Articles Posted in Prenuptial Agreement as Estate Planning Tool

by Michael Ettinger, Esq.

Prenuptial agreements (“prenups”) are contracts entered into by a couple before marriage setting out the rights of the parties in the event of divorce or death. Less common is the postnuptial agreement, with similar terms, but executed by the parties after marriage.

Who signs these types of agreements and why? Often couples marrying for the second or more time will have children and/or substantial assets at the time of remarriage. They may wish to insure that all or some of their assets go to their children and not to the new spouse, who may have children and assets of their own. Even with a will which leaves everything to one’s children, without a prenup the surviving spouse is legally entitled to claim about half of the deceased spouse’s estate. Having been married before, these couples know that sometimes things do not work out and wish to simplify matters in the event of a divorce, including whether or not alimony will be payable.

In the prenup each party sets out a list of their separate property, i.e. what they owned prior to entering into the marriage. The agreement then sets out the division of property in the event of divorce as well as the inheritance rights between the parties. While most prenups provide that neither party will inherit from the other, it is not unusual for the parties to partially waive those provisions after a few years and execute a will or trust leaving assets to the spouse despite the prenup. Other ways to leave assets to the spouse are by making some assets joint or naming the spouse as beneficiary on IRA’s, annuities or insurance policies. The prenup may also contain a “sunset provision” that it expires after the parties have been married for a set number of years.

When there is great economic disparity between the parties, or one of them owns a business, the wealthy spouse may want to protect themselves (as Donald Trump is well known to have done) and, similarly, the less well off spouse will want to establish what they will receive in assets and/or alimony in the event of divorce. If there are business partners of one of the spouses, they may want protection so that the new spouse does not become a partner in the business by way of inheritance.

In our experience, prenups do not work well with younger couples about to enter into a first marriage. They are considered unromantic and usually the young couple does not have sufficient assets to be concerned. While some of them may be coming into substantial inheritances, the invention of the Inheritance Trust has solved this problem. Parents may now leave the inheritance to a trust created by a New York estate planning attorney that protects the assets for their son or daughter in the event of divorce and pass it by blood, instead of by marriage. In the event of death, the child’s spouse has no right to make a claim against a trust set up by a third party, such as the parents or the deceased spouse.

by Michael Ettinger, Esq.

With people living much longer than in the past, the frequency of remarriage is increasing, even in later years. This latter phenomenon is raising a host of elder law estate planning issues. On the other hand, we are also seeing with increasing frequency the blended family with “his, hers and theirs” children, creating another set of potential pitfalls.

Most of these estate planning issues can be resolved with thoughtfulness on the part of the clients and the compassionate guidance of their estate planning attorney.

Here are some of the key issues and potential solutions for planning for second marriages.

1. The duration of the second (or third) marriage and also the relative financial positions of the parties. Recently a client came to see us whose husband has early Alzheimer’s. His IRA named his children as beneficiaries many years ago. The couple have now been married for thirty-five years and the wife would be left destitute without her husband’s IRA. Hopefully, husband has the capacity to understand the situation and make a change. One option: husband may leave his IRA to his wife on the condition that she name his children as the beneficiary on her death.

2. In our experience, a great deal of thought should be given to what the children of the first marriage will receive should their parent be the first of the couple to die. By looking at the matter from the heirs’ point of view, we can often provide an outright bequest of a portion of the estate, or name them as beneficiaries on an insurance policy, so that they feel loved and cared for by their parent and not relegated to an inferior position. This is especially important if the parent has married a much younger spouse. Needless to say, this will also greatly affect their future relationship with the surviving step-parent. Thoughtlessness is this area alone has led to a lifetime of hurt and anguish for many a child of a remarried parent. Wills, at the very least, should provide recognition to the children of the prior marriage.

3. The use of living trusts is often an essential tool where the surviving spouse needs the majority of the combined assets to survive on. Here, the issue becomes how to guarantee that the predeceased spouse’s children will receive their fair share on the surviving spouse’s death. Typically, we set up one trust if the estate is not subject to estate taxes, or two trusts if needed to reduce or eliminate estate taxes, and make both spouses co-trustees of the trusts. The trusts provide for equal distribution among his and her families after the second death. What prevents the surviving spouse from raiding the trust and giving everything to his or her own children? Generally, we recommend a professional co-trustee to serve with the surviving spouse, so as to prevent this occurrence.

4. The estate planner must consider any prenuptial agreement as well as any obligations to children arising out of a divorce decree. These may need to be changed after a number of years to reflect the current situation which may have been greatly altered. For example, after many years one spouse will often wish to provide life rights in the marital home to the other, should he or she be the survivor, something expressly forbidden in the prenuptial agreement drawn up many years earlier.

5. Long-term care obligations have proven to be intimidating to many couples later in life. Even a prenuptial agreement providing that the spouses’ assets are separate and that they have no financial obligations to each other is not binding vis-a-vis Medicaid. Medicaid considers the combined assets of the married couple as being available for the care of the ill spouse, regardless of whose name they are in. Hence, the need, amount and availability of long-term care insurance is often a factor to be considered in second marriages. Medicaid planning as well as setting up a Medicaid Asset Protection Trust for one or both spouses must also be considered in this context.

6. For wealthier couples, one spouse may wish to take care of his or her less well off spouse for their lifetime but then have the unused funds revert to their biological family. Here a QTIP (Qualified Terminable Interest in Property) trust may be set up for the surviving spouse, which will (a) provide a lifetime income, (b) delay, reduce or often eliminate estate taxes, and (c) protect the inheritance for the children of the predeceased spouse.

As you can see, with a little thoughtfulness on your part and the help of an experienced elder law estate planning attorney, often gleaned from hundreds of cases, second marriage couples have the ability to “do the right thing” for all concerned and avoid acrimony or even litigation in estate administration and probate.

Contact Information