Are you ready for the big day?
As you look forward to life with your new spouse, the last thing on your mind is the specter of divorce. After all, you and your partner love each other — right?
Maybe so, but when filling out current and future assets on the prenup asset form — from current real estate holdings, valuable personal property and investments to potential inheritances and other windfalls — can’t be protected by love alone.
If you’re committed to protecting your legacy in the event that your upcoming marriage ends in divorce, pre-wedding planning is crucial. Many believe that using a prenup to protect wealth is the most effective planning tool.
Prenuptial agreements became common in the 1970s and have gained in popularity ever since. However, a “prenup” is far from the only form of pre-divorce asset protection.
In fact, prenups have been — and will continue to be — broken and/or circumvented with relative ease. Anyone who tells you that a prenup is a rock-solid, indisputable form of protection is either misinformed or lying.
Beyond their legal defects, which we’ll get to in a moment, prenup to protect wealth have another serious drawbacks: They require your future spouse’s consent. This inevitably leads to an awkward, potentially painful pre-wedding conversation that may challenge even the strongest of relationships.
You have a much stronger, less awkward pre-wedding planning option at your disposal: an irrevocable trust. Experts know that irrevocable trusts effectively separate personal assets from marital assets without the need for that awkward conversation.
Here are the top 5 things you need to know about this powerful form of asset protection:
1. Avoid an Awkward Talk Before the Wedding
Ted is engaged, and just four months remain until the big day. Ted and Mary, his fiance, both want the day to be perfect. Mary and her family have spent months planning and preparing for the wedding.
Ted, though, has a big secret: He’s set to inherit sizable amounts of money and assets. What’s more, he has accumulated substantial savings of his own. He loves Mary, but he’s aware of statistics that show that even the strongest marriages can end in divorce. He knows that he needs to protect his current and future assets.
Ted decides to ask Mary for a prenup to protect hi wealth, summoning more courage than it took to pop the question.
“We need to talk, Mary,” he says, going on to explain his concerns.
Smiling like a fox who’s just cornered a defenseless hen, Mary strikes back. “Seriously, Ted?” she asks venomously. “I thought you were different, but you’re already planning for our divorce!”
Ted’s heart sinks as Mary launches into an angry, resentful tirade and storms off. When her family hears about the conversation, they rally around her — and against Ted. Even if the wedding goes forward as planned, Ted’s apparent mistrust of his future wife’s intentions have planted a seed of distrust and resentment that Mary will never forget.
In other words, Ted has already lost this battle and potentially destroyed a beautiful marriage.
It didn’t have to be this way. If he had opted for an irrevocable trust, Ted could have secured even greater asset protection without ever telling Mary what he’d done — and creating a firestorm of hurt feelings and broken trust in the process.
How is a prenuptial agreement inferior to an irrevocable trust? Let us count the ways.
The biggest drawback is that parties to a prenup must specify all of the assets they currently own as well as the property they want to keep as separate during the marriage and thus retain ownership of in the event of a divorce. Practically speaking, this means that individual spouses may never use their separate personal accounts for marital expenses.
Trust us: Rigorously compartmentalizing your personal and marital assets gets old fast.
A prenup must also be agreed upon and signed by both parties. It’s very difficult to discuss the subject of maintaining ownership of separate property with your future spouse — just ask Ted. 99% of soon-to-be-married couples would prefer to avoid talking about divorce while planning their marriage.
They can — without sacrificing asset protection. The secret: an irrevocable trust.
This document looks just like a prenup, but it offers one key advantage: It doesn’t require the involvement of your fiance.
When you place assets in an irrevocable trust, they’re no longer held in your name. They never become part of the marital estate, so they’re never at risk in the event of a divorce. Don’t worry: You can still use, sell, or refinance assets and cash placed in an irrevocable trust.
2. Asset Protection from Legal Challenges in a Divorce
Despite prenup agreements’ popularity to protect wealth, even partially informed lawyers can successfully challenge them in a divorce proceeding. By contrast, it’s virtually impossible to challenge the validity of a properly drafted, implemented and funded irrevocable trust. There is nothing stronger.
History is littered with divorce cases between spouses who successfully challenged the validity of their prenup to protect wealth despite initially agreeing to the documents’ terms. You can find examples of such cases in all 50 states. We aren’t just talking about regular Joe’s here — most of these cases involved millionaires who used very expensive attorneys to guide them. In the end, no amount of money or effort could save their prenuptial agreements.
Real-life specific examples of cases include:
- Galetta v. Galetta, (NY 2013) A notable law firm in NY created a prenup with defective wording of key portions of the document that held fatal to its validity. The NY Court of Appeals early in 2013 upheld a challenge to the prenup on the grounds that the acknowledgement section did not contain language confirming that the notary properly identified the parties signing the document. In its decision in Galetta v. Galetta, the court found the document to be invalid even though the parties did not challenge the authenticity of the signatures.
- Happold v. Happold, (NJ Nov. 21, 2011) The attorney representing both parties invalidated their prenuptial agreement after 20 years of marriage. During their divorce proceeding, the wife challenged the prenuptial agreement on the ground that she was not properly represented by an attorney when she signed it. In Happold v. Happold, a New Jersey court ruled in favor of the wife where the husband admitted retaining the attorney that represented both of the parties.
- Weymouth v. Weymouth, (Florida 2012) In this case, the prenup failed to identify any potential appreciation of separate real property as a separate asset. By default, the appreciation was deemed to be marital property. The court ruled in favor of a spouse who claimed equitable distribution of the appreciation in value of the supposedly “separate” home.
- Jurek v. Couch-Jurek, (Texas 2009) Contrary to this couple’s prenup, the wife’s rental properties were determined to be community property. A Texas court simply ignored the terms of a prenup that identified the properties as the separate property of the wife.
Don’t take our word for it. Read here a list of 25 additional case summaries with links to full cases that show how prenups and irrevocable trusts performed to protect wealth in live divorce situations all across the country.
3. Protect Assets from Prying Eyes
When you create and fund an irrevocable trust, you do so in private, and you never have to disclose what you own to your spouse. By contrast, many prenuptial agreements have been invalidated because of a failure to disclose every single asset — even in the event of an honest mistake.
In Estate of Frank P. Dito, (CA Mar. 28, 2008), the Court of Appeals of California ruled that a prenuptial agreement was unconscionable because the husband did not adequately disclose the full extent of his assets. This decision was unusual because the challenge to the prenuptial agreement happened during an estate proceeding that followed the husband’s death. Despite strong evidence that the marriage was a sham to allow the foreign-born wife to remain in the United States, the court still ruled in her favor. Did she deserve to realize untold profit from an aging magnate’s honest mistake?
4. Estate Planning Tool
An irrevocable trust ensures that this won’t happen to you — regardless of the basis for your marriage. This arrangement offers a vehicle for controlling and protecting your hard-earned assets up to and after your death. Since a prenuptial agreement doesn’t survive death, it gives you no say in the ultimate distribution of your assets.
What does this mean? For starters, your spouse will probably get all of your assets to distribute as he or she pleases. If he or she wants to cut out your children completely, well, that’s perfectly legal. Indeed, surviving spouses regularly shortchange children from their deceased spouses’ prior marriages. In life or in death, an irrevocable trust ensures that your assets are distributed exactly as you choose.
5. Creditor, Medicaid, Probate, and Estate Tax Issue Planning
A properly drafted, implemented and funded irrevocable trust has numerous additional benefits. It boosts your financial and personal privacy, helps you avoid lawsuits, eliminates nursing-home costs and dramatically reduces the delays and expenses associated with probate. By transferring your assets to an irrevocable trust, you also reduce the size of the asset pool that the government uses to calculate your Medicaid eligibility.
Since it’s designed for only one thing — splitting assets in the event of a divorce, not death — a prenup achieves none of these goals.
Your assets are your legacy, and no relationship — however pure or good — is more important than that. Please use the resources we’ve provided to weigh the substantial benefits of an irrevocable trust. If you’re serious about protecting what’s rightfully yours, we’re confident that you’ll opt for a powerful trust over an easily overturned prenup.
We’d be happy to answer any and all questions on this most important matter, so don’t hesitate to call us at your convenience.