Although it is difficult for couples to imagine divorce while they are in the midst of pre-wedding bliss, it is a reality that must be addressed in an age when close to fifty percent of marriages end in divorce. In a divorce, each spouse is entitled to half of the marital estate, regardless of his or her contribution to the marital estate. Many couples would like to have more control over the division of assets in a divorce, especially in situations where there is a significant income disparity between the parties or where there are large business or property assets involved.
Historically, a prenuptial agreement has been the predominant tool utilized to address the issue of asset division in case of divorce. It is an agreement that is signed by both parties before the marriage that specifies how the assets of the parties shall be divided. However, the prenuptial agreement has garnered a bad reputation and presents several serious issues that should be considered before deciding to utilize it.
When people think of a “prenup”, it often brings to mind agreements that favor one party to the extreme disadvantage of the other party. Because of this negative connotation, many people feel that they cannot suggest a prenuptial agreement to their partner without insulting or offending them. Additionally, prenuptial agreements are very susceptible to challenges and can easily be found to be invalid. In order for a prenuptial agreement to be enforceable, both parties must be represented by independent legal counsel to prevent accusations of coercion or duress. Also, prenuptial agreements require both parties to make full financial disclosures, which can be a deterrent for some if they are wary of sharing private financial information. Further, the prenuptial agreement must be fair at the time the agreement was made. If one party challenges the validity of the prenuptial agreement, the fairness of the agreement is determined by a judge or jury. Challenges to the prenuptial agreement can lead to costly and lengthy legal battles where the parties lose what control they thought they had over asset division.
Couples preparing for marriage are now utilizing new methods to determine asset division in case of divorce. Trusts are becoming one of the most popular alternatives to prenuptial agreements. The person creating a trust is called the settlor. When the settlor creates a trust prior to marriage and puts some or all of his or her assets in that trust, the assets contained in the trust are not considered to be part of the marital estate. The assets in the trust are now owned by the trust, not the settlor. Therefore, the trust is not subject to equitable division during a divorce because the trust assets are considered to be the separate property of the settlor. This allows a person to determine the division of their assets and property prior to marriage in a manner that is less likely to be challenged or found invalid. The named trustees will administer the trust according to the terms the settlor establishes in the trust documents.
One benefit of utilizing a trust rather than a prenuptial agreement is that the creation of a trust does not require the signature of the other party to the marriage. One party can make the unilateral decision to put his or her assets in a trust prior to the marriage. Also, the settlor does not need to inform the other party of the existence of the trust. This can eliminate the potential of offending or insulting the other party, which could have potentially put a strain on the relationship. Further, a trust survives a person’s death, while a prenuptial agreement does not. If the settlor dies, the trust will still be distributed according to the instructions that the settlor put in the trust documents. Finally, a trust is less likely to be successfully challenged by the other party. As long as the settlor follows the relevant state statutes regarding the creation of a trust, then the trust will be found to be valid and is not subject to equitable division in the event of divorce.
At Milvidskiy Willis LLP, our attorneys provide pre-marital estate planning advice and, in many cases, encourage clients to consider a trust as an alternative to a prenuptial agreement. Trusts allow for the settlor to determine asset division prior to marriage, without the unreliability of a prenuptial agreement. Clients can rest assured knowing that the trust is valid. Additionally, the settlor does not have to risk ruining or straining a relationship by requesting a prenuptial agreement from his or her partner.
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