Prenup out of the question? Consider a premarital divorce trust

On behalf of Stange Law Firm, PC posted in Property Division on Wednesday, May 22, 2013.

For people with substantial personal assets or children from previous relationships, it can be important to protect those assets, and their distribution to intended future beneficiaries, before entering into a marriage. For most people, a well-drafted, enforceable prenuptial agreement is the best legal option. However, for a variety of reasons, some prospective spouses simply won’t agree to sign one. What then?

If your fiancé or fiancée won’t agree to sign a prenuptial agreement, setting up a trust in advance of the marriage can serve many of the same legal goals. While a good prenup is usually the best option, if that isn’t possible, a number of trusts can help you protect your separate property from later distribution to someone you didn’t intend, make it easier to distribute assets that are difficult to divide in divorce, and protect your assets from some creditors should your marriage end.

The fact is, nearly half of all marriages in the U.S. end within eight years. Moreover, as a Barron’s writer recently pointed out, Americans are marrying later, which means that brides and grooms are more likely to enter a marriage with their own assets they may wish to protect. What are the options?

If you have children from a previous relationship, consider a qualified terminal interest property trust, often called a Q-TIP. You can set up your spouse as a lifetime beneficiary of the Q-TIP with limited access to the principal, and name your children as successor beneficiaries so they receive the principal upon your death.

This works well for successful marriages, but it also has an advantage in case of divorce. If your ex remains the lifetime beneficiary of the Q-TIP after the divorce, the trust income can be a part of the property settlement and be counted against alimony.
One divorce planning lawyer recommends his wealthy clients consider a self-settled trust. Essentially, you set up an irrevocable trust with yourself as the lifetime beneficiary, and then fund it with property that a later divorce court would characterize as separate, not marital, property.

Premarital trusts do need to be carefully drafted and entered into long before you see marital or financial troubles coming. If you divorce or face a creditor action later, courts will scrutinize the trust to make sure it was not set up to intentionally shield your assets from lawful claimants. If it doesn’t pass the “scoundrel test,” the court will overturn it.

Source: Barron’s, “Divorce Trusts,” Tatiana Serafin, May 18, 2013

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