Estate Planning in Preparation for Marriage: Prenuptial Agreement vs. Irrevocable Trust

Getting married is generally a romantic event.  However, with more than 50% of marriages in the US ending up in divorce, it is crucial for a young, wealthy individual to consider premarital estate planning.  Many wealthy celebrities and entrepreneurs have blissfully entered into marriage only to come out losing significant amounts of their wealth.  For example, Rupert Murdoch paid divorce settlements of more than $1 billion each to two of his three ex-wives.

When it comes to premarital planning, many couples use a prenuptial agreement (prenup) to detail how assets will be divided upon divorce or death of one spouse.  However, prenups do not always do what they are meant to do.  Signing a prenup is not romantic and can hurt a relationship before the marriage.  Even if spouses agree to a prenup, the prenup needs to be drafted very carefully to comply with validity requirements.  Prenups can be challenged and nullified if the challenging spouse can prove that the prenup was not “fair” at the time of execution for reasons such as, the spouse did not have knowledge of what the document signified when signing, was coerced into signing, or signed without information on the other spouse’s assets.

An irrevocable trust protects the assets of the settlor-spouse.  Once the settlor-spouse places assets into the irrevocable trust for management by a trustee, the settlor-spouse does not have to inform a future spouse about it, and these assets are excluded from the marital estate.  The settlor-spouse has significant control over when and how to distribute the assets.  If the settlor-spouse wants to receive the assets upon divorce, the settlor-spouse can name himself/herself as the beneficiary (also known as a self-settled trust).  The settlor-spouse can also choose to have the assets pay out to other beneficiaries such as the settlor-spouse’s child(ren) or charities.  By removing the assets from the marital estate and providing more flexibility for the settlor-spouse to do what he/she wishes with these assets, an irrevocable trust is likely a more effective tool for premarital estate planning than a prenup.

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