Why Do You Need A Prenup If You Have A Trust?

Many people getting married who have assets in trust believe they do not need a prenuptial agreement. That is most likely not true. If you have a trust, you may have some protection for the trust assets if you marry and later divorce, but then again, you may not. Each situation is unique. There are several factors to consider. Those factors will need to be analyzed in light of the upcoming marriage and the possibility of divorce.

What a Prenup Does

A prenuptial agreement is negotiated and signed by you and your fiancé before the wedding. The prenup allows you to circumvent what you are required to give your spouse under state law in the event of divorce or death.

The prenup typically carves out your assets as Separate Property. Your trust and the assets in it are usually included in the prenup as your Separate Property. If you later divorce, you often retain your Separate Property.

Likewise, if you die during the marriage, a prenuptial agreement usually allows you to leave your Separate Property to whomever you choose. In that case, you are not required to leave the assets to your surviving spouse.

What Kind of Trust Matters

If you have a revocable trust you created, it usually offers you no protection if you marry without a prenup. That is because you can change the trust at any time. You control the trust and therefore the trust assets. The assets are essentially yours. In the event of a divorce, a judge could order you to give some of the trust assets to your divorcing spouse.

If the trust is irrevocable, it may offer you some protection, but the level of protection depends on the state where you divorce and the trust terms.

Where Will You Divorce

The state where you divorce is important. For instance, some states’ laws provide greater protection for trust assets by providing that a beneficiary’s interest in an irrevocable trust is Separate Property. In that case, the trust interest cannot be divided up in the event of divorce. You may marry in a state that offers this protection. However, given the possibility that you may relocate to another state during the marriage, a prenuptial agreement will provide you with greater protection.

Look at the Distribution Terms

Whether or not your trust assets can be reached in a divorce often depends on how the trust was written. One consideration is whether you have access to the trust assets. If you can withdraw trust assets at any time, then a judge could order you to withdraw some of the assets and distribute them as part of the divorce.

Some trusts are drafted to allow you to withdraw assets after reaching a certain age. If that is the case, the assets are typically considered yours once you reach that age. For example, if the trust says you can withdraw assets at age 30, and you get divorced at age 40, a judge could order you to take the assets and give 1/2 to your divorcing spouse.

A judge may also try to penetrate the trust if the trustee is authorized to give you distributions for your maintenance and support. Giving a beneficiary distributions for health, education, maintenance, and support is a standard provision in many trusts. If your trust contains this language, a judge may order the trustee to make distributions to either support your ex-spouse or to support you so that your ex-spouse can receive more of the marital property.

Does the Trust Give You an Income Stream

If the trust gives you a stream of income, a judge could order you to divert some of that income to your divorcing spouse. Usually, this happens through alimony. The trust income will be included in your income and used to calculate the amount of alimony you will need to pay going forward.

The Trustee is Important

If a close family member, such as a parent or a sibling, is the trustee, a judge could look to break the trust under the theory that your family member will do what you ask. You will have more protection if you have an independent trustee who will not take direction from you. Needless to say, if you are a trustee, a judge could order you to make distributions to the extent the trust allows for that.

Analyze Past Distributions

A court will often look at what distributions have been made to you in the past. If you typically receive money from the trust every year and you stop taking it in light of an upcoming divorce, a judge may order that your spouse receive more of the marital assets because you can receive money from the trust.

The State Law of the Trust May Be Helpful

Typically trusts are governed by the law of the state where they were drafted. Some states, such as Alaska, Delaware, Nevada, New Hampshire, South Dakota, and Wyoming, are known to have favorable trust laws. Those state laws may offer more protection in the event of a divorce. Of course, your divorce may take place in another state where that state’s law will apply to the divorce, while the trust’s governing law will govern the trust.

Some states have seen cases where a judge has ignored trust law and ordered that trust assets be distributed as part of a divorce. Negotiating a prenup before the wedding removes the risk of going to court where you lose control of the negotiation process.

Depending on the trust terms and the state where you divorce, an irrevocable trust may offer you some protection, but the best practice is to have a prenuptial agreement. While no solution is ironclad, a prenup is the gold standard.