Prenuptial Agreement vs Trust: Differences and Advantages

The Basics of a Prenup

While a prenuptial agreement can seem like a contract for divorce, for many couples it is a very smart way to look out for themselves. Similarly, these documents can help rectify any potential legal issues that may arise before or during marriage, such as:
If you ever need to go through the divorce process, your prenuptial agreement will be a vital means of getting through it with as little financial loss as possible. Will you keep all of your marital belongings if you separate from your spouse? What happens to the property in the event that your partner files for divorce? All of these are issues your prenuptial agreement may cover.
However, prenuptial agreements are not only meant for these scenarios . Sometimes a couple is faced with significant legal problems during their marriage and are advised by their Morrisonville, Wisconsin attorneys to draft a prenuptial agreement before they can move forward with a solution. This is not uncommon for polygamous relationships, same-sex marriages, marriages involving business owners and marriages involving significantly different financial obligations and assets.
Without a prenuptial agreement, the law will determine how your belongings will be divided, how much of your income/spouse’s income you will be owed and whether either of you will be asked to pay the other alimony/spousal support. Generally speaking, these laws will not be suited to your specific needs and as a result, will put you at a legal disadvantage.

What is a Trust?

Trusts are essentially legal arrangements that allow for the management of assets. A trust’s creator, known as a "settlor," transfers their assets to the trustee who can be an individual or a corporate trustee. The individual who benefits from the trust is called the "beneficiary." During the life of the settlor, a trust is generally revocable, although the settlor may nominate a trustee in the event of disability so the trust is not interrupted. The trust becomes irrevocable on the death of the settlor. Once the trust becomes irrevocable, the trustee must follow the instructions contained in the written document and can no longer be changed and it generally operates without interference from estate administration proceedings.
There are a variety of different types of trusts including: revocable living trusts, irrevocable trusts, marital deduction trusts, special needs trusts, special needs trusts, charitable remainder or lead trusts, credit shelter trusts, grantor retained annuity trusts ("GRATS"), irrevocable life insurance trusts, educational trusts, and pot trusts, to name a few. Thus, it is important to discuss the precise purpose and goals with your lawyer to determine what type of trust is best for you.
For individuals who wish to avoid, or at least minimize, their exposure to probate, a trust can be used in estate planning. When assets are placed in an inter-vivos trust, they do not pass through probate on the death of the settlor. Instead, the arrangements for the distributions upon death are governed by the trust instrument itself. Thus, in many cases, a trust can pass assets to heirs without resorting to probate. However, although the creation of the trust may avoid probate, the ineffectiveness of the trust itself to avoid the imposition of the estate tax can nonetheless trigger the need for a probate proceeding if federal estate tax or New Jersey state estate tax return is required to be filed.
The primary reasons someone would consider a trust are:

Prenup vs. Trust

Although both prenuptial agreements and trusts can serve as tools for asset protection, they fulfill different purposes and are structured under different legal frameworks. A prenuptial agreement is purely a contract. A trust is a legal entity whose terms are expressed in a writing (the "trust document") and which is created by the transfer of property to the trustee to hold for the benefit of the trust beneficiaries.
If a premarital agreement is intended to protect a trust asset from the reach of a beneficiary’s future spouse, the trust will have to be irrevocably established during that beneficiary’s single years to obtain general premarital protection. In many states, including Texas where there are complex statutory protections for family trusts, a beneficiary’s interest in an irrevocable trust predominates the beneficiary’s spouse’s rights upon divorce over that interest. Another type of living trust, the revocable nomenclature, allows a creator of a trustee-established trust to retain control over the trust property including distribution of trust assets. Having a third party as a trustee may not be necessary to achieve a premarital benefits purpose.
As a practical matter, some couples prefer not to establish trusts during their single years due to the down-side of losing financial control over their assets once they fund the irrevocable trust. Remember, if you choose the irrevocable trust route, although you lose financial control over the general trust assets, it is only with respect to the general trust assets. The Creator of the irrevocable trust generally designates the trustee who may thereby control the distribution of the trust assets. As an example, Family A has a high net worth. Both citizens are doctors. They decide to do an irrevocable trust to protect the prize assets of their community estate-their respective medical practices. They agree that each spouse will place his or her practice assets into an irrevocable trust. They designate a trusted cousin as trustee who can write checks from the trust accounts on behalf of either one of them. In addition to being a trustee, the cousin will also be family care-taker and will act in "hospice" capacity if the doctor-spouse becomes sick (the self-help option). As long as the named trustee is not the married beneficiary, the original partner’s practice assets should remain protected from loss at divorce.

The Benefits of Each – What They Mean for You

Prenuptial agreements and trusts are both tools that can be employed to protect assets and provide clarity on financial issues, but there are key legal advantages and considerations that should be weighed before making a decision on which is the best option for your situation.
The enforceability of a prenup largely depends on the fairness of the agreement at the time of signing. A prenuptial or antenuptial agreement "is a contract made in contemplation of divorce and the terms are set up as to how the financial, property and personal obligations of each party will be handled in the event of a subsequent divorce…"
In general, pets are considered property in the eyes of the law, but the law is evolving. If you and your soon-to-be-spouse are both animal lovers, include provisions in your prenuptial agreement that address pet custody disputes just like you would child custody concerns.
If either of you is a parent or a grandparent with an estate plan, you will most likely have estate planning documents in place to govern the distribution of your assets. In those documents, you will direct who handles your estate, who will receive property and how much property they will receive. In order to produce the desired results, those plans must be regularly updated – which can be time consuming and cumbersome.
While a prenuptial agreement can help to avoid many of the costly disputes that can arise after a divorce, you may still need to go back to court after a divorce has occurred. The court is not bound by the terms of the prior agreement after the divorce has occurred and can go back and reallocate assets and financial obligations even if the original agreement was deemed fair at the time that it was signed.
Prenuptial agreements are not necessarily less useful or less flexible than trusts. There are prenuptial agreements that are far simpler than trusts, and it is possible to create complex prenuptial agreements that serve the same purpose as a trust. However, in general, a trust is more flexible than a prenuptial agreement because it can contain more detailed instructions regarding assets.
There is not a strict correct answer because your family and financial needs will change over time. Also, the assets that you are trying to protect are a factor as well. However, if you ask most attorneys, I believe that they would tell you that for the average person, a prenuptial agreement is the least complicated and most cost effective solution for asset protection.

How to Decide Between a Prenup and a Trust

Deciding whether to create a prenuptial agreement or a trust depends on a number of factors and considerations. These considerations should be discussed with your California attorney and financial team. Some factors to consider are as follows.
Personal Situation
If you have been married before, you may absolutely want to protect your assets in the event of a second divorce. If you had children prior to your current relationship, similar considerations apply when it comes to protecting your children’s inheritance rights and you really do not want anything to happen to them in the event you become disabled, develop dementia or die. Prenuptial agreements can accomplish all of these objectives.
Financial Goals
Your personal financial goals will also impact whether or not you want a prenup in place. In the event of a prenup, if your attorney writes it correctly , any assets you bring into the marriage are protected as is any appreciation on those assets during your marriage. You should also stipulate that any property you own prior to the marriage belongs solely to you and any marital property you acquire during that time belongs to both you and your spouse. A prenup will protect you during your marriage so that you do not have to share any of your assets with your spouse. You also want to negotiate your child support and spousal support obligations. Furthermore, if one or both of you become disabled and cannot work, you want your assets to be used for your benefit so you can continue to live a comfortable life.
Family Dynamics
If you come from a family with significant assets, you may wish to preserve these assets for future generations. By not concluding a prenup, your spouse may be entitled to all of your assets if you die or become disabled. This means that your wealth could be redistributed to your spouse or other family members. If your spouse is not an American citizen, by not having a prenup you may impact your estate plan and expose your estate to significant estate taxes. The estate tax presently tops out at 40 percent for all estates above $11 million. If you do not have a plan to deal with these issues, you should consider a prenup that accomplishes these objectives.

Real-Life Applications and Examples

Real-life scenarios where a prenuptial agreement and a trust were used in real life with effective results are abundant. One such example involves a high-net-worth couple who, prior to marriage, entered into a prenuptial agreement that specified that any income earned or assets created during the course of the marriage would remain separate property for the recipient. As the marriage progressed, one spouse began to earn a considerable salary that vastly exceeded the general cost of living. The prenuptial agreement allowed the spouses to plan for the high rate of income and create a separate account that could only be used for investments while allowing for some lifestyle expenses.
At the end of the marriage, a motion for temporary spousal support was filed. The court had to consider the prenuptial agreement, but could not completely rely on the legality of the contract and had to consider whether the effect of the agreement would create an unreasonable disparity of income or establish a limitation on spousal support that would be unconscionable.
In this case, the court found that even if spousal support was warranted, it could not be ordered as there would not be a sufficient amount of money available for the payor after the fair market value of the spouse’s separate account was accounted for. This case shows that it is important for spouses to be aware of how much spousal support can realistically be paid when establishing a prenuptial agreement.

Conclusion

Both prenuptial agreements and trusts serve specific purposes. A prenuptial agreement is an essential tool for protecting assets and setting financial boundaries for the duration of a marriage. The protection of the family wealth through a trust often goes beyond a single generation. It is designed to meet the goals of planning, management and security to multiple generations, regardless of marital circumstances. At the same time , the application of these legal tools must be tailored to the specific needs of each client. In some cases, one will suffice. In others, both should be used for maximum protection. Understanding the pros and cons – and consequences – of both is essential to the long-term health of your relationships and financial security. Expert guidance is essential for determining and modifying the best approach for your unique needs.