Helping you plan for the future.
People tend to think of estate planning as death planning, however, that is a big misconception. While estate planning certainly includes death planning, it is only one part of the equation. We believe that estate planning is multi-faceted and pre and post marital planning is an important part of the estate planning process.
We advise clients that they should be just as concerned about preserving their estate during their life as they are about preserving their estate at death. While your living, your estate includes all of the assets you currently own, however, a pre or postnuptial agreement can even protect the assets you do not yet own -those you may accumulate in the future.
Our pre and post marital planning recommendations typically involve multiple layers, often including a mixture of trusts and agreements, all of which together provide layers of protection from probate, creditors, and divorce.
Some examples of pre and post nuptial planning vehicles are:
Separate Property Trust
A separate property trust is a revocable living trust created to hold separate property assets. In general, separate property (also known as non-marital property) is any real or personal property acquired:
- Outside of marriage (before or after marriage)
- By gift or inheritance (before, during or after marriage)
- During marriage with separate property funds
Generally, community property (also known as marital property) is any property acquired during the marriage that does not fall into separate property category (i.e., the income of either spouse earned during marriage, or any other real or personal property acquired during the marriage, including, but not limited to, houses, businesses, cars, investments, bank accounts, furniture or other household items). An individual should create a separate property trust before marriage and fund it with all of their assets to:
- Avoid probate (in the event of death)
- Clarify and delineate the ownership status and separate property character of all of the assets owned before marriage.
It’s important to note that having a separate property trust does not foreclose the ability to have a community property trust with one’s spouse. A separate property trust would provide the game plan for one’s separate property, whereas a community property trust would govern how the community property owned by the couple is managed at incapacity and death.
It has become quite common for couples to live together before marriage, often purchasing property and building a financial house together before tying the knot. In addition to creating and funding a separate property trust, individuals who are or intend to cohabit with their significant other should consider entering into a cohabitation agreement to confirm the arrangement regarding their legal rights to separate and jointly acquired property.
More and more people are postponing marriage to focus on their education and career, resulting in the accumulation of wealth and/or the development of substantial earning power before marriage. Individuals in this position, should think seriously about the legal protections offered by a prenuptial agreement. A prenuptial agreement is an agreement entered into before marriage to document the nature of property acquired before and during marriage and the division of property and income (including support) in the unfortunate event of divorce, separation or death. The idea is to separate property to prevent application of the community property or equitable distribution laws to your separate property. While spouses are always free to enter into a binding agreement regarding their marital property rights during marriage (via postnuptial agreement), agreements regarding spousal support must be entered into before marriage (via prenuptial agreement) to be enforceable.
The Tax Cuts and Jobs Act of 2017 (the newly enacted tax law) has increased the “cost” of spousal support by repealing the deduction for alimony paid after 2019. This means that, in the event of divorce, the high-income earning spouse will pay tax on all of their income, even that portion of their income that is paid over to their ex-spouse (their ex-spouse will pay no income tax). To limit the potentially devastating effects of this new law, high income earners can instead enter into a prenuptial agreement that limits amount and duration of spousal support or conditions or altogether eliminates the obligation to pay spousal support. Alternatively, women who choose to stay at home with their children in lieu of climbing the corporate ladder may wish to enter into a prenuptial agreement setting forth the right to receive a certain amount of spousal support in the event of a divorce, as an added layer of security.
Prenuptial agreements are also protective in situations where one spouse has children from a former marriage. Such an agreement helps to ensure that a spouse’s separate property goes to their own children. A prenuptial agreement also provides added protection against separate property claims brought by the children against the trust and/or estate.
Prenuptial agreements can do the following:
- Distinguish between separate and marital property
- Protect one spouse from the other spouse’s debts
- Provide for children from a previous marriage or relationship
- Keep inheritance and family property in the family
- Protect your estate plan
- Define property distribution upon divorce
- Detail your property rights and obligations during the marriage, which can include addressing the following issues:
- Separate business interests
- Retirement benefits
- Income, deductions, and claims for filing your tax returns
- Management of household expenses
- Management of joint bank accounts, if any
- How investments in certain purchases or assets will be handled
- Property distribution at death
Prenuptial agreements cannot do the following:
- Provisions detailing anything illegal—contracts for sexual relations.
- Decisions regarding child support or child custody
- Encourage divorce—i.e. no financial incentives for divorce
- Cannot set up rules regarding private domestic matters, such as details about child-rearing, where to spend holidays. Such rules are typically unenforceable.
Lewis-Traut & Ruswick, APC
949 South Coast Drive, Suite 555
Costa Mesa, CA 92626
Phone: (714) 581-8808
Fax: (714) 581-8809
LET’S BEGIN YOUR PLANNING