Julia Rodgers, CEO of HelloPrenup, champions collaborative prenups and promotes financial communication in marriage.
For many folks these days, parental financial support doesn’t end upon adulthood. In fact, many parents of adult children continue to provide financial help well into adulthood—whether it’s paying for a wedding, contributing to a down payment on a house, helping with grandchildren’s schooling or even offering a regular allowance to cover living expenses. These financial contributions are often made with love and the intention to ease the burdens that come with life’s major milestones.
Combine that with what is being called the “Great Wealth Transfer,” a historic shift where trillions of dollars are being passed down from Baby Boomers to Gen-Z, Millennials and Gen-X. Parents are playing an active role in their children’s financial lives through adulthood.
As an attorney representing a client who receives financial support from their parents, it’s crucial to employ specific drafting techniques in the prenuptial agreement to protect those assets. This involves thoroughly identifying all parental gifts and loans in the financial schedule and clearly establishing them, along with any appreciation in their value and any spousal contributions, as the client’s separate property. A well-drafted prenup should comprehensively address all aspects of these parental contributions to ensure they remain protected.
How A Prenup Protects Financial Support From Parents
Simply put, any financial gifts and contributions that are not protected with a prenup could become part of the marital estate and be subject to division during a divorce!
A prenup can prevent parental gifts from becoming marital property and being divisible in a divorce. What many people don’t understand is that, without a prenup, the default law in their state may categorize parental gifts as joint property and divide them in a divorce.
For example, in Renck v. Renck, the court explained that an inherited asset from one party’s parent, which is normally separate property, was commingled and therefore considered marital property and divisible in a divorce. This is the default divorce law in many states, and it is not something many people who receive large sums of money, like hundreds of thousands of dollars, from their parents fully understand. In fact, I’ve found that most of those people receiving very generous gifts from their parents believe that it is their money because it is gifted by their parents. Wrong!
A prenup ensures that any financial help from parents is treated as separate property, protecting it from being divided in a divorce. It allows people to clearly define their intentions with their parents’ money and safeguard the wealth they are receiving. For example, let’s say a parent gives their married child $200,000 for a down payment on their first family home. Without a prenup, that $200,000 would typically be considered marital or community property in many states, meaning it could be split between the divorcing spouses.
However, with a prenup, that contribution can be designated as separate property, ensuring it stays with the child who received it. Alternatively, the money can be set up as a loan, to be repaid to the parent if the house is sold or in the event of a divorce. Without a prenup, contributions like wedding funds, down payments or even regular allowances could be at risk of being treated as marital or community property.
Drafting The Parental Assets Into The Prenup
So, how can you help clients protect this wealth, and what should you include in a prenup to do so?
First, make sure the prenup includes a clause that clearly states all financial gifts are considered separate property. This can include gifts and inheritances given during the marriage, and encourage clients to get very specific about the dollar amounts involved.
A prenup can be as detailed as the clients want, so it’s important to think through each potential scenario and map it out. Ask your client about appreciation for parental gifts. What happens if the parental gift grows in value—should that appreciation be separate, too? What about if the other spouse contributes to their gift (think: renovations on a gifted home)? These are important considerations for the prenup.
In addition, if that parental money is meant to be separate property, and clients want it clearly indicated as such in the prenup, then make sure they know to keep it in a separate account once received. If they move that money to a joint account, it will likely be considered commingled, and even with a prenup, it could lose its separate property status. The key takeaway here is simple: To keep separate property actually separate, it must stay in a separate account.
Starting The Conversation
Talking to your client about the “Bank of Mom and Dad” is crucial because some clients may not even realize that they have received or are currently receiving help in some way, shape or form.
For example, if a client is living in their parents’ paid-off condo in Manhattan, which is usually unoccupied, they may not see it as financial help, but in reality, it is. If a couple moves into this home that is owned by one person’s parents, and then it becomes the primary marital residence, and the other spouse contributes monetary and sweat equity into improving the home or gets their name put on the deed, it could potentially be categorized as marital property in a divorce.
This is why extracting financial information from your clients is critical. Don’t just take every piece of financial information at face value—really make sure you dig into the ownership details and structure of each asset to ensure there isn’t any parental element to the obligation or asset.
The second topic to broach is how they want to treat these parental gifts or loans. Are they meant to be gifts to both spouses and split up in a divorce? Or are they meant to be repaid to the parents? Or maybe they’re a sole gift to the child from the parents.
Whatever the case may be, make sure you understand exactly how the clients want the assets to be treated in the prenup.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.
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