Few moments in life can compare to the moment you look at the person you love and say, “I do.” A lifelong commitment, an ultimate expression of love and devotion—for many people, it is the moment in life when they are happiest and most hopeful about the future.
All of us enter marriage with powerful faith in our love for our spouse; we believe that divorce just isn’t going to happen to us. And yet half of us still get divorced, somehow. To assume you are “immune” to divorce may feel romantic (and to be clear – it may be true!), but it is also unwise. For families of means, who have substantial estates to safeguard, divorces can be incredibly costly—whether the wealth was created by the couple themselves or inherited from a parent or family member.
The “prenuptial planning” process is made more difficult by the fact that—well, it’s likely that you had a visceral reaction to the word “prenuptial” just now. Obviously, none of us relish the prospect of developing a financial strategy to protect ourselves from a loved one, but it remains an extremely important step in many prudent multigenerational plans. Here, we’ll offer a few introductory thoughts on this awkward, unromantic and very important topic.
Prenuptial Agreements
- Defining Property: A well-written prenuptial agreement defines what property is deemed each spouse’s “separate property” (i.e., property they held when entering the marriage) and may also identify gifts, inheritances or property from family trusts as separate property that cannot be subject to division in a divorce.
- Setting Terms of Spousal Support: A prenuptial agreement may waive alimony entirely (i.e., establish that a spouse is not entitled to any support in the event of a divorce) or may set forth the terms of that support based on the length of the marriage.
- Addressing Debt: Typically, prenuptial agreements make each spouse individually liable for debt (if any) prior to the marriage, and then outline who is liable for any joint marital debts.
- Updating the Estate Plan: The prenuptial agreement also addresses each spouse’s disposition of assets on death and sets the “floor” of what each spouse must leave the other. For example, the estate planning portion of the agreement may include a requirement that spouses buy life insurance to protect the other spouse in the event of an untimely death.
- Carving out Family Assets: Prenuptial agreements often aim to keep family assets out of the marriage. Meaning, if a spouse is a beneficiary of a family trust, his/her spouse will not be entitled to distributions from that trust.
- Determining Jurisdiction: Prenuptial agreements address which state law will govern in the event of the couple’s divorce. In an increasingly global society, prenuptial agreements help eliminate a great deal of uncertainty with respect to the applicable law at the time of divorce.
Clarity and shared understanding are the two key principles that we seek to resolve when helping clients create a prenuptial agreement—and this is especially important in the case of a child getting married when their parents are seeking to protect that child’s inheritance. If parents have the ability to leave their child a substantial legacy, it is understandable that they want both the tangible and intangible value of that legacy to stay with their child through a divorce or other adverse life events. Of course, these conversations have the potential to become emotionally fraught, but this is often the result of a lack of clarity. If conducted in a reasonable manner where everyone feels like they are being treated fairly, they can lead to reduced financial stress overall.
As with many financial strategies, one of our greatest allies in prenuptial planning is time: the process generally proceeds much more smoothly when the groundwork has been laid with repeated discussions about the topic as a family’s younger generation grows into adulthood. This is, of course, beneficial in providing attorneys and other advisors with ample time to develop and establish trust vehicles and the like, but perhaps more importantly, it sets the stage for a prenup as a simple matter of precedent and not an indictment of any potential bride or groom. (When such topics are broached for the first time AFTER someone is in love, it can be exceedingly difficult for that person to not view the topic as a personal attack.)
Additional Thoughts for the Parents
Beyond any prenuptial agreements, there are additional steps that parents can take to protect a child’s inheritance from a future divorce. Reviewing estate plans thoroughly can ensure that they are drafted in a manner that contemplates a child’s marriage and potential divorce; such topics are often left unaddressed if estate plans were drafted when children were hypothetical or very young.
In most states, trusts established by third parties (i.e., a trust established by a parent for a child) are less likely to be subject to division in a divorce, but parents can take additional protective steps—for example, such trusts can avoid mandatory distributions when the child hits a specific age, and/or prohibit withdrawals by the child’s spouse. We also advise that trusts set up for children should be wholly discretionary and should have an independent trustee; this can help mitigate the potential for personal conflicts of interest entering into decisions about the trust.
Non-trust entities, such as an LLC, can be another effective vehicle for holding and protecting family assets. These entities can be sheltered in a variety of ways from a child’s divorce, and typically prohibit non-family members from owning any interest in the entity. Family entities are a preferred planning technique for many cross-border families, as they can eliminate the complexity of estate and trust planning across multiple jurisdictions with different legal frameworks.
We have barely scratched the surface of this complex and delicate topic; it is off-putting, but the conversations about it should never be put off. Plan early, plan wisely, and prenuptial planning can help contribute to a happy marriage as well as a better outcome should that marriage come to an end. For a more comprehensive conversation, don’t hesitate to contact us
The Family Mission Statement and Strategic Plan
We believe a family mission statement—and a strategic plan to implement that mission—allows a family to filter out the “background noise” of day-to-day challenges and focus on long-term goals and objectives. Developing these documents provides a process for reaching agreement on the family’s core values and creates a shared vision among all family members.
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