Pre-Marital Planning (Prenuptial Agreements vs. Irrevocable Trusts)

Pre-Marital Planning

People who are remarrying after a death or divorce, and even, increasingly, couples who are getting married for the first time in their lives are strongly considering prenuptial agreements or other pre-marital planning. When prenuptial agreements became popular a generation ago, most people thought of them as a way for wealthy people to protect themselves in case they were marrying a younger, less wealthy spouse. Today, however, prenuptial agreements and pre-marital planning to protect a person's assets do not have the same connotations. They are often used as a straight-forward financial and estate planning tool, especially by mature couples who are entering into a second marriage. 

The number-one reason that people enter into pre-marital planning when they begin a second marriage is that they have children from their first marriage, and they want to make sure the children will be well provided for in case they get divorced or in case they die before their new spouse. A similar concern is to balance the benefits that will be going to the children from the first marriage while making sure that their new spouse is adequately taken care of in the event one spouse predeceases the other. 

Increasingly, individuals are considering alternatives to prenuptial agreements, which many people view as distasteful and present a hard subject to approach with their potential spouse. The alternative to a prenuptial agreement can be the establishment of an irrevocable trust. In either event, pre-marital planning can save significant heartache and expense in the event of a subsequent divorce or death when disputes can arise regarding the distribution of assets between a married couple. 

With respect to a prenuptial agreement, the question is oftentimes asked whether these agreements work and will something work better. If a prenuptial agreement holds up in court, it still is often challenged on many different fronts causing additional expense and time. The spouse who is on the losing end of a prenuptial agreement usually attempts to find a way to circumvent or nullify the agreement, costing everyone (except the lawyers) in the process. 

Spouses attempt many strategies to circumvent a pre-nuptial agreement and sometimes with success. A spouse can attempt to prove that they have been tricked, coerced or the victim of bad intent when they agreed to the terms of the prenuptial agreement. A spouse can also try to prove that the document was never signed, that their attorney was ineffective or the prenuptial agreement is outrageous (maybe it wasn't when signed, but it is now). Spouses also attempt to prove that the agreement was signed without adequate knowledge of the other spouse's assets. Any of these factors can nullify a prenuptial agreement and, at the very least, pull the other spouse into a prolonged divorce proceeding, which can lead up to a voluntary settlement whereby the terms of payment far exceed those that were originally agreed to in the prenuptial agreement. In summary, a prenuptial agreement can be challenged and nullified. 

These problems with respect to prenuptial agreements have led to many individuals considering irrevocable trusts when dealing with their own pre-marital planning. The question is oftentimes asked as with a prenuptial agreement, whether an irrevocable trust has the same issues? Basically, no. The reason is an irrevocable trust is set up by a future spouse and the other future spouse does not have to even know about it or even sign anything for the trust to be official. 

A future spouse, let's call him Mr. Smith, takes all of his worldly possessions and places them in an irrevocable trust prior to his marriage to Mrs. Johnson. Mr. Smith, as trustee, manages the assets within the trust while they grow in value. These assets are untouchable by Mrs. Johnson in the event of a divorce. They were never part of the marital estate. The assets in the trust are not even counted toward child support if that is an issue between the married couple; although, some courts have found inventive ways to challenge that and even if the court didn't, Mr. Smith may make a request to the trustee to support his children or they may be beneficiaries to the trust with specific goals to each for specific rewards. In any event, the payments to Mr. Smith's children would be on Mr. Smith's own terms, not the court's. 

The irrevocable trust works well because basically you don't own your assets anymore after establishing and transferring the assets to the trust. All of the assets transferred to the trust by a spouse prior to his/her marriage are safe in the trust and probably will continue to grow substantially within the trust. 

Although this article is meant to be only an overview of the commonly used tools in pre-marital planning, please note the following contrasts with respect to a prenuptial agreement and irrevocable trust: 

  • One of the most appealing advantages of an irrevocable trust over a prenuptial agreement is that your fiancé doesn't even have to know and doesn't have to sign anything.
  • When there is an irrevocable trust involved, a judge will only look to see if the assets in the trust are part of the marital assets, and if not, the judge will exclude them.
  • A prenuptial agreement can be challenged using many different strategies. A prenuptial agreement doesn't protect against excessive child support in the event child support is an issue between the married couple. With an irrevocable trust, in most cases, you can predetermine what assets go to your children, when they are given and under what circumstances.
  • You can settle a challenge to a prenuptial agreement to avoid a long-term expensive divorce, but it oftentimes exceeds significantly the amount that you had agreed to pay in the event of a divorce in a prenuptial agreement. Keeping with an irrevocable trust, you hold the power to give whatever you want or nothing at all. Keeping the power in your hands can encourage the other spouse to settle for whatever they can get, thereby speeding up a divorce proceeding and cutting costs associated with what oftentimes is a protracted fight.
  • A prenuptial agreement does not survive death. With an irrevocable trust, your assets will be used how you want them to be used with no restrictions. In other words, your spouse can't acquire and spend your money on their new "friend" unless you allow it. Your children won't be able to spend it away or lose it in a lawsuit. Your trust will continue to support whomever you wanted to support and cut out those that you do not wish to support.