This seems to be a staple in many law firms’ “form” trust agreements.
Let’s analyze the logic. The attorney (or many times the client) believes that by requiring that a beneficiary have a prenuptial agreement in place it will therefore almost force the beneficiary to do so and therefore somehow magically protect the trust assets.
However, such a provision actually causes the very problem that the drafting attorney and/or the client was trying to avoid. Let’s use actual logic, not faulty logic…
What It Actually Protects Against
By essentially forcing the beneficiary to obtain a prenuptial agreement, this behavior likely only protects most of the beneficiary’s personal assets from divorce. It does not protect the trust assets at all! Let me say that one more time: It does not protect the trust assets at all!
Therefore, it’s faulty logic. But even worse, it can actually cause the very problem that it was intended to protect against!
Coercion and an Invalid Prenuptial Agreement
One of the most common reasons for a prenuptial agreement to be ruled invalid is where there is coercion.
This is why attorneys generally recommend that the prenuptial agreement be signed as far in advance of the wedding date as possible.
This is also why each party generally obtains separate counsel to represent him or her during the negotiation and drafting of the prenuptial agreement.
Being a Beneficiary of a Trust Requiring a Prenuptial Agreement
Let’s assume that the parents of one of the parties to the marriage has set up a trust that requires that the beneficiary have a prenuptial agreement in place prior to receiving a trust distribution. And let’s assume that there are millions of dollars of assets in the trust so that the potential distributions are meaningful.
Isn’t there an almost 100% probability of coercion given that the beneficiary’s fiancé is essentially forced to sign a prenuptial agreement since it would adversely affect his or her financial life and the financial life of the trust beneficiary if one was not signed?
I can’t think of a worse provision to include in a trust! Yet, as previously stated, this provision is a staple in many law firms’ trust “forms”. It’s time to rethink this faulty logic.
How to Protect Trust Assets
If you want the greatest protection of the trust assets, trusts should drafted as fully discretionary trusts, not as “health, education, maintenance and support” trusts.
If there is a divorce and either no prenuptial agreement or one that is thrown out by the court on account of coercion or for any other reason, then you have to look at the provisions in the trust agreement and also look at which state law applies to the trust. [Failing to use the more protective laws of another state when setting up a trust is beyond the scope of this article but is a topic I have written about many, many times!]
A discretionary trust is generally (but not always) drafted with the primary beneficiary as investment trustee and either a close friend or a corporate trustee as distribution trust.
This type of trust should not include a provision allowing distributions for “health, education, maintenance and support” since that is a problem provision.
Do not draft a trust with a provision requiring a married beneficiary to have a prenuptial agreement in place in order to be eligible to receive a distribution from the trust. This type of provision is used very frequently, but simply shouldn’t be used at all!
If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:
- The Spousal Lifetime Access Trust: A Gifting and Creditor Protection Technique
- Estate Planning Techniques in a Time of Low Interest Rates
- The Installment Sale to an Intentionally Defective Grantor Trust
- The Grantor Retained Annuity Trust: Significant Estate Tax Savings with Nearly Zero Gift Tax Risk
- Steve’s FREE State Rankings Charts
ABOUT THE AUTHOR
Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He has been named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth. He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020 and 2022. He can be reached at 702-341-6000, ext. 2, at firstname.lastname@example.org or at his firm’s website, www.oshins.com.