When getting married, most people think only of prenups as having the ability to protect their financial futures. However, did you know there are other options that could complement a prenup? Enter the trust! While commonly used for estate planning purposes, trusts can also be useful in conjunction with prenuptial agreements to plan for your financial future prior to marriage.
What is a Trust?
Trusts are legal arrangements in which the ownership of certain property is held for the benefit of another – or yourself. The property is intended to pass directly to a beneficiary upon death. All types of assets and property may be included in a trust including real estate, stocks and bonds, vehicles, savings accounts, life insurance policies, and more.
There are several types of trusts, but we will focus on revocable and irrevocable trusts. As the names suggest, revocable trusts can be altered over time while irrevocable trusts are pretty much set in stone. A revocable trust can be controlled by the creator of the trust (also known as the grantor or trustor). That way, you can manage your assets and derive income from them during your lifetime while also designating them to pass directly to your beneficiary upon death.
In contrast, with irrevocable trusts, you cannot name yourself as the “trustor” or beneficiary. Instead, you must name someone else to manage the trust and must designate beneficiaries. Here’s the kicker: once you’ve set the terms, no alterations to the agreement are permitted (absent a few exceptions).
With trusts, you are actually transferring ownership of your property or assets to the trust. So, at the end of the day, you don’t technically own any of the property you put into a trust – not directly, at least. You may see where we’re going with this but if you don’t own something, it can’t be divided and distributed upon divorce (in most cases). Hence, why trusts can be a great prenup tool.
Want to create a trust? Check out Trust&Will, an online resource for everything trust related, and to create one online.
Trusts v. Prenups
So, you may be wondering, what about prenups? Can’t they protect you just as well or better than a trust when planning for marriage? Well, yes and no. One huge advantage that trusts have over prenups is that they don’t require agreement from your soon-to-be spouse. You can unilaterally create a trust in order to protect your separate property. Like a prenup, it should be entered into prior to marriage to best protect your separate property.
Another big difference between trusts and prenups is that property in a trust is not technically owned by one of the spouses – it is owned by the trust. Therefore, it is not included in the marital estate. Prenups on the other hand, can contractually exclude assets from the marital estate based on the agreement of the spouses. However, actions of the spouses, such as commingling marital and non-marital assets (check out more on financial disclosure here!) or challenging the validity of the prenup can threaten or undue prenup protection.
Trusts also have the added benefit of protecting your assets from creditors as well as providing tax advantages. In addition, they typically don’t have the same validity issues as prenups. In some states, prenups can be invalidated for a host of reasons including if the court considers the agreement to be unfair or if there are changes in circumstances down the road. Spouses trying to have the prenup thrown out can also argue that they signed under duress or coercion. That’s not really the case with trusts.
In comparison to prenups, trusts are often well-suited to your separate property. While you and your future spouse can create trusts for your marital property in the future, those trusts won’t provide much protection in the event of divorce because the trust is not yours alone. You can add property and assets to your non-marital (revocable) trust down the road but be careful not to commingle non-marital and marital assets.
Think you can just create a trust instead of a prenup, put all your separate property in there, and be safe? Think again. Judges in divorce actions have a lot of discretion, and just because property is in a trust, does not mean they won’t attribute income to you as a result, or divide assets disproportionally as a result. The best solution? A prenup, and possibly a trust.
Why You Should Consider Creating a Trust
Trusts provide great protection for your separate property. Here are a few common scenarios where a soon-to-be spouse may want to consider creating a trust:
- You received a significant inheritance
- You have accumulated substantial assets prior to marriage
- You are getting married later in life
- You have children from a previous marriage
- You own a business
In all of the above examples, a trust can be used to protect assets. Trusts can be especially great if you have children from a prior marriage whom you want to protect and provide for. With trusts, you can name your children as beneficiaries of your trust. That way, the trust is protecting the assets during your lifetime, and in the event of death, all of the assets in the trust transfer directly to your beneficiaries – in this case, your children. Win-win!
The great news about prenups and trusts is that you don’t have to choose! In fact, the more the merrier in this context. As mentioned above, using trusts in conjunction with a prenup can help you to create a thorough and rock-solid pre-marital financial plan.
If you are considering creating a pre-marital trust, be sure to reach out to a trust attorney in your area to discuss your options.
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