Prenups and trusts are two distinct tools that offer protection in the event of a divorce. Now, no one wants to think about divorce when you’re getting married. But, in the same breath and especially if you already have children, there is absolutely nothing wrong with creating either—or both. Statistics show that half of first-time marriages end in divorce. The divorce rate for second marriages is even higher than that. So, it’s better to be safe than sorry when you’re pledging for richer or poorer.
Keep in mind that a prenup or trust isn’t a premonition of divorce and should not be considered an escape route. In fact, having either in place also protects your assets in the event of your death, as well. You have every right to determine your beneficiaries as you please and these structures ensure your will is carried out after you’re gone.
But which structure is the best for your situation? You and your trusted advisor and attorney should work closely together to determine your best route. The information below provides a bit of information on both so you understand the differences in the two.
Prenuptial Agreements
Prenups are common and perhaps more well-known than trusts. These documents clearly outline the bride’s and groom’s pre-marital assets such as property, money, and investments. Often, potential alimony is determined, as well as how joint property is divided in the event of divorce. Allocation of retirement funds, pension plans, and education funds are spelled out, along with ownership of any life insurance policies.
In the event of a divorce, a prenup can provide a bit of calm in the face of a storm. Each party leaves the marriage with what they brought into it, and division of joint assets have been predetermined, for the most part. This can be a tremendous help in an already stressful situation.
However, sometimes just the mention of the word “prenup” can cause strife that can overshadow what’s supposed to be one of the happiest days of your life. Both parties must sign the document for it to be valid, and there is no getting around that requirement. Also, while every state recognizes prenups, judges and attorneys in divorce court can sometimes derail your plan if the language is not exactly as it should be. And, this is where revocable trusts can make all the difference in the world.
Revocable Trusts
Trusts are a bit more air-tight than prenups in most cases. If you choose this option, all personal, pre-marital assets are placed in a revocable trust. This means you no longer personally own the property; it’s owned by the trust, which protects those assets from your spouse in a divorce. You can put real estate, vehicles, investments, and other qualified items in the trust.
You can also remove and add assets and/or income to your trust as well as change the terms if you please. You can name yourself as the sole beneficiary or choose multiple beneficiaries like your children.
There are a few things to be aware of when forming your trust. If you add marital property to it, you run the risk of voiding the trust. Everything in it may then be deemed as joint property upon a divorce. Also, if you placed a pre-marital home into your trust and pay the mortgage with jointly-earned money—that home may not be protected under the trust. It can get a bit murky here, so consult with trust attorney to ensure your trust maintains the status you created it for in the first place.
Double Down on Protecting Your Assets
It is possible to have both a prenup and a trust in place before your marriage. This provides double protection in the event of miscommunications or the proverbial he-said-she-said situations that often occur in a divorce and upon the death of a spouse. Along with having your assets under the umbrella of protection a trust provides, you have a signed document agreed upon by both parties.
In closing, understand this: you don’t have to live the lifestyle of the rich and famous to utilize a prenup or a trust. Regardless of how large your estate may be, it’s good business sense to protect pre-marital assets for yourself and for your children in the event of divorce or your death.
Pantheon Wealth Planning and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation.