Prenuptial Agreement

A Prenuptial Agreement (often called a 'prenup') is a private, legal contract signed by a couple before they marry. While it may not be the most romantic topic for a dinner date, for an investor, it's one of the most powerful Risk Management tools available for your personal life. Think of it as an insurance policy for your assets. The agreement sets out clear rules for how Assets and Liabilities will be divided if the marriage ends in divorce or one partner passes away. For a value investor dedicated to the long-term Compounding of their capital, a prenup is essential. It ensures that a lifetime of careful investment decisions, a family business, or a meticulously built portfolio isn't dismantled by a legal dispute, allowing you to protect the assets you bring into the marriage and the future growth they generate.

A prenup isn't about planning to fail; it's about planning to protect what you've worked hard to build. For an investor, the stakes are particularly high.

Without a prenup, a divorce court could order you to split your investment portfolio right down the middle. This might force you to sell winning stocks at an inopportune time, triggering massive Capital Gains taxes or liquidating assets at a market bottom. This forced selling is the enemy of the long-term, patient investor. A prenup allows you to designate your pre-marital portfolio as Separate Property, shielding it from such a division and preserving your investment strategy.

If you own a stake in a family business, a divorce can be catastrophic. A court could award shares to your former spouse, suddenly making them a co-owner with voting rights. This can introduce a new Shareholder who may not share the company's vision or values, leading to conflict and paralysis. A well-drafted prenup can ensure your business interests remain yours alone, protecting the company from courtroom interference.

Value investing is a long game. You buy assets today expecting them to be worth significantly more in the future. A critical function of a prenup is to define what happens to that future growth. The agreement can specify that the appreciation of your pre-marital assets remains your separate property, protecting the rewards of your investment acumen and patience.

When discussing a prenup with your partner and legal counsel, focus on these key financial areas.

This is the core of the agreement. The goal is to draw a bright line between “yours/mine” and “ours.”

• Separate Property: This typically includes everything you owned before the marriage, as well as any inheritances or gifts received by you individually during the marriage. For an investor, this means your brokerage accounts, real estate, or business interests.
• Marital Property: This is the wealth you create and acquire together after you are married. It's often called the 'marital pot'. A prenup clarifies exactly what goes into this pot and what stays out. The legal term for this is Marital Property.

This is a detail that trips many people up. A solid prenup must explicitly address the income and growth generated by separate assets during the marriage.

1. Do the Dividends from your pre-marital stock portfolio become marital property, or do they remain separate?
2. If your pre-marital rental property generates income, is that money yours or ours?
3. If your business triples in value, is that increase in value shared?

Answering these questions in the prenup prevents ambiguity and future conflict.

For business owners, a prenup can save a fortune in legal fees. Instead of battling in court over how much the business is worth, the agreement can pre-determine the Business Valuation methodology. You can specify that a particular formula be used or a specific, neutral appraiser be hired, turning a potentially explosive issue into a simple calculation.

At its heart, a prenuptial agreement aligns perfectly with the value investing mindset. A value investor obsessively analyzes downside risk and seeks a 'margin of safety' before buying a stock. A prenup is the ultimate 'margin of safety' for your personal balance sheet. It identifies a significant, non-market financial risk—divorce—and neutralizes its potential to destroy your capital. It’s not an act of cynicism; it’s an act of profound financial foresight. By encouraging an open and honest conversation about money before marriage, a prenup builds a foundation of transparency. This clarity allows you and your partner to build a future together with clear expectations, freeing you to focus on your shared goals without ambiguity.