Premarital agreements can be useful tools for couples with a high-net worth. The agreements sometimes evoke a negative response, creating the perception that they only exist to protect the assets of one spouse from being taken by the other. Meanwhile, the other half of a financial equation—debt—is often never considered.
How debt is divided in a divorce
Debt is considered property, which must be divided between spouses during the divorce process. Since Pennsylvania is an equitable distribution state, both assets and liabilities are classified as either separate property or marital property. Separate property is anything owned entirely by one spouse and will remain with that spouse following the divorce.
Marital property, including marital debt, is owned by both spouses and subject to equitable distribution. Sometimes this means splitting marital debt in half, but not always. The court’s primary goal is to divide all property fairly, rather than equally.
How can a premarital agreement help?
Imagine a situation where two spouses own their own businesses, one of which is established and stable while the other is more of a risky startup. Both are sole proprietorships, which means both spouses will be personally responsible for all business debts. Is it wise to risk the stability of one business if the startup accumulates too much debt and fails?
The point is that a premarital agreement may be able to solve the issue before it becomes a problem, by agreeing in advance that the startup will remain the separate property of the spouse who owns it. This could provide some level of protection to the other spouse and to their own business.
The assets and liabilities of high-net-worth couples tend to be varied, sometimes requiring creative solutions to potential problems before they exist. A premarital agreement may provide that solution.
