What Is a Postnuptial Agreement? How It Works and What's Included

What Is a Postnuptial Agreement?

A postnuptial agreement is a contract agreed upon by spouses after marrying that outlines the ownership of financial assets in the event of a divorce. The contract may also set out the responsibilities of each for the duration of the marriage. A postnuptial agreement is also known as a post-marital agreement or postnup.

A prenuptial agreement, on the other hand, is signed before marriage. They do not address issues of child custody or child support, which are determined by state laws and court orders.

Understanding Postnuptial Agreements

Similar to a prenuptial agreement, a postnuptial agreement can alleviate tensions caused by financial concerns. Entering into this style of contract will allow spouses to establish an equitable distribution of assets if the marriage dissolves.

Marital agreements, post- or prenup, may run counter to the spirit of love or companionship. Critics argue they indicate the couple expects the marriage to fail. However, if a contract can remedy financial discomfort, a couple might consider a contract in hopes of restoring marital harmony.

Although laws differ by state, there are five basic elements to a postnuptial agreement:

1. It must be in writing. Oral contracts are not enforceable
2. It must be entered into voluntarily by both parties
3. It requires full and fair disclosure of relevant information at the time of execution
4. Terms must not be unconscionable, unjust, or one-sided
5. Both parties must sign the agreement

Issues Covered by Postnuptial Agreements

Beyond the basics, there are several other matters that most postnuptial agreements address. First, the agreement will lay out what happens to marital property in the event of the death of one spouse. A surviving spouse may waive certain property rights they would otherwise inherit automatically.

Secondly, a postnuptial agreement establishes terms that have been agreed to by both parties in the event of a separation. By agreeing to these terms in advance, both parties can avoid the time and cost of divorce proceedings. The disposition of property and other marital assets, custody, alimony, support, and the like are agreed to by the marital partners upon separation. This part of the agreement is typically incorporated into the final divorce decree.

A postnuptial agreement will seek to establish spouses' rights in a future divorce. These agreements often limit or waive alimony.

Issues Not Covered by Postnuptial Agreements

Some issues are not enforceable through a postnuptial agreement. They include issues related to child custody or child support.

A postnuptial agreement cannot include terms that attempt to regulate routine aspects of a marital relationship.

Enforcement of a postnup varies by state law. Most courts tend to uphold the agreements as long as they’re written, signed without coercion, and involve a full disclosure of financial information on both sides.

Some jurisdictions put up additional barriers. In New Jersey, for example, the postnup must be considered “fair and just” to be enforceable. In California, where spouses have a fiduciary obligation to each other, the contract must reflect the “highest good faith and fair dealings.”

Reasons for Postnuptial Agreements

Couples may seek postnuptial agreements for any number of reasons. They may simply have not gotten around to drafting a prenup. With a postnuptial agreement, they can iron out the same financial considerations they wanted to address earlier.

The following are some other scenarios in which couples may seek a postnup.

Protecting an Inheritance

When one spouse expects a large inheritance, the two may want to work out who’s entitled to the money should they split. That’s especially important in community property states, in which assets acquired during the marriage generally are split equally between the spouses.

Inheritances received by one spouse during the marriage are usually not considered community property. However, if an inheritance has been handled in a way that caused it to become "co-mingled" with community property, an inheritance may be considered community property.

When a postnup is in place, the agreement would override that equal claim on property and ensure that the heir retained the inheritance. Even in some non-community property states like Pennsylvania, any increase in the value of the inheritance is considered marital property.

Providing for Stay-at-Home Parents

A stay-at-home parent may want a legal document dictating the partition of assets. In the event of a divorce, the spouse may have spent years out of the workforce and foresee a struggle to reenter it.

A stay-at-home spouse who has children from a previous marriage might seek protection for them in the event of a divorce.

Dividing Interest in a Business

Assets such as bank accounts and retirement funds are relatively easy to value in a divorce proceeding. But putting a dollar figure on a business in which one or both spouses are principals is considerably harder.

Because valuing a company can be expensive and time-consuming, some couples use postnups to categorize the business as separate property that will stay with the titled spouse. The agreement may include a bigger share of non-business assets to make up for the loss.

Repaying Gifts

A divorce settlement can be a particularly awkward process when one spouse’s parents give the couple a substantial amount of money—perhaps for the down payment on a house.

A postnuptial agreement provides the in-laws as well as the child with the peace of mind of knowing that they’ll be reimbursed if the relationship doesn’t last. The contract may stipulate, for example, that the spouse whose family was the source of the money gets the first $100,000 in assets to recoup the gift.

Rebuilding a Relationship

In some cases negotiating these topics is seen as a way to keep a struggling marriage solvent.

Suppose, for example, that one spouse has been unfaithful. Agreeing on post-divorce terms that are favorable to the other spouse can be a sign of an intention to keep the relationship intact.

The Bottom Line

The concept of a postnuptial agreement is distasteful to many. However, it's worth considering if you or your spouse has real concerns about the future. It even can be helpful as a way of articulating and resolving differences of opinion about financial matters in a marriage.