Prenuptials and Trusts-A Tag-Team to Protect Inheritances
- 22 July 2020
- Cindy Vova
- 0 Comments
Often I am asked, particularly by younger newlyweds-to- be “do I need a prenuptial agreement?” The answer is probably yes, but it is definitely yes if one of the spouses stands to inherit family money.
However, a prenuptial agreement is but one of the tools I suggest to protect these “bloodline assets.” A parent, grandparent or other relative who wants to ensure that the family money stays within the family and is protected from dilution in a divorce should not only encourage their offspring to seek the guidance of a family law attorney, but they should also enlist the assistance of an estate planning attorney in advance of the wedding.
Although gifts and inheritances are, generally, one of the few assets that are not subject to equitable distribution (division) in a divorce, and a prenuptial can further be crafted to segregate not only the inherited assets but the growth of those assets as well. There are, however, loopholes (surprise) and exceptions that a prenuptial agreement combined with a third party beneficiary trust, can close.
Third party trusts are often used to safeguard a beneficiary’s share of the trust from potential creditors. However, these trusts are also effective in protecting the income and principal of the trust from the beneficiary’s divorcing spouse. In its simplest terms, for example, the parents or grandparents create a trust for the benefit of their child/grandchild who is about to marry. It is common for the trust to allow the trustee (who is given the power over the trust income and principal-subject to the terms of the trust itself) to use the income and sometimes the principal of the trust for a beneficiary’s “health, education and welfare.” However, if one of the goals of the trust is to avoid a beneficiary’s spouse from claiming any income or principal from the trust, one might consider giving the trustee broader powers with a provision that allows the trustee absolute discretion in distributing the income and assets of the trust. With this “absolute discretion” provision the funds can protected from being used for marital purposes or included as an asset or stream of income if a beneficiary’s marriage ends in divorce. It can also protect the trust assets in the event the beneficiary predeceases a spouse.
A common provision in trust often allow for distributions of portions of the principal (i.e. a percentage) when a beneficiary reaches certain ages (i.e. – a partial distribution at age 25, and another at 35, etc.) until the principal is fully distributed. If this is included in a trust, the trust would no longer fully protect the asset from becoming, at least in part, marital. This is one of the areas where a well- crafted prenuptial agreement tag-teams with the trust to shelter the assets from the beneficiary’s spouse.
So the combination of well thought out pre-planning, and the use of an estate planning and family lawyer can help keep assets in the family and avoid a lot of headaches, heartaches and expenses down the road.
Prenuptials and Trusts keep it in the family
Please feel free to contact our firm to learn more about keeping it all in the family.
-Cindy S. Vova