Prenup or Trust: How to Protect Your Assets in the Course of Marriage

Congratulations on your marriage! It may sound unromantic to talk about asset division at this point, but there will be many situations where an asset protection plan is appropriate and smart: for example, when you are an entrepreneur, you have children from a previous marriage, or your future spouse has a great amount of debts. This article will help you weigh your options and get prepared.

Marital Property is Subject to Division

Why do we even need to talk about the options you have with your assets in the course of marriage? Because getting married means that under the law, your spouse can have a share of some of your property. Marital property is subject to division when divorce happens, while separate property is not. Generally, marital property includes most assets and debts a couple acquired during marriage, while separate property includes property an individual acquires before entering the marriage. There are several exceptions to this general rule; for example, gifts and inheritances received by one spouse are normally treated as separate assets no matter if they are received before or during the marriage.

The laws regarding marital property are complicated and vary by state. What makes it even more confusing is that separate assets may often get “commingled” with marital assets, for example, by being placed in a joint bank account or by investing in joint assets. Therefore, it is necessary to take some precautions if you would like to protect some of your property from your soon-to-be husband/wife in the future.

Prenups and Trusts are Two Options to Keep Property Out of Division

The two common strategies you can use to avoid an unexpected property distribution are a prenuptial agreement, commonly known as a prenup, and a trust.

Prenup

A prenuptial agreement, as its name indicates, is a contract you and your spouse enter into before getting legally married. In this contract, you and your spouse come up with a detailed plan about what happens to all the finances and assets during your marriage, and divorce. Couples need to provide a full disclosure of every asset — a conversation which may get very awkward. Also, just like all other types of contracts, the prenuptial agreement is not automatically binding. In the event of a divorce, the validity of a prenup will sometimes be contested by parties. When such a dispute occurs, it is up to the court to look into the agreement and give effect to the terms. A prenup is valid only if such an agreement would produce a fair result, meet the basic needs of the parties, and was not made in unfair circumstances as a result of mistakes, misrepresentation, duress or undue influence.

Trust

On the other hand, you can choose to establish a trust for your assets. However, whether the trust you establish will protect your property from a divorce is another complicated topic. A lot of factors may make a huge difference: when you set up the trust, what structure you are adopting for the trust (e.g. how much control you have over the trust, who is the beneficiary/trustee), how you fund the trust (with or without marital assets), and what type of trust you are using. For example, if the trust is established before marriage, then it’s typically considered separate property as long as the funds are not combined with marital funds at any point. Funds in an irrevocable trust may be protected, while funds in a revocable trust may be treated the same as any other asset if you have full control over the distribution of the trust; and if a trust is funded with marital assets, it would be considered marital property regardless of the named beneficiary.

One preferable type of trust is a Domestic (or Offshore if you have any assets abroad) Assets Protection Trust (DAPT). DAPT is an irrevocable and self-settled trust. Unlike other irrevocable trusts, DAPT permits you, as the settlor, to fund the trust with your own assets, and at the same time, remain the beneficiary of the trust. A properly structured DAPT shields those trust assets from the claims of most future creditors, including your spouse in future divorce. However, not every state offers DAPTs and some states treat it as against public policy, so it might require some very careful planning to execute one properly. (Currently DAPT is recognized in 17 states: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.)

Bottom Line: Plan Ahead and Plan Carefully

Neither a prenup nor a trust is a 100% guarantee for your assets if you do not have a clear protection plan. You need to carefully draft your prenup to ensure its validity; the terms and conditions of a trust also must be structured cautiously so that it will not be treated as marital property. A lawyer with expertise in estate planning and family law will help you better understand your options and help you design your property protection plans. Let us put you in touch with one of the experienced attorneys on our platform: www.sleegal.com