Irrevocable Trust vs. a Prenuptial Agreement
Pro's and Con's of a Prenupt and a Trust
Hypothetical example of an irrevocable trust vs a prenup agreement is reviewed. Case studies Loomis v. Loomis, Avent v. Avent, Sharma v. Routh are analyzed.
What's better: an irrevocable trust or prenuptial agreement?
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Divorce is all too common in the United States and the legal issues surrounding divorce seem to only help the lawyers involved. Many try to mitigate the cost and emotional aspect of a divorce by drafting and signing an antenuptial agreement, better known as a prenuptial agreement. Good luck getting your fiancée to sign that! The question is, do these agreements work and is there something that will work better?
Let's start with the prenuptial agreement. Even if a prenuptial agreement holds up in court, it still is often challenged on many different fronts, causing additional expense and time [see Callahan v. Hutsell, Callahan & Buchino P.S.C. Revised Profit Sharing Plan, 14 F.3d 600 (C.A.6 (Ky.), 1993); Miller v. Weinstein, No. FA 98-0717738 S (CT 5/18/2004) (CT, 2004); Cooke v. Cooke, 647 S.E.2d 662, 185 N.C. App. 101 (N.C. App., 2007); Estate of Patterson v. C.I.R., 736 F.2d 32 (C.A.2, 1984); among others)]. The spouse who is on the losing end of the prenuptial agreement usually attempts to find a way to try to circumvent or nullify the agreement, costing everyone (except the lawyers) in the process.
Spouses attempt many strategies to circumvent a prenuptial agreement with success. A spouse can attempt to prove they had been tricked, coerced or were the victim of bad intent when they agreed. A spouse can also try to prove that the document was never signed, that their attorney was ineffective or the prenuptial agreement is outrageous (maybe it wasn't when signed, but it is now). Spouses also attempt to prove that the agreement was signed without adequate knowledge of the other spouse's assets. Any of these can nullify a prenuptial agreement and at the very least pull the other spouse into a prolonged divorce proceeding, and possibly push you into a settlement.
In addition to all those attacks on the prenuptial agreement, the spouse without custody of the children is subject to any and all child support the court demands. So, you may have a prenuptial agreement, but that doesn't apply to the kids and their standard of living. You could end up paying anyway, just under the umbrella of child support. All of this does not bode well for the prenuptial agreement.
In summation, a prenuptial agreement can be challenged and nullified. A prenuptial agreement, even if not nullified, may cost you a lot of money in court costs, attorney fees and child support. A PRENUPTIAL AGREEMENT DOES NOT DO WHAT YOU WANT IT TO DO.
What about the irrevocable trust? Doesn't it have some of the same issues? Well, in a word, no. An irrevocable trust beats a prenuptial agreement hands-down. First, an irrevocable trust is set up by the future spouse and the other future spouse does not have to know about it or sign anything for the trust to be official. These irrevocable trusts are used by affluent families; in fact a member of the patriarchal Dupont family used an irrevocable trust to protect assets in expectation of marriage [DuPont II v. Southern national Bank of Houston Texas, No. 84-2043, 5th cir. (1985)]. They can also be used by you. Let's take a look at how an irrevocable trust keeps your assets where you want them:
Hypothetical Example: Irrevocable Trust vs. Prenuptial Agreement
Future spouse X (or even current spouse) takes all of their worldly possessions and places them in an irrevocable trust prior to the marriage (or during the marriage under certain circumstances). Spouse X has a trustee manage them within the trust while they grow in the value. These assets are untouchable by spouse Y in the event of a divorce. They were never part of the marital estate. The assets in the trust aren't even counted towards child-support; although some courts have found inventive ways to challenge that and even if the court didn't, spouse X may make a request to the trustee to support his children or they may be beneficiaries in the trust with specific goals to reach for specific rewards. These payments to X's children would be on X's own terms, not the court's.
Case Law Examples of an Irrevocable Trust and Prenuptial Agreements
Loomis v. Loomis, 158 S. W.3d 787 (2005).
Mrs. Loomis, at the beginning of her marriage, set up an irrevocable trust and funded it with a life insurance policy, worth $0.09 at the time. Over the years, the value of the life insurance policy grew. The Loomis's were married for about 10 years and filed for divorce. Mr. Loomis attempted to have the current value of the life insurance ($55,567.04) included in the marital assets. The court disagreed, because the life insurance policy was owned by an irrevocable trust that was NOT set up in anticipation of a divorce. The entire value of the trust was left out of the marital assets even though this trust was set up after the marriage!
Avent v. Avent, 849 N.E.2d 98 (2006).
Mr. and Mrs. Avent decided to get married in 1978 and signed a prenuptial agreement saying that during the marriage their assets would remain separate. During their many years of marriage, they continued to keep their assets separate. After 25 years of marriage, they filed for divorce. Now in their 80s, their children managed their finances. Mrs. Avent, despite being a minimally paid school cafeteria worker, managed to save and invest a rather large amount of assets. Mrs. Avent, under direction of her daughter, put a large amount of Mrs. Avent's assets in an irrevocable trust. Mr. Avent originally had the trust included in the marital assets, but the appeals court reversed and determined that since the assets were in an irrevocable trust, they were not marital assets.
Sharma v. Routh, 302 S.W.3d 355 (2009).
Mr. Sharma was married to Mrs. Sharma who passed away, but left two irrevocable trusts to benefit her husband and children. A few years later, Mr. Sharma and Mrs. Routh were married but only for a few months. In the divorce proceedings between Mr. Sharma and Mrs. Routh, Mrs. Routh tried to have the trusts included in the marital assets. The appeals court excluded the trusts thereby keeping Mrs. Sharma's assets safely away from Mr. Sharma's new temporary wife.
How does an irrevocable trust work so well? Well, basically it works so well because you don't own the assets anymore. So, when spouse X (you) gets married, X owns nothing. When X gets a divorce, X only shares the marital assets outside the trust. The trust owns everything else. In fact, X may be the one getting assets from the marriage because X doesn't own anything on his own. All of X's assets prior to the marriage are safe in the trust and probably grew substantially within the trust. Spouse Y can try to challenge the trust, but chances are that the case won't go too far, because Spouse X transferred his assets before getting married. The judge will most likely take one look at the trust, determine the assets in the trust are not marital assets and remove them from the divorce proceedings.
So let's compare.
- First, one of the most appealing advantages of an irrevocable trust over a prenuptial agreement: YOUR FIANCEE DOESN'T HAVE TO KNOW AND DOESN'T HAVE TO SIGN ANYTHING!
- When there is an irrevocable trust involved, a judge will only look to see if the assets in the trust are part of the marital assets and if not, the judge will exclude them.
- A prenuptial agreement can be challenged using many different strategies. A prenuptial agreement doesn't protect against excessive child support. With an irrevocable trust, in most cases, you can pre-determine what assets go to your children, when they are given and under what circumstances.
- You can settle a challenge to a prenuptial agreement to avoid a long expensive divorce. With an irrevocable trust you hold the power to give whatever you want or nothing at all. Keeping the power in your hands can encourage the other spouse to settle for whatever they can get, thereby speeding up the divorce.
- A prenuptial agreement does not survive death. With an irrevocable trust, your assets will be used how you want them to be used with NO RESTRICTIONS. In other words, your spouse can't acquire and spend your money on their new “friend” unless you allow it. Your children won't be able to spend it away or lose it in a lawsuit. Your trust will continue to support whomever you want it to support and cut out those that you do not wish to support.