortly before.8
If we ever separate, the first thing we do is add up the balances of each account we own individually. Then, we each add to our subtotal half of the balance of any shared account. The total of our separate assets plus our half of joint assets equal our “Separation Assets” – a fun divorce accounting term I invented just for our marriage. Ain’t love grand!
Determining how much we share
If, when we separate, my Separation Assets are more than 45% greater than hers,9 I agree to transfer her enough to bring us to only a 45% difference. If Mrs. Vigilante’s Separation Assets exceed mine by a percentage difference of greater than 55%, she transfers some to me. We’ve chosen methods for transfers to avoid tax and penalty, and that consideration takes priority over any consideration of the varying value of a dollar between accounts. (More on the last point later.)
This analysis protects either of us from being in a marriage where all the saving is done by one party while the other wildly spends every penny. It also protects the lower-saving spouse from being left destitute at the end of a decades-long union to a millionaire spouse who left for a younger supermodel. I don’t expect either to happen, but more realistically: It ensures that if we become financially independent as a couple, neither of us will be left anywhere near broke by way of divorce. Rather, we’ll most likely remain FI or be just barely sub-FI.
This is honestly by far the most complex part of our prenup, so I’ve prepared a calculator so you can see it in action. You didn’t think I was going to leave you with just a wall of text, did you?
As you can see, this means Mrs. Vigilante can leave the marriage with a comparatively much larger chunk of change than I can, but we would both be leaving with a respectable portion of what we had saved as a couple.
This direct dollar-for-dollar comparison has one glaring weakness: We are comparing balances directly, not accounting for tax effects, penalties, and guaranteed payments. As Physician on FIRE’s recent post My Money Is Worth More Than Your Money highlights, a dollar in one account isn’t necessarily worth the same as a dollar in another account. But rather than try to define the value of each dollar relative to another in an ever-evolving and unpredictable tax code – and not knowing what savings vehicles each of us might have available to us in the future – we decided to rely instead on the less accurate, but far simpler, direct dollar-for-dollar comparison.
We strongly considered agreeing to appraise certain accounts, and we might amend the prenup in the future to do so. But we are comfortable with this semi-solution right now for two reasons. First, it’s a problem that divorcing couples face whether they have a prenup or not. Second, if we don’t get appraisals done, it is highly likely to work to the benefit of Mrs. Vigilante – the likely lower income earner – anyway. She has a pension plan where each dollar invested would be appraised for over one dollar, and she has a 457(b) account with no early withdrawal penalties. Even if we leave the marriage with identical Separation Assets, she’s technically leaving with more than I am!
Basically: love or not, we negotiated a huge incentive for me to stay with this one. Kind of a contractually bound romance, I guess?
Waivers of other rights
Finally, we each agreed to sign any ERISA or similar waivers presented by the other to waive spousal/inheritance rights to retirement accounts, Social Security, and the like. Neither of us have signed one yet, and I don’t foresee a situation in which we would. Right now we are each the primary beneficiary of, well, everything we own. As it will likely stay til the day you see my face on the Darwin Awards.
But we both wanted the flexibility to change that, if there is ever a logical reason to do so. Perhaps one of us wants to help a troubled niece or nephew but the other does not. Or maybe I want some account of mine to fund server time for hamsterdance.com instead of buying Mrs. Vigilante new shoes. With the kind of flexibility in our prenup, anything’s possible!
Part 2: Dividing the House
Technically, our house is not a part of the prenuptial agreement. We had executed a cohabitation agreement when we purchased our townhouse prior to marriage, and the cohabitation agreement is incorporated into the prenuptial agreement. Ok, it’s a technicality, but I like to flex my lawyer muscles on occasion and there’s no room in this post for a “henceforth.”
Our arrangement for the jointly owned primary residence – and any other real estate we might buy together, including rental property if we decide to go that route – is complex but intuitive. To avoid boring you with the legalese, I’ll break it down into three basic scenarios:
- Scenario 1: If one of us wants the property and the other doesn’t, the one who stays simply buys out the other’s equity using a recent appraisal, an appraisal we agree upon, or the average of two appraisals.10
- Scenario 2: If neither of us wants the property, we have a system for setting a sale price based on a recent appraisal, a joint appraisal, or an average of two appraisals, and splitting any proceeds evenly.
- Scenario 3: If both of us want the property, we have a buy-out (or, if you’re a Clint Eastwood fan, shoot-out) provision borrowed from contracts that I have drafted for sales of interests in businesses. Basically, whichever of us is willing to pay more for the property will get the property. Simple.
In any case, whoever keeps our primary residence will also keep everything in it, with a few specific exceptions.11 The person who keeps all the house “stuff” owes the other a small, one-time payment (or promissory note) to help the other get furniture, kitchen wares, etc. The payment is adjusted for inflation or deflation as time goes on.
Part 3: Money I Owe Mrs. Vigilante, Loan Shark
Because she wisely chose not to go to law school, Mrs. Vigilante beat me into the work force by a few years. So, she had far less debt and far more savings, and she ended up contributing far more to the purchase of our townhome than I did. Well, that coupled with a substantial “gift”12 from her parents to help us achieve the down payment about one year sooner than we would have been able to on our own.
No matter what happens with the house under the cohabitation agreement, I will owe Mrs. Vigilante for what should have been “my half” of her contributions to the household. Basically, the down payment, closing costs, mortgage payments, and any other things such as appliances that we normally would have split in half are recorded on an addendum to the prenup, which she then gets to hold over my head any time I forget to vacuum and mop “her” floors. The dollar amounts contributed by each of us are tallied, and I owe her half of the difference in any circumstance – even if she keeps the house. In the end, our payments will be equal.13
Currently, Mrs. Vigilante is about $60,000 ahead of me in payments. So, I automatically owe her about $30,000 if we were to divorce today, regardless of our savings. The gap is still growing today, as she pays our mortgage – but that should be changing soon, as I start paying the mortgage!
Part 4: Dividing the Debts
Some of you may have been wondering through this whole process: “What happens to the debt?” Ideally, we will have none other than our mortgage and my student loans. Those are rather simple to handle.
The mortgage is divided pursuant to the house provision, for obvious reasons. The student loans are mine, even if they are refinanced as a joint debt with some joint asset as collateral. If any portion of any joint debt is traceable to my student loans, I will write a check or a promissory note to Mrs. Vigilante. Easy peasy.14
In the unexpected event that there is another consumer debt, medical debt, or something else other than student loans for either of us, we will divide it evenly unless one of us takes the asset that it is associated with.
Lemon squeezy. I figured you could use a break for reading this far.
Part 5: Spousal Support / Alimony
I waived spousal support, alimony pendente lite, and alimony.15 Which isn’t saying much, because I am currently the slightly higher earning spouse and am likely to, for our entire lives, be the much higher earning spouse. It would be realistic to assume that my salary will be around twice her salary for most of our working lives.
The more interesting point of our prenup – and a point relevant to many Lean FIRE couples – is that Mrs. Vigilante also waived spousal support under most circumstances. Given the purpose of spousal support, we agreed that neither of us would need the support of the other since our core yearly expenses are well under what either of us could afford alone.16
However, Mrs. Vigilante negotiated a small alimony payment17 from me to help her get back on her feet under one condition. If, prior to our separation, Mrs. Vigilante has left her current full-time employment for purposes of retirement or to accept part- or full-time employment providing lower gross annual income than her gross annual income with her current employer, she gets this agreed spousal support, which is likely lower than the support she’d get otherwise.
I realize that’s a mouthful, but it makes sense for two reasons:
- She may leave her employment at our coast FI stage under the assumption that we will continue to earn together. Divorce would change that.
- Her future employment prospects would suffer from a resume gap more than mine would, considering I have the option of going solo as an attorney.
Child support is not waivable in Pennsylvania and not affected by any terms of a prenup. So, depending on our custody situation and our incomes/earning potential, we may still be exchanging some money for child support. Most likely from me to her. Even though it is unlikely to be necessary for either of us, the possibility isn’t really troubling. I trust that Mrs. Vigilante will spend some of this surplus on crazy future virtual reality video games, and this future kid will let dad play.
Part 6: Inheritance
Anything acquired by either of us as a gift or inheritance is the separate property of the one who received it. If it’s real estate, an investment, or anything else that might appreciate in value, any increases in value on it during the marriage are also separate property.18
But, if either of us gets such a gift or inheritance and places it in a joint account or titles it jointly, it gets split like everything else. And based on how our relationship and finances are structured right now, I think it’s safe to assume it will all be split, because pretty much our only “separate” stuff today is our employer-sponsored retirement and our traditional IRAs.
This will almost certainly be neutral or work to Mrs. Vigilante’s benefit, since she expects a much larger inheritance than I do. Neither of us have jet-setting billionaire world-leader parents, but she’s one of only two children to two upper-middle class parents in the northeastern United States. I’m one of four children to two lower-middle class parents in the northeast. This provision prevents me from being the money-grubbing gold digger we all know is in there, thanks to the images in the Eccentric Millionaire series.
Part 7: Assorted Other Personal Property
Despite our mutual lack of concern for vehicles, we do have a provision for cars so that neither of us has an issue with getting to work on the day after a separation. We’re a two-car household today, and the vehicle driven primarily by either party remains with that party regardless of titled ownership. Currently, this works a bit in favor of Mrs. Vigilante, because she drives our more fuel-efficient vehicle on her longer commute. I’d get a Honda Civic with over 100,000 miles on it; she’d get a Nissan Versa with just over 20,000 miles – which is worth a few thousand more. But we have no idea what the future holds here, and the roles could reverse if I start commuting further. (Mr. Money Mustache would not be pleased.)
What we do know is that down the road, we’ll probably be a one-car household. If so, the car will pretty much be handled like our house: Whoever is willing to pay more gets it.
We also have an addendum laying out certain personal property that, most likely, neither of us would argue over. But just for purposes of comfort, we know where it will go. For instance, Mrs. Vigilante has Celiac disease, and so she gets to keep the bread machine that we use to make cheap gluten free bread. Despite the fact that I LOVE the bread machine.19
It would be excruciatingly difficult for me to part with this bread machine, but sometimes things just don’t work out. You have to learn to let go. I just hope she cleans it properly and treats it with respect…great, now I’m tearing up.
Part 8: Business Interests (including I, Vigilante!)
Have no fear! Mrs. Vigilante gets no interest in my blog, no matter what – so you’ll always have free access to me! I also get no interest in her future blog, which is most likely going to be far more successful than mine. This rule will be effective despite the fact that she makes my Pinterest pins, helps me brainstorm post topics, and acts as my thesaurus. And despite the fact that I will be contributing heavily to helping her with the technical and promotional aspects of her blog.
The same goes for any other business interests either of us decides to take part in alone – the business is my baby or her baby, not our baby. Money earned from any “baby” will be split, obviously, if it goes into a joint account, or if one of us leaves the marriage with substantially more assets than the other. But an ongoing business interest – like a partnership interest, a stock certificate in a closely held corporation, or a little storefront one of us rents out to start a whiskey bar – will not be considered a marital asset, which should come as a comfort to any future business partners that we may have.
Part 9: And, of course, we comply with state requirements.
Aside from the above provisions, we have quite a few details included that help ensure our prenup will be enforceable if it’s ever needed. For example, we were required by Pennsylvania law to do a full financial disclosure – not a penny overlooked. This is one of many details that the state requires to ensure that neither party is misinformed or being taken advantage of.
A prenup is a contract guiding the single biggest investment most people ever make, so there are extra safeguards added on top of those in typical contract law. As any first year law student knows, the writing on a bar napkin agreeing to sell 45 Widgets for $100 a piece might actually be an enforceable contract – but a prenuptial agreement scribbled on the back of a bar napkin before your shotgun Vegas wedding will not be enforceable. Unless, maybe, you find yourself before Judge Judy.
If you want a prenup, consult an attorney with family law experience in your jurisdiction! These distinctions from typical contracts are not simply formalities or minor details that will be overlooked in favor of the “intent of the parties.” Prenuptial agreements – like divorce law in general – are fraught with pitfalls for both parties, and the enforceability of a prenup depends to a very large extent on compliance with the unique laws in place at the time of execution. We were careful not to screw this one up, and you should be too!
For us, this agreement works.20 Obviously, not every marriage would be served by having the same exact agreement that we do. In fact, since prenups are meant to be tailored to the couple, most marriages would not be well served, by definition! Our prenup is tailored to our financial situation, our goals, and our lifestyle. So, despite our undeniable brilliance, don’t just sign a piece of paper directing your future selves to this URL to divide everything – this agreement might be grossly unfair in your marriage!
But please do ask us questions (yes, I said “us” – Mrs. Vigilante21 is responding to comments now!) and please do review and share this list if you or a friend are considering a prenup. Hopefully, it can help generate ideas and discussion that will lead to a flexible agreement that works for everyone involved!
- Usually the fallacy of people don’t change, with the assumption that all women or men are evil. But it’s often married with the anecdotal evidence fallacy, supported by horror stories from divorce forums which may or may not be accurate representations of real life.
- Often, the supernatural source fallacy, where any argument is explained by reference to a basic truism like “marriage is about love” or “prenups are always bad for the lower income spouse.”
- A personal aside: I have not done this once. If only I could say the same for Mrs. Vigilante.
- Hopefully, the “time for divorce” variable is null, for you computer geeks.
- Obviously, life never goes as planned. Something may happen that you never even thought of or accounted for when drafting your prenup. Rest assured that massive, unexpected changes – like winning the lottery or a sudden disability – may invalidate the prenup, anyway – especially if enforcing the prenup will leave one party destitute. General contract law applies, including the key idea of unconscionability. Even unexpected, non-financial life changes like having twins instead of one child shouldn’t be a big issue, as child support is not something that a prenup can generally cover. Of course, you should always check with an attorney and listen to his or her advice about your jurisdiction!
- To be clear, this is not a universal suggestion of how a prenup should be structured for couples seeking or achieving financial independence. It fits our situation, our goals, and our lifestyle. For other marriages, this might be grossly unfair to one or the other spouse. But that’s the point – prenups are flexible!
- I’ll be taking over the mortgage because she is able to save tens of thousands more than me in pre-tax dollars each year due to her 457(b) account paired with a future solo 401(k). Basically, we can have the same lifestyle, reduce the disparity in our contributions to the house (as described later in this post), reduce our tax burden, and grow our nest egg faster if I pay all of our debts with my paychecks. It’s a win-win-win-win!
- We each agree to reimburse the other for any losses caused by an action that is taken (like a trade or withdrawal) within six months of our separation without the written consent of the other. It’s not perfect, but at least it prevents the all-too-common draining of the joint checking account the day of filing for divorce or picking stocks for tax advantages of one party at the expense of another. It’s still possible to cause problems, but we’re hoping to minimize that risk by keeping a simple, low-risk allocation of ETFs and bonds in any joint investment account, agreeing to every trade, and, you know, not being assholes. So, part honor system, enforced by love and the threat of letting everyone know Mrs. Vigilante’s dark secret. You know the one, Mrs. Vigilante.
- Determined by taking the difference between our Separation Assets, dividing it by the average of our Separation Assets, and multiplying by 100. You know, the way we were all taught to calculate percentage difference before we promptly forgot.
- For our current home, this is made much easier by the fact that we can both easily afford to refinance in or own name. This may present a problem in the future if we choose to own pricier real estate, but given our lifestyle that is an extremely unlikely situation. Some of my clients have not been so lucky. This should always be a consideration in a homeowner’s prenup!
- Some of these things make a lot of sense, like bicycles or jewelry or family heirlooms. Some of them are silly, like how I take the espresso machine because she never knows how to use it, and she takes the bread machine because it’s used primarily for us to save money on gluten free bread she needs due to Celiac disease.
- Here read as “loan,” since we are paying it back.
- We did not account for interest here, because it would complicate the arrangement and it would then incentivize me to make the mutually poor financial decision of making huge advance payments on our mortgage to avoid owing her interest – or owing her anything at all – in the event of separation. Plus, it’s likely that this disparity in contributions to the house is actually going to tip in my favor within a few years, so unless we suddenly end our happy marriage tomorrow, it’s not really an issue. Also, this means she’s not a very good loan shark.
- Note for the lawyers: We considered potential issues with promissory notes, other unsecured debts, and bankruptcy. Mrs. Vigilante is trusting my reluctance to be a scam artist here. But the only way this would feasibly become an issue is if I refinance my student loans using home equity while they are still substantial, and then we immediately divorce. It’s a pretty remote possibility, especially since I keep getting lower and lower rates on the loans anyway, reducing my incentive to use home equity at all.
- It’s not important, for purposes of this post, what the distinctions between spousal support and alimony pendente lite are. Alimony is the only one that indicates a transfer of money after the divorce is final; the other two are transfers of money between separation and the entry of the divorce decree.
- Of course, this may change with life circumstances. We addressed that a bit with the next part, but mostly we assume we can amend or invalidate the prenup if something like disability affects our lives.
- A certain dollar amount, adjusted for inflation.
- This is an important distinction to make. In our state’s laws, the earnings on a premarital asset, like an IRA, during the marriage is usually marital property. We’re rejecting that rule.
- Upcoming post will include the recipe for our delicious high protein, gluten free bread!
- Or, perhaps, one of you may find a fatal flaw in my prenup, and Mrs. Vigilante and I can make a postnuptial amendment!
- She looks a little something like this. Beautiful, right?