What is better, a trust or a prenuptial agreement? You can set up an asset protection trust yourself without the intervention of your future spouse. An experienced professional creates the trust. You put your assets into it. Established properly and legally, we have seen the proper trust very effectively protect assets from divorce. With a prenuptial agreement, on the other hand, you must hire an attorney who represents only you. Your future spouse must hire a separate attorney that represents only her or him. The two attorneys hammer out the terms. Your fiancé’s attorney fights for more. Yours fights for less. After battling, the two parties usually come to an agreement. You both sign.
If there is a divorce, opposing counsel can challenge the validity of the prenuptial agreement. A trust, especially an offshore trust where the trustee is outside of the jurisdiction of your local courts, is very difficult to challenge. In fact, we have never seen one of our clients lose money in a divorce case for whom we have established an offshore asset protection trust. We help people establish trusts. However, we have stopped providing prenuptial agreements because of their weaknesses, as you shall see. From our decades of experience, we have seen the trust as the most effective option for most people.
You’re about to marry the love of your life. Talking about trusts and prenuptial agreements right now isn’t exactly romantic – but it’s smart.
Your assets, especially high-value assets, may be at risk down the line. Divorce may be the last thing on your minds, but the American Psychological Association (APA) cites that 40-50% of first marriages in the United States end up in divorce. The rate for subsequent marriages is even higher. Even if you and your partner never divorce, there are also lawsuits and the death of a spouse to consider. Without trusts, prenuptial agreements, or an asset protection plan, you are vulnerable.
But how helpful is a trust or a prenup? How do you know which strategy is right for you? This article will define a trust and a prenuptial agreement, then compare them side by side.
Before we explore the differences between a trust and a prenuptial agreement, we’ll define these terms first. There are two main types of trust: revocable and irrevocable trusts. Both trusts are an important part of estate planning. These trusts manage and protect assets as the trust grantor, or owner, ages. The trusts verbiage determines how assets are managed and distributed to beneficiaries after their death.
Investopedia defines an irrevocable trust as a fiduciary agreement that has terms that cannot be modified, amended, or terminated. Often the grantor or the grantor’s named beneficiaries can request that the trustee make certain changes. Conversely, a revocable trust is a trust where any provisions included in it that the grantor can alter or cancel. This allows for flexibility and income for the grantor, who earns money from the trust during its life. An irrevocable trust, properly structured, has the added benefit of protection from creditors. But a revocable trust allows the grantor to cancel the trust and reclaim the property at any time. Thus the grantor’s creditor can generally do the same. Once a revocable trust grantor dies, however, the trust becomes irrevocable.
A prenuptial agreement is a contract that two people create before entering into marriage. Most often, this agreement focuses on outlining the terms associated with dividing up financial assets and responsibilities at the end of a marriage. Couples decide to get a prenuptial agreement or “prenup” for a variety of reasons. Professional, such as our organization, often create such trusts to protect property or as part of a larger estate plan.
Setting up a trust before marriage can be one of the keys to keeping assets separate from your partner. There are several benefits to putting your high-value assets into a trust, as an article for Forbes explains. When an experience organization, such as ours, drafts the terms and conditions of a trust carefully, it can be a very effective asset protection strategy. It can even protect your assets in the case of legal action against your spouse.
The law usually considers any assets placed in a trust as separate property, as long as you create it before marriage. This is especially important for business owners or if you own real estate. Putting property in a trust gives ownership of the property to the trust instead of you, so a future ex-spouse has no claim on that property. The law does not consider assets you place in a discretionary trust as belonging to the beneficiary when it comes to alimony. A discretionary trust is one you have set up for the benefit of one or more beneficiaries. The laws vary by state, but most states uphold that one cannot enforce a claim for alimony against a trust that one created prior to a marriage.
Even if you remain with your partner, a trust is a great asset protection tool. Lawsuits from your business or an auto accident could create huge financial strain if you aren’t prepared. The best way to protect yourself is to make yourself the smallest financial target possible. Trusts take away the ownership of assets, and the less that you personally own, the less there is for a lawsuit to take from you. With the right kind of asset protection trust, you can have access to the use of the assets, as needed, within the protective guidelines. Therefore, a trust can prevent a lot of financial problems, no matter what comes your way.
People often associate a prenuptial agreement to protect assets with celebrities and the extremely wealthy, but they have many more uses. People of all ages and many different situations can benefit from a prenup. Arag explains that if you have a significant premarital estate, it is a good idea to make sure that your spouse will only get as much of it as you wish in the event of divorce or death. This is especially true if you want to protect the inheritance of your children from a previous relationship. A prenup can also protect income and assets acquired during your marriage. Without setting terms at the beginning of a marriage, you may end up paying unexpected support or alimony to your spouse.
What you put into a prenuptial agreement is dependent on what’s important to you. The requirements by state vary on a prenup, but many of them require that each party have their own attorney present. Doing this helps prevent a court from declaring the prenuptial agreement invalid. A prenuptial agreement is a binding contract, but you are able to amend it later in the form of a postnuptial agreement if your circumstances change.
Prenuptial agreements are also a good way to protect some of your intangible assets. This includes, but but is not necessarily limited to, intellectual property and business ventures.
In our years of experience, the answer for most people is an asset protection trust. To be clear, this is not just any trust. It is a trust you structure specifically with asset protection in mind. Both a trust and a prenuptial agreement have their benefits, but which one is right for you? The answer is that it depends on your situation. If you have significant assets to protect, from decades in the asset protection field, the trust is most likely the best choice for you.
One of the key differences between these types of asset protection strategies is how many parties they involve. Using a trust to protect assets in divorce is something that you do alone, while a prenuptial agreement requires the agreement and signature of both parties in the marriage. To ensure your trust holds up in a divorce, you should create it before the wedding day, Zacks explains. The courts could see trusts you create only in your name after marriage as an effort to hide money. Though, even if they do make this determination, it can still protect your assets. It’s also important to note that if you create a prenuptial agreement, it needs to be done right. An agreement that isn’t written correctly can leave room for an attorney to find loopholes. Anything not in writing, clearly, can be contested in divorce court.
The bottom line is this. A prenuptial agreement makes you plan your divorce before you get married. If there is a great way to throw water on the fire of a romance, this is it. If there is one way to get your future spouse’s mind to focus on marriage failure before you tie the knot, this is it. He or she will have to hire a separate attorney. Their attorney will go over all of the legalities of divorce and will negotiate to get as much of your assets as possible should the marriage fail. After divorce, opposing council can poke holes in the validity of the agreement, push for more and invoke any of a series of theories of legal liability.
A proper trust, on the other hand, protects assets regardless of the validity of a prenuptial agreement. Kick it up a notch and set up the asset protection trust and trust bank account offshore. When you do this, the offshore trust takes the assets out of the jurisdiction of your local courts. For decades we have established offshore trusts and have not seen one client lose money through a judgment or divorce proceeding.
No matter which strategy you use, it’s a good idea to have an open and honest conversation with your partner about your finances and assets before marriage. Once you’ve created a plan, you should also keep their stipulations in mind. Some of your actions after the marriage begins may void the conditions in the prenuptial agreement or trust. For example, adding joint assets to your personal trust could lead the court to deem those assets as marital property.
If you’re already married, is it too late to protect yourself in a future divorce? The answer is no. There are still many ways of protecting assets after marriage, as an article for NerdWallet explains. The most important thing to focus on is keeping everything you want separate truly separate. For any property that’s only in your name, you should create or keep your separate bank account to pay for any expenses. Using joint funds to pay on that property could lead to it being considered joint property down the road. Any joint funds used to pay for real estate or mortgages often turns that property into marital property.
Keep track of all of your pre-marriage documentation. Account statements from banks, brokerage, or retirement accounts from the previous month can help establish their value. Keep any copies of wills or trusts that show an inheritance along with account statements. If you had your business or other hard-to-value property appraised before marriage, those documents can be important to showing their value. Continue to keep good records for all separate accounts.
Another option is a “postnup” – or postnuptial agreement. This agreement is very similar to a prenup, except that it is created after a couple is already married. This contract is especially helpful if a couple wants to divide things up differently than the laws of their state would otherwise dictate. This written agreement is a more secure way to lay out who owes what than any verbal promises or understandings between a couple.
The postnuptial agreement has the same, or more, weaknesses as the prenup. If the marriage is already on shaky ground, forget it. The attorney you must hire for your spouse to put together such an agreement will likely eat you alive. You can set up an asset protection trust, on the other hand, without involvement from your spouse. Naturally, co-owned property such as real estate, will require mutual agreement.
Whether you choose a trust, a prenuptial agreement, or something else, make sure you’re doing it right. Contact our experienced financial consultants today. We’ll help you better understand your options and ensure that you have the right amount of coverage. Planning for a wedding is exciting and time-consuming, but don’t use it as an excuse to put off protecting yourself and your assets. By doing the financial work up front, you’ll be prepared for whatever life has in store regardless of what happens to your relationship.
