Welcome to the exciting world of personal finance and estate planning! Legal documents are vital tools for protecting your assets, outlining responsibilities, and ensuring your wishes are honored. You may have heard of prenuptial agreements (prenups), living trusts, and wills – three of the most common legal instruments. Each of these documents serves a specific purpose, but they often intersect when it comes to protecting people and their money. 

Understanding the differences between these legal instruments and how they can overlap is essential for effective estate management and future planning. In this article, we’re going to delve into the key features of each document. We’ll also explore how they intersect in real-life scenarios and provide valuable tips for those looking to plan for their future. Get ready to learn and take control of your financial future!

What is a prenuptial agreement?

A prenuptial agreement is a contract entered into by two individuals before marriage, outlining the division of assets, spousal support, and more in the event of divorce (and depending on how you draft the prenup also upon death).

So, what goes into a prenup, you ask? Let’s discuss. First, there’s asset protection. Prenups define which assets are considered separate property and which are subject to division in case of divorce, helping to protect individual wealth accumulated before and during marriage. Prenups can also address how debts acquired before and during marriage will be managed, shielding one spouse from the other’s liabilities.

Don’t forget about spousal support. Prenups can specify whether spousal support will be paid and under what conditions, providing clarity and potentially avoiding contentious disputes during divorce proceedings. Finally, estate planning– while a prenup is not a substitute for a will or trust, a prenup can complement estate planning efforts by addressing inheritance rights and property distribution upon death.

What is a living trust? 

A living trust, also known as a revocable trust, is a legal arrangement where assets are transferred into a trust during the grantor’s lifetime, managed by a trustee for the benefit of designated beneficiaries. Unlike a will, which only takes effect upon death, a living trust can provide benefits during the grantor’s lifetime and after death, offering flexibility and privacy in estate planning.

Still confused? Let’s break it down and explain this concept as if you were five years old. Imagine a treasure chest. Instead of keeping all the treasures inside it, you decide to put them in a special box called a “living trust” while you’re still alive. You or someone you trust, called a “trustee,” takes care of your treasure. Now, this treasure box will initially be just for you and then for anyone you want to share the treasures with, like your family or friends. These people are called “beneficiaries,” and they get to enjoy the treasures in the box when the time comes. 

Why do people get living trusts?

Let’s discuss what the key features of a living trust are and why people choose to get one. 

1. Probate Avoidance: Assets held in a living trust bypass the probate process, enabling a smoother and faster distribution of assets to beneficiaries after the grantor’s death, potentially saving time and money.
2. Privacy: Unlike wills, which become public record upon probate, living trusts maintain privacy as they are not subject to court oversight, allowing for discreet asset distribution.
3. Incapacity Planning: A living trust can specify provisions for managing assets in the event of the grantor’s incapacity (i.e., mental or physical disabilities, etc.), ensuring continuity of financial affairs without the need for court intervention.
4. Flexibility: Living trusts can be amended or revoked by the grantor during their lifetime, providing flexibility to adapt to changing circumstances or preferences. 
5. Unilateral Nature: Living trusts are unilateral documents, meaning that there are not two parties required to sign it, such as is the case with a prenup. That means one person can make the decisions on the living trust document.

What is a will? 

A will, also known as a last will and testament, is a legal document that outlines how a person’s assets and properties will be distributed after their death. It also allows individuals to designate guardians for minor children, specify funeral arrangements, and appoint an executor to oversee the estate administration process (a living trust package will also include all this).

What are the benefits of wills?

Let’s dive into the many different benefits of getting a will and why a person might opt for one. 

1. Asset Distribution: Wills detail the distribution of assets, including real estate, personal belongings, investments, and any other property owned by the deceased in the event of their death.
2. Guardianship: A will may designate guardians for minor children, outlining who will be responsible for their care and upbringing in the absence of the parents (this is applicable also in living trusts).
3. Executor Appointment: Wills appoint an executor responsible for carrying out the deceased’s wishes, managing the estate, paying debts, and distributing assets to beneficiaries according to the will’s instructions.
4. Charitable Bequests: Wills allow individuals to make charitable donations and specify beneficiaries for such bequests.

Now that we know the basics and differences between the legal documents, let’s look at how they intersect in the real world. 

How A Prenup Can Be Incorporated Into Your Estate Plan

In some cases, couples may choose to incorporate both prenuptial agreements and trusts into their estate planning strategy. One example is that a couple may sign a prenup that will outline the division of marital assets in the event of divorce or death while also specifying how certain assets will be held in trust for the benefit of children from previous relationships or other intended beneficiaries. Or, a couple can choose to make the surviving spouse sign a prenuptial agreement if they remarry (after the death of the other spouse) if they wish to remain the trustee of a joint living trust in order to protect the assets from the new spouse.

Also, depending on your state, your estate plans may affect what you can leave your spouse unless there’s a prenup. For example, California estate laws allow a surviving spouse to half of the community property despite any explicit attempts by the deceased spouse to disinherit a spouse in the estate planning documents (trust or will), unless there is a valid prenup agreement. Without a prenup, the surviving spouse will automatically receive half of the community property (this does not affect separate property). While in common law states a spouse has the right to an elective share, which allows the spouse a specific % of the deceased spouse’s estate (such as ⅓ up to ½), even if the deceased spouse attempted to disinherit the surviving spouse in their estate plan.

Real World Application

Northern Trust v. Shaw exemplifies how a prenuptial agreement can affect your estate after you pass or, at the very least, wreak havoc. Here, the surviving wife brought a lawsuit against her deceased husband’s estate in probate court and claimed she was owed funds according to their prenup. According to the prenup, the wife claimed she was entitled to a specified portion of her husband’s estate, which included a sum of $500,000 along with other assets.

Following her husband’s passing, the wife received certain assets from the estate in accordance with state law. However, she pursued probate litigation, asserting her entitlement to the additional $500,000 beyond what she inherited as his spouse. Ultimately, the probate court ruled in favor of the wife, affirming her right to the extra $500,000 as stipulated by the prenuptial agreement. However, the appellate court then reversed the lower court’s order, stating that Ms. Shaw was not entitled to the $500,000 because she had already received $500,000 from the estate based on how “estate” was defined in the prenup. 

The bottom line? We can see in this case that your prenup AND your living trust (or will) MUST be clear as to what gifts you are giving and how you are defining the terms; otherwise,b you risk your family having to go through probate court and airing out your private affairs.

Other issues to look out for when getting a prenup and a trust

We’ve broken down a few other pitfalls to be aware of when obtaining these various different legal documents.

Conflicting terms
When there are conflicting distributions in a prenup, living trust, and/or will, an estate or a beneficiary can open a probate to challenge the conflicting documents. This, of course, leads to probate litigation, which is not only costly for all parties involved (think thousands of dollars in attorney fees) but also emotionally draining. Ensuring that all your documents are aligned and state the same distribution is essential to ensure your family is able to coordinate properly after your passing. Make sure to notify your attorney if you already have documents drafted and to ensure that they all align.

Challenging a legal document based on duress/incapacitation
Anyone can challenge a prenup, a will, or a trust by claiming that you were under duress or incapacitated when you created that document. To ensure that your wishes are upheld, it’s important to ensure that all the formalities are met when drafting and signing each of the documents. Each state has its own requirements, so make sure to talk with an experienced family law and estate planning attorney in your state.

Be wary of what happens with a prenup but without any estate planning
In cases where individuals pass away without a will or other estate planning mechanisms, the probate court typically oversees the distribution of their estate in accordance with the state’s laws of intestate succession. However, if there is a prenuptial agreement in place, the terms of that agreement could influence the probate court’s decisions regarding the distribution of the estate property. Similarly, if probate litigation reveals that a will is invalid, the terms of a prenup might also be considered in the distribution process.

Divorce complicates things in California
In California, immediately when you file for dissolution (a.k.a. divorce), you are restricted from modifying or creating a non-probate transfer unless you give notice, get written consent from the other party, or obtain a court order. This means that if you and your spouse have an estate plan (whether a joint trust or separate trusts) at the time of commencing divorce and you pass away before your divorce is finalized, your spouse will inherit based on what your estate plan says. If you have no estate plan at the time of your death while in the process of divorce, your spouse will inherit half of the community property assets unless you have a prenup that specifies how community property will be distributed. 

Change your will ASAP after a divorce (California)
In California, when a divorce is finalized it revokes gifts or inheritance to the spouse that are listed in a will, unless otherwise specified. As a result, the property will go to the next beneficiary listed in the will. Because of this, it is imperative that you change your will once your divorce is finalized otherwise, you risk “holes” in your will that the court will then have to attempt to fill. Similarly, if you have a trust, it is dissolved as to the community property because once a divorce is finalized, the division of the community property has already occurred during the divorce process; at this point, it is best to create a new trust after the divorce and update all your power of attorney and health care documents. 

The bottom line

Given the complexity of estate planning and the legal nuances involved, seeking guidance from experienced legal and financial professionals is crucial. Attorneys specializing in family law and estate planning can help couples navigate the intricacies of prenuptial agreements and trusts, ensuring their legal planning goals are effectively achieved while complying with relevant laws and regulations.

You are writing your life story. Get on the same page with a prenup. For love that lasts a lifetime, preparation is key. Safeguard your shared tomorrows, starting today.

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Sara Ovando-Bowen

Sara is a bilingual Spanish-speaking attorney and legal advisor from Orange County, CA. Sara is the co-founder of Ovando Bowen LLP, along with her husband Chumahan Bowen, Esq. As a legal advisor, Sara helps her clients navigate the complexities of both business and personal affairs. Sara has been assisting individuals and families since 2009 when she worked at the Long Beach Courthouse, Self-Help Center. Book a Q&A or Full Representation with Sara here

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