Asset Protection for a Later Marriage – Trusts and Prenups

Using Trusts and Prenups to Protect Your Assets in Connection with a Second Marriage or Later-in-Life Marriage

Anytime people enter into a second (or subsequent) marriage, or any late-in-life marriage, we strongly recommend having your assets in a trust prior to marriage to protect them from going to your future spouse if you don’t want them to AND having a prenup for added protection, to protection non-trust assets from going to your future spouse if you don’t want them to.

When getting married, you probably think only of a prenup as having the ability to protect your financial future. However, a trust is actually a simpler and much less stressful way to protect your assets in connection with an upcoming marriage because you don’t need to discuss it with your future spouse as you do with a prenup. And of course a trust is important for you in any event for estate planning purposes,  whether that’s to protect your assets from probate by using a revocable living trust or to protect your assets from probate PLUS lawsuits PLUS nursing home expenses by using our proprietary Living Trust Plus® irrevocable asset protection trust. Using a trust (to protect your assets owned by the trust) AND a prenuptial agreement (to protect any assets not owned by your trust) to plan for your financial future prior to marriage offers the best protection.

What is a Trust?

A trust is a legal arrangement in which you hold the ownership of certain property for the benefit of one or more beneficiaries, sometimes yourself or sometimes other people. The assets in your trust pass directly to your named trust beneficiaries upon your death.

What Assets Can Go into Your Trust?

Most types of assets may be transferred into your trust, including real estate, regular brokerage accounts, stocks, bonds, savings accounts,  checking accounts, life insurance policies, non-qualified annuities, and more.

What Assets Can’t Go into Your Trust?

Some assets, such as 401(k)s, IRAs, qualified annuities, 403(b) plans and other tax-deferred annuities, and any other pre-tax retirement accounts, can NOT be transferred into a trust. Sometimes shares of stock or membership interests in a small business (including all professional service businesses) are restricted and can’t go into a trust.

Types of Trusts

There are many types of trusts, but we will focus on the main types that we offer — revocable living trusts and our proprietary Living Trust Plus® irrevocable asset protection trust. As the names suggest, a revocable living trust can be modified as often as you wish and in any way you wish.  Our Living Trust Plus asset protection trust — although irrevocable — can also generally be modified by you in significant ways, as irrevocable” does not mean unchangeable. Typically, as a creator of the Living Trust Plus, you retain the right to act as a trustee, change the trustee(s), and change the beneficiaries. That way, you can manage your assets (and derive income from them during your lifetime if desired) while also deciding exactly who these assets pass to upon your death, without worrying that your spouse will have a claim against these assets in the event of your death or in the event of a divorce.

Why a Trust Protects Your Assets in Connection with an Upcoming Marriage

It’s very simple . . . after you create a trust, you transfer ownership of your home and other assets to the trust. This means you don’t technically own any of the assets you put into a trust. If you don’t own something, it can’t be divided and distributed upon divorce (in most cases). This is why trusts are such a great tool to protect your assets in connection with a later-in-life marriage, in addition to being the best estate planning tool for most people!

New Marriage Needs New New Trust and Other Estate Planning Documents

Even if you have already completed an estate plan of your own, a new marriage typically calls for changes to your plan, including a new Trust, a new Will, a new Power of Attorney, and a new Advance Medical Directive.

Leaving Something to Your New Spouse

If you are like most people entering into a second or subsequent marriage, you want to leave something for your soon-to-be spouse if you die before your spouse. Frequently this is a percentage of your assets and the right for your spouse to continue living in the marital home if you die first when the marital home is one that you owned prior to the marriage.

Controlling How Much Goes to Your New Spouse

Most people entering into a second or subsequent marriage also want to protect some or all of their existing assets for their existing children or other relatives. Without a trust, and without a prenup, your new spouse will be entitled to a percentage of your assets in the event of death or divorce, including a percentage of the assets you owned prior to the new marriage.

Problems with Prenups

Many people believe that a prenup is the best way to handle what happens to your assets upon death or divorce, but there are many potential problems with prenups:

  1. The first problem with prenups is that you must talk about it with your soon-to-be spouse before you are married; this is a difficult discussion for many engaged couples because many people don’t like to contemplate death, and very few people are practical enough to enter into a loving marriage while contemplating divorce.
  2. The second problem with prenups is that you and your betrothed must either go to separate attorneys or go to an attorney/mediator who is willing to have you go through mediation to draft a prenup; spending time and money on something that one spouse probably doesn’t want or doesn’t think is needed.
  3. The third problem with prenups is that there are many mistakes you can make that can lead to the prenup being invalidated by a court of law, including:
    • one party feeling pressured to sign (undue influence);
    • invalid provisions;
    • lack of full disclosure of all assets and income and liabilities;
    • and lack of the opportunity to have independent legal representation.

Instead of asking a future spouse to sign a prenup and worry about all of the above problems, you could theoretically put all of your assets in a trust and thereby put them out of their reach when the marriage ends, whether in death or divorce. This is theoretical because many people have assets that simply can’t go into a trust, such as 401(k)s, IRAs, qualified annuities, 403(b) plans, restricted shares of stock, or restricted membership interests in a small business or professional service business. If you have assets such as these that can’t go into a trust, this is where a prenup is essential.

Prenups for “When Death Does You Part”

Prenups are known by many other names, including:  prenuptial agreement / prenuptial contract; pre-nuptial agreement / pre-nuptial contract; premarital agreement / premarital contract; pre-marital agreement / pre-marital contract; and even the old-fashioned ante-nuptial agreement / ante-nuptial contract.

Many people think of a prenup as a contract dealing with what happens to assets in the event of a divorce. However, prenups are NOT just for divorce; prenups deal with what happens when the marriage ends, whether through divorce or death. In fact, the most important reason for a prenup is to determine how your estate will be distributed if one spouse dies during the marriage (you know, that whole “until death does us part” thing in your vows), especially if your marriage becomes a long-term marriage, which of course is the intended goal of all marriages. Given that almost half of all marriages in the U.S. end in divorce, this means that the other half of all marriage end in death, NOT in divorce.

Keep in mind we strongly recommend a trust if you’re getting remarried or getting married later in life, especially for older individuals where nursing home expenses may be more likely to come into play, as Medicaid does not recognize prenups, and prenups have all the potential problems mentioned above.

Using Mediation to Create a Prenup

If you have assets that can’t go into a trust, and/or if you want to address who is entitled to post-marriage income and who is entitled to assets acquired during the marriage, you need a prenup in addition to a trust. Although both parties to a new marriage have the right to hire separate attorneys in connection with the creation of a premarital agreement, many couples prefer to go through this process together, via mediation, in order to minimize the expense and avoid the adversarial nature of being represented by two separate attorneys. The advantage of having two separate attorneys is that both parties both receive completely independent, private, and confidential advice. By going through mediation in an effort to develop a written agreement and estate plan, you will be giving up these advantages. If you choose mediation, the purpose of the mediation will be to attempt to arrive, in a cooperative and informal manner, at a mutually acceptable agreement that resolves all financial and legal issues that may arise in connection with your upcoming marriage, your existing marriage, or your co-ownership of property.

Evan Farr is a trained mediator and is available to mediate premarital contracts with couples planning to enter into a second or subsequent marriage, with the goal of preparing the agreement and then doing the subsequent estate planning (including the appropriate trusts) for the couple. To get started, please see our Mediation Agreement and fill out our Lifetime Planning Intake Form.

For further reading:

Critter Corner: Are a Prenuptial Agreement and a Postnuptial Agreement Essentially the Same Thing?

Getting Remarried: Avoiding Estate Planning Mistakes

Premarital Issues in Second Marriages

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