Here in part two of our series on prenuptial agreements, we’ll look at different estate planning vehicles that could provide similar—or even better—protection than prenups.
By setting up a revocable living trust and funding it with your separate assets before getting married, those assets would likely be considered non-marital property and not subject to division by the court upon divorce—as long as you never commingle any of those assets with your spouse after your marriage. It’s vital you create and fund the trust with your assets before the marriage and never add any assets acquired or created during the marriage.
If you commingle assets acquired during the marriage in a trust containing your separate non-marital assets, a court could declare all of those assets as marital property subject to claim as part of a divorce settlement. To this end, a revocable trust only protects your separate assets from divorce if they remain separate from marital property throughout the whole length of your marriage.
Note that since a revocable trust is “revocable” by definition, there’s no asset protection for assets in your revocable trust, meaning that a revocable living trust won’t protect your assets from creditors during your lifetime. If you want to achieve protection from both a future divorce and future creditors, you may want to consider one of the irrevocable trusts below.
You can protect your assets from divorce by having your parents (or another loved one) establish an irrevocable trust for you before your marriage. Then, the investment trustee of the irrevocable trust (who could be you) could purchase all of your existing assets in an arms-length transaction and manage those assets inside of the trust, where they’re totally protected from a future divorce and any future creditors.
Your parents or grandparents could also leave any future inheritance you’re to receive to this irrevocable trust, ensuring your inheritance would also be protected. If this irrevocable trust is properly established and the terms are well-counseled and well-drafted, all assets the trust owns—and any assets left to you in the future—will be fully protected from a future divorce, future creditors, and even from estate taxes and probate upon your death.
It’s also possible for you to establish an irrevocable trust for yourself and gift your assets into the trust to keep them safe from divorce. However, this strategy is not as airtight as having a parent or grandparents establish the trust for you.
When you gift assets to an irrevocable trust, there’s a risk that a spouse or future creditor can claim fraudulent conveyance, if you gift those assets within a certain number of years (the exact time frame depends on the state) of the trust being set up. If you’re looking for asset protection and an alternative to a prenuptial agreement, and don’t have a parent or grandparent available, a self-settled irrevocable trust can be a great second-best alternative.
Start your marriage off right
Meet with us for trusted counsel and guidance on all of your options well before your marriage. Once you’re married, many planning options are off the table. Regardless of your concerns about divorce, you definitely need to create or update your estate plan to protect and provide for your soon-to-spouse and any children you have in the event of your death or incapacity. Schedule a Life & Legacy Planning Session today to get this planning started.
AB Law, PLLC is a full-service business law and estate planning firm that serves clients throughout Texas. All consultations are free and no question is too silly, ridiculous, or complex. https://calendly.com/ablawpllc www.ab-firm.com