Financial planning for any major life event can be an extremely delicate matter, and that’s especially true when it comes to helping a client plan for an adult child’s marriage.
Discussions about prenuptial agreements and planning for the possibility of a future divorce can be particularly disturbing for a couple. It’s not uncommon for a young adult to shoot down the idea of negotiating a prenuptial agreement, even in the face of overwhelming evidence showing just how common divorce is.
Clients who are concerned for their child’s financial well-being should understand that they have options — and be offered solutions for ensuring that their child understands both the available planning approaches and the rules that apply when dividing assets in a divorce. That can save many couples from some of the more contentious legal battles should the relationship splinter.
Prenuptial Agreements: The Discussion
Marriage is a financial partnership as much as anything. Framing the concept of a prenuptial agreement in a less antagonistic fashion can be key to convincing an adult child to agree.
It’s important for all parties to remember that a prenuptial agreement is a practical solution to spelling out how assets would be divided in a divorce. Prenups don’t have to be unfair or one-sided. In fact, to ensure that a prenuptial agreement will be enforced, it must generally be reasonable and fair.
Full asset disclosure from both parties is also key to ensuring that the agreement will be respected.
A prenuptial agreement helps each spouse understand their financial position and any future obligations related to the marriage. Discussions over the content of the agreement can also be a valuable tool to help a young couple become comfortable discussing finances and goals.
Maintaining Separate Property
If adult children have already accumulated assets, or have been given them, it’s important that they understand the importance of maintaining separate property that they possessed before the marriage. Marital property, on the other hand, is anything acquired during the marriage.
Separate property is not subject to division in a divorce, unless it becomes commingled with marital property. To ensure that separate property is kept separate, adult children should stop contributing to any accounts they maintained before the marriage. They should never allow their spouse to add to any premarital accounts, nor should they add their spouse’s name to those separate accounts.
It's also important to understand that any income earned by either spouse during the marriage is considered marital property. Using separate funds to purchase a marital asset, such as the family home, will result in converting the separate assets into marital property that would be subject to division in a divorce.
Trust Planning Alternatives
As time passes, it’s almost inevitable that spouses will commingle assets. When separate assets are blended with marital assets, proving which assets are separate and which are marital can complicate an already charged divorce process.
A revocable trust is one option for protecting an adult child’s premarital assets. Funding a trust with only premarital assets can ensure that the separate assets are never commingled with marital assets.
Careful documentation is important. Documents proving that the funds were owned before can be attached as exhibits to the trust document itself. Obtaining a separate taxpayer identification number for the trust can also be helpful when it comes to establishing the separate nature of the trust assets.
Irrevocable domestic asset protection trusts are a more complicated option but can be highly valuable in cases involving significant wealth. They must be formed in a state that permits this type of trust, with an in-state trustee named to administer the trust. Twenty-one states currently offer some form of domestic asset protection trust, with Alaska, Delaware, South Dakota, Utah and Nevada offering the strongest protections.
While these trusts can be useful in preserving the separate character of property during a marriage, there’s no guarantee that a court will respect the protections offered by them when it comes to protecting assets from creditors or claimants in lawsuits.
Of course, the existence of any trust should be disclosed during negotiations over any prenuptial agreement.
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