Talking with Your Kids About Family Money – The Prenup Edition

Carolyn B.R. Decker, CFP®, CPA, PFS BY: Carolyn B.R. Decker, CFP®, CPA, PFS 09.27.19

Have the Prenup Discussion with Your Children

Quite possibly, the only thing that parents dread more than talking with their kids about the birds and the bees is talking with their kids about family money – especially the topic of a prenup. These subjects may be hard to tackle head-on, but it is incredibly important to have open and frank discussions before irreversible mistakes are made.

Why Consider a Prenup? 

There’s a reason a prenup is a sensitive topic. Without one, it’s fair to assume that 50% of the assets owned directly by and for the benefit of your child could, in the event of a divorce, be diverted to their ex-spouse. This diversion could also include 50% of a future income stream.

However, for families of wealth, a prenup should be as normalized as an insurance policy. People don’t buy homeowners insurance believing their house will burn down. Similarly, a prenup isn’t a judgment on the likelihood of a successful marriage.

Picture this: your son comes home one weekend with his girlfriend and they announce their engagement. If you haven’t already had discussions about a prenup and provided your son with a sense of the family wealth, you are already behind the 8-ball. At this point, any mention of a prenup is likely going to be perceived by your future daughter-in-law (and possibly your son) as a personal attack on her character. 

Discuss a Prenup Early with Your Child to Set Future Expectations

We recommend that families with teenagers introduce the concept of a prenup well before their child is dating anyone seriously. This way, the next generation understands from an early age what is expected of them and a future spouse. With early introduction of the concept, there is no way to misinterpret asset protection concerns as character indictments. It also allows your child to set expectations early with their partner, helping to remove any personal feelings from the process.

Once your son or daughter is engaged, it’s important to start formal prenup discussions with separate legal representation for each party. These discussions should be concluded far in advance of a wedding.  A prenup signed on the eve of a wedding could be construed to have been signed under duress and may weaken potential future enforcement. 

The future in-law should be encouraged to choose their own attorney, separate from your child’s counsel. If your child’s future spouse is not from a family of means, it is common for you to make a cash gift to help defray the legal costs of this process (using the annual gift exclusion is usually sufficient). It is important to provide the cash with no strings attached and that you do not pay it directly to the attorney.

To have a more effective prenup, it’s important to understand that all family financial information will be disclosed to both your child and your future in-law. To sign a contract agreeing to what is a fair separation of assets in the future, both parties need to know what those assets could potentially be (specifically, assets in your child’s name, trusts/LLCs that are set up for your child, as well as potential inheritance).

The Implications of Choosing Not to Discuss Wealth with Your Children

This disclosure of assets has come as a major shock to some parents who have decided not to share family financial information with their children, often for fear of removing any motivation for the child to work hard and be financially independent. 

Not only is deferring that conversation potentially doing a disservice to your child by not starting them on a path toward financial literacy and being prepared to handle the responsibility of wealth, but it can create much more difficult conversations when your child is ready to get married.  

We don’t believe that in the flurry of wedding planning, during a time that should be joyous, it is the right opportunity to be revealing funded irrevocable trusts for your child’s benefit or the size of a possible future inheritance. 

While prenups have a bad rap in society and the media, they are commonplace for families of wealth and do not have to be the cause of insult or suspicion if treated properly from the outset. Early and open conversations about expectations for your children will go a long way to mitigate negative reactions by all parties. It can also be a time to share family history and values to further the family’s legacy and goals.

let's talk
The path to your financial security starts with a simple, friendly conversation...
Tell us a little bit about yourself so that we can set up a meeting with one of our specialists and get you started.
  • This field is for validation purposes and should be left unchanged.