The ‘Talk’
You had the “talk” with your young adult child about getting a prenuptial agreement.
The divorce rate is often suggested to be 50%. You have wealth. Your child has accumulated some wealth already. But mostly, you hope to minimize the potential angst and antagonism that a potential divorce may bring. You child responded politely telling you either to keep your nose where it belongs, or, as is so common, “we don’t need one.” No one needs a prenuptial agreement until the divorce is imminent. Is there anything that you can do if you hear the refrains above?
A Kinder Prenuptial Agreement
One approach might be to explain to your child that a prenuptial agreement doesn’t have to be antagonistic or adversarial. It doesn’t have to be about unreasonably harshly limiting their future spouse’s financial interests. In fact, although it may sound oxymoronic, a well-done prenuptial agreement may spare your child and their soon-to-be spouse the ugliness of what a future divorce might otherwise bring. It can also, from a positive perspective, help the soon to be couple to better understand their own financial picture and responsibilities. The process of a well-planned prenuptial agreement can help determine appropriate life, disability and other insurance coverage for the upcoming marriage. Too often those practical issues are not addressed in as deliberate and thoughtful manner as advisable. The prenuptial process can foster that. Some matrimonial attorneys may suggest terms that they believe are the minimum financial commitments for the agreement to be upheld. If desired, there is nothing wrong with exceeding those minimum financial commitments.
Maintaining Separate Property Characterization
Whether you achieve any success with the kinder prenuptial agreement approach or not, a step that you can encourage and guide your child to take is to maintain the identity of separate property. Separate property are assets in your child’s individual name before the marriage. For example, your child may have saved and invested earnings from their job or business. You might have made gifts to the child in prior years (consider a trust in the future instead of outright gifts to protect the assets). You might have funded uniform gift to minor act or uniform transfers to minors’ act accounts in the past and now your child has those funds years (consider a trust in the future instead of UGMA/UTMA gifts to protect the assets). If your child retains those assets post-marriage in a separate account, only in their name, and doesn’t add to it, and certainly doesn’t permit their new spouse to add to it, those assets may retain their characterization as separate pre-marital property. That way, in a future divorce those assets may be off the table during divorce negotiations. For many soon-to-be-wed kids this shouldn’t carry the stigma they may associate with a prenuptial agreement, and it may provide some protection. Your child may actually not have to take any affirmative action, just leave what is, as it was before the marriage. But if you don’t address this with your child, they may not realize the importance of this and might well retitle those separate accounts into joint name with their new spouse undermining any protection.
A Revocable Inheritance Trust
Even if your child is agreeable to maintain the integrity of separate property assets, it can be difficult over time to avoid commingling assets or otherwise tainting them. If your child continues to contribute savings to the pre-marital accounts, that commingled account may then have to be subject to a forensic accounting analysis to determine what portion may remain as pre-marital. Similarly, if the new spouse contributes savings to that account a similar analysis would be required. At some point, and there are not definitive bright line rules, a court might say “Hey, that account has been so commingled, we are going to view it as a marital asset.” One way to potentially lessen that risk is for your children to set up a revocable trust before marriage. That is a very common estate planning document typically used to avoid probate. But here a different application is suggested. The revocable trust should obtain its own tax identification number from the IRS. The trust might be called “Child Name Revocable Inheritance Trust.” Only pre-marital separate assets should be contributed to the trust. Documentation showing that the assets are premarital should be attached as an exhibit. The trust should be signed and funded well before marriage and if your child agrees to a prenuptial agreement, that trust should be disclosed as a separate asset. The purpose of this trust is to lessen what almost seems to be a natural propensity for commingling assets post-marriage. Having a different name (i.e., the trust name not your child’s name), and a different tax identification number may all help to maintain the purity of those assets as separate property.
Domestic Asset Protection Trust
This is more costly and complicated approach than those above, but should provide better protection from a future divorce. In appropriate circumstances a DAPT could be a great tool for estate tax planning (depending on what tax legislation is passed in Washington and the child’s current and future wealth level) and asset protection planning (protection from lawsuits and claims). Your child would create a trust in one of the approximately 20 states that permit these types of trusts. That will require naming a trustee in one of those states. Using an institutional trustee who is perhaps more likely to adhere to all trust formalities then a family trustee is probably advisable. That will enhance the likelihood of the trust being respected if there is a future divorce or other challenge to trust assets. Your child could be a beneficiary of the trust, or with other variations of this planning technique could be added as a beneficiary in a future date, or be the potential recipient under a limited power of appointment (a right given in the trust document to an independent person to appoint trust assets to your child). That could be critical to the planning as many soon-to-be-wed children (even adult children or those previously married) may need some ability to access the wealth transferred, and would not be wiling or able to make such transfers if they could not benefit from the funds.
If a DAPT or similar trust plan is used, consider disclosing that in a prenuptial agreement if one is obtained. Different matrimonial lawyers have different views on whether such a disclosure is necessary or advisable. But consider the potential benefits that broad disclosure brings and also the interpersonal aspect of not disclosing. What if the new spouse discovers years in the future that your child had a large assets that they did not tell them about.
Conclusion
Divorce rates, even if less than the oft-cited 50%, are significant. The financial damage and antagonism a divorce can create can be tremendous. While a prenuptial agreement, even a kinder version of what sometimes is done, may be an optimal step, that step can be bolstered by each of the three other planning techniques noted above. If your child won’t pursue a prenuptial agreement, the three planning steps discussed above can provide some protection.
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