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Financial Planning > Trusts and Estates > Trust Planning

Prenups and Protection

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What type of “investment” can grow almost 120 times in just four years? Surprisingly, it is not the type of financial planning tool you want your clients to have. This tremendous investment growth actually resulted from an unprepared marriage agreement between Paul McCartney and his bride of just four years, Heather Mills. While the

couple’s wedding cost “just” $3.2 million in 2002, their pending divorce, as reported by NBC News, is estimated to bring the wife of the former Beatle approximately $375 million.

Without the benefit of a prenuptial agreement, the estimated settlement represents one-quarter of Sir Paul’s net worth, putting a new twist on his past hit, “Baby You’re a Rich Man.” This reported payout is not only a financial win for Ms. Mills, but may become a catalyst for a run on prenuptial agreements.

While “prenups” are not a new concept, the recent spurt of break-ups by British royalty and Hollywood couples has brought renewed interest in this asset protection vehicle. Although a number of financial planning aspects are key to a marriage, the prenup may be moving higher on some of your wealthier clients’ priority lists.

Not the Most Romantic Valentine

As your wealthy clients buy flowers, candy or diamonds to celebrate Valentine’s Day, you may not think a “financial planning” discussion is appropriate. However, a prenuptial agreement, despite its unromantic connotation, may be just the ticket to a happy marriage–and wealth preservation for your clients. Thoughts of love on Valentine’s Day are not necessarily accurate barometers of long-term success. While the U.S. divorce rate has declined in the last two decades, so have the number of marriages. In 2005, for every 1000 U.S. residents, there were 7.5 new marriages and 3.6 divorces; a decrease from 9.8 and 4.7, respectively, in 1990, according the National Marriage Project.

While the mention of a prenuptial agreement may seem negative or too personal, bringing up the topic with your wealthy clients may open a healthy exchange about their financial goals while also strengthening their impending marriage. Most people would imagine that negotiating a prenup is potentially divisive, but, in fact, it may be the best way to evaluate a couple’s goals on money and property while eliminating misunderstandings that could cause a future conflict. It also complements a couple’s estate planning efforts.

What Exactly Is a Prenup?

A prenuptial agreement is a legally binding contract signed by spouses-to-be that governs how their assets will be divided in the event a marriage is terminated by death, divorce, separation, or annulment. In particular, it spells out in precise detail who owns which assets, which assets are held jointly, and the rights and obligations of each partner. In some cases, related issues, such as alimony, child support, and the provisions of inheritance, may also be covered.

For the agreement to hold up in court, both partners must be represented by legal counsel–in fact, by separate legal counsel. Each partner must fully disclose all financial assets and liabilities to ensure the agreement is not legally voided in the future.

Providing Unemotional Counsel

So who among your client base should consider a prenup? When asked whether they recommend prenups to those with substantial assets, many financial advisors reply that it depends upon the circumstances of each couple. In particular, they cite age and marital history of the future spouses. If both parties have money, have been married before, and have children from those marriages, they are more likely to view a prenup as a practical planning tool that protects all involved.

Despite its negative reputation, there are times when a prenuptial agreement may be advisable–for example, when husband and wife are marrying late in life and each brings substantial assets to the relationship. A spouse who owns a business or may be expecting an inheritance might use a prenup to direct those assets to his or her children or grandchildren in the event that the marriage is cut short by divorce or death.

Keeping in mind that divorce and death would put each individual’s assets at risk, it is reasonable to suggest that divorcing without a prenup is somewhat akin to dying without a will. If explicit instructions from each spouse are absent, the courts will apply their own formulas for deciding who gets what–formulas that will probably not sit well with either party or their heirs.

Finding the Right Tool

For people who marry late in life, concerns about death outweigh those about divorce. Specifically, older couples may be more inclined to focus on the need for ensuring the proper disposition of their estates upon death. In such situations, there are at least two trust-planning tools that may be considered and are worth discussing with your wealthy clients. Both are created unilaterally, which means no opposing lawyers, no hurt feelings, and no potentially ugly legal wrangling.

A Qualified Terminable Interest Property (QTIP) trust may be ideal for both tax-planning purposes and family dynamics, especially when one spouse is significantly more affluent than the other.

The QTIP, a type of trust traditionally used by wealthy married couples and administered by a trustee, allows a surviving spouse to make use of the trust property estate tax-free. Taxes are deferred until the surviving spouse dies and the trust property is received by the final trust or beneficiaries, who were named by the first spouse to die. While it provides the surviving spouse with an ongoing source of support, it protects the trust’s principal for designated heirs.

QTIP trusts can be funded during a marriage as a means of balancing estates to reduce overall estate-tax rates, or upon death as a means of postponing estate taxes. It is important to note that a QTIP trust is designed primarily as an estate-planning tool and is not intended to be a divorce contingency plan. A QTIP trust ensures that any assets remaining upon the death of the spouse for whom the trust was created will pass as directed by the spouse who created the trust.

Safeguarding Family Assets

While wealthy clients seek advice to grow their investments, more often than not they are also looking to safeguard their assets to ensure that their heirs are cared for and protected in the long term.

One relatively painless way to leave family assets to a child and to ensure that they are protected is through an irrevocable trust with a spendthrift clause. Once set up, an irrevocable trust, which may include the assets of a business, investments, cash and life insurance policies, cannot be changed or canceled without the consent of the beneficiary.

A spendthrift clause can be written into virtually any type of trust. The clause can make it impossible for a spouse to access a child’s trust fund in a divorce proceeding, or to inherit if an offspring should die. This device also shields the trust assets from creditors and from lawsuits that may be brought against your client’s child.

Post-Wedding Bell Agreements

After the honeymoon is over, sometimes those who had decided to forego a prenuptial agreement regret their earlier decision. For these couples, a postnuptial agreement may provide the financial protection they either did not think they needed or had opted not to pursue prior to their wedding day.

Keep in mind that a marriage may not necessarily be on the rocks when thoughts turn to such an agreement. While “postnups” can be used to address a variety of marital/financial issues, they often come into play because one or both spouses’ financial circumstances have been altered since their wedding day, causing them to rethink the importance of such an agreement.

Of course, a postnup may also be advisable if the marriage is in trouble and both spouses agree to work things out while they’re still on speaking terms. Should the couple eventually split, the postnup may serve as a valid separation agreement and provide a smoother, less costly divorce settlement than might otherwise be achievable.

Anyone considering a postnup should keep in mind, however, that the legal standing of these documents will vary from state to state. Also, postnups are generally held to a higher standard of fairness than prenups and, thus, are relatively easy to overturn. Why such a discrepancy? If one party tries to trick or threaten the other party into signing a one-sided prenup, the other party can always call off the wedding plans. A dependent spouse, on the other hand, may not feel at liberty to walk away and, therefore, requires stronger legal protection.

The “Long and Winding Road” from Valentine’s Day to divorce court does not have to hinder your clients’ financial plans. Speak with your clients about planning for marriage as well as their estate plans. Although “Can’t Buy Me Love” may have been a big hit for his former band, Paul McCartney could have invested in a prenuptial agreement to protect his assets for his existing family and future heirs.


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