Legal Insights

Overlapping Issues of Family Law, Trusts and Estates

The article title, “Overlapping Issues of Family Law, Trusts and Estates” is meant to reflect the importance of considering these areas of law together.  We have experience in Trusts and Estates, as well as in Family Law.  Debbie had been an active member of the Montgomery County Bar Association Family Law Section for many years.  You can see the overlap of the family law and estates issues in divorce cases:  what happens if someone inherits money and then files for a divorce?  You can see the overlap in spousal and child support cases:  can you use a trust to protect assets from being considered available for child support?  You can see the overlap in estate planning:  what if you want to leave money to your adult child but do not trust his/her spouse or suspect they may divorce soon?

If you are interested in these types of issues, you may want to read on to get a sense of how they may play out in the limited context of a prenuptial agreement.

Protecting Your Assets From Your Spouse

From a personal perspective, prenuptial agreements are not very appealing, but from a common sense and legal point of view, they can be essential.  Getting married is the biggest financial decision in most people’s lives, but many do not consider the financial entanglements that marriage creates.  Just ask anyone who has lost a house or retirement plan in a divorce.

Despite reading articles about the importance of using a prenuptial agreement as a tool for planning, plenty of people feel uncomfortable with prenuptial agreements.  Luckily, there are secondary measures, not all as good as a prenuptial agreement, but perhaps more in line with your personal views and the realities of your relationship.  For example, there are ways to structure corporate documents to insulate your business from divorce proceedings, whether your own divorce or that of a business partner.  Buy-sell agreements among shareholders and corporate insurance policies in the event of a forced buyout can be effective tools to protect the business.  Likewise, postnuptial agreements are an option, even if the prenuptial agreement seemed awkward at the time of marriage.  A postnuptial agreement can be all encompassing, or it can be limited to a spouse relinquishing claims on an interest in a business, a retirement account, or the increase in value on an inheritance.

Awkward: Asking For a Prenuptial Agreement

How to avoid awkwardness in asking your loved one for a prenuptial agreement?  Blame it on someone else.

Blame your Mom.  Maybe Mom’s Will is written such that it requires you to provide her Executor with a valid and in-force pre/post nuptial agreement in order to inherit money from her outright, otherwise, the money will be left in a trust to be controlled by a trustee.

Blame your business partners.  A prenuptial agreement can be a mandatory prerequisite for ownership in a business, essentially forcing all owners to enter either prenuptial or postnuptial agreements to protect the business from divorce. This can be effective, as the pressure to enter such an agreement is external, and the blame for needing a postnuptial agreement can be shifted to the attorney for the business.

Second Marriages, Blended Families – What Can A Prenuptial Agreement Do for Me?

Most people have heard about prenuptial agreements, but may not understand how a prenuptial agreement can help them avoid a long and costly divorce, while also protecting their Estate for their children or  in the event they die while happily married to a second spouse.  A prenuptial agreement, however, will not address the issues as to any children born of the second marriage, such as child support and custody.  With that exception, what it can do for you is protect your business, your salary, your pension and your retirement account from claims related to a divorce.  It can state how the marital home is to be handled and what property is your separate property.  The significance of protecting your business from equitable distribution during a divorce, and your salary from years of alimony cannot be understated.

A prenuptial agreement can also set forth the financial parameters of the marriage from the day of the wedding up through and including how your Estate is handled after you die.  It can state whether your spouse has a right to an interest in your retirement benefits and your business.   It can state whether or not your spouse waives the right to claim spousal support or alimony.  Some couples do not agree on a straightforward waiver of rights, but instead agree on a sliding scale—the longer the marriage lasts, the greater a dependent spouse’s entitlement to a portion of specified marital property.  Other couples agree to limit the scope of their prenuptial agreement to certain assets or rights.

Make Them Match Up – Your Prenuptial Agreement and Your Estate Plan

Once you finalize and sign your prenuptial agreement, you must effectuate it by ensuring that your estate planning and your day-to-day finances match up with what your prenuptial agreement says.  This means, check your Will/Trust, and update it if necessary.  Check that your beneficiary designations, deeds and the titling of bank/investments accounts reflect the terms and intentions of the prenuptial agreement and your estate planning.  What if your pre-nuptial agreement defines income as marital property, but your spouse puts all extra income in a 401K beneficiary designated to her children from a first marriage?  What if your spouse owns the home in which you both reside?  Are both of you required to contribute towards mortgage and taxes?  What if you help pay for a new roof and siding and then die?  The money you put into the house is now owed by your spouse.  You didn’t accumulate that money to leave to your heirs.   Will improvements be retained by the spouse owning the property?  You could have a serious clash if your prenuptial agreement says plaid, your Will say stripes, and your beneficiary designations say polka-dotted.

Yes, this seems like a lot of work.  But without it, your assets could be left to someone who, not so long ago made you smile while holding hands at a movie, but today kills your appetite when he slurps milk out of his cereal bowl.

Second Marriage Finances – Do You Want Your Money to Be Left to Your Children?

A prenuptial agreement is the best tool to prevent your Estate from unintentionally ending up in the hands of someone else’s children, while also setting the financial parameters of your marital relationship.

Let’s consider Mom, who at 65 looks great.  Last year, she married Bob. Mom has a son and a daughter, but Mom did not get around to planning…so what happens when Mom dies before Bob and she does not have a Will or a Trust?  If Mom is a resident of Pennsylvania, we need to consider Bob’s statutory right of Election. This law allows, but does not require, Bob to “Elect” to take 1/3 of Mom’s Estate. The right of election exists whether or not Mom has a Will, and regardless of what Mom leaves Bob in her Will.  The only way to cancel this right is by agreement between Mom and Bob, such as a pre/post-nuptial agreement.
If Bob chooses to Elect against Mom’s Will, he gets 1/3 of Mom’s assets that pass through her Will.  Let’s say Mom’s Estate assets are a $200,000 investment account, and her house is worth $400,000—a total of $600,000—essentially the money Dad made through hard work and careful saving.  This means that Bob gets $200,000, Mom’s son inherits $200,000, and Mom’s daughter inherits $200,000.  Did Mom want Bob to get $200,000 from her Estate? Didn’t Mom always say she would leave everything to her children 50/50?

Depending on other circumstances and concerns, simple solutions might include placing assets in a Trust, gifting them to son and daughter before her demise.  Or Mom and Bob at any point before or after marriage could enter an agreement mutually waiving their rights to each other’s Estates, including a waiver of their statutory right to claim an Elective Share.

In the event Mom does not want to leave Bob without anything, Mom and Bob can explore options that express loyalty and respect for her late husband and their children, as well as for Bob’s well-being after she dies. For example, Mom may wish to grant Bob a life estate in her home, so long as he pays upkeep and taxes. Or, she may want to fund a testamentary trust from which Bob can obtain income and support after her death. Depending on Mom’s wishes and the situation, this can be accomplished in a prenuptial agreement, a Will or by Deed.

Second Marriage – Mom’s Remains:
Who Decides Burial/Cremation, New Husband or Children?

After Dad died, Mom married Bob.  Mom’s children know that Mom and Dad wanted to be buried in the family plot in Pennsylvania.  However, if Mom does not make her intentions as to her remains firmly known, then Pennsylvania law allows Bob as the surviving spouse the unfettered right to decide where she will be buried.  Bob might want her to be buried in Florida near his winter condo. To resolve this issue, Mom can state her intentions as to her remains in her Will.

Marriage:  Dealing with Creditors and Bills

Can you avoid your spouse’s debt, and, if yes, how?

It depends.  A prenuptial agreement can protect you from your spouse’s debts accrued before marriage.  Depending on the assets and expected cash flow, an agreement could require use of separate property (rather than income earned during the marriage) to pay down the separate debt.   If income earned during the marriage will be placed in a joint bank account, can it be used to pay down separate debt, such as a mortgage or school loan?  This issue needs to be addressed before the marriage.

Something as simple as how the Deed to your home is titled could be important in dealing with creditors.  Let’s say, for example, your new Husband is not financially responsible.  In that case, maybe his name should not be on the Deed to the marital home.  First, you will not likely qualify for the lowest interest rates on a mortgage if his credit score is part of the mortgage application.  Second, if a Deed is titled in Husband and Wife, and Wife dies first, the home paid for out of both of your earnings and assets may be taken by Husband’s creditors.  Sometimes, however, having the Deed titled in your name alone may not protect you entirely–in Pennsylvania, spouses can be held responsible for each other’s basic support.

In addition to being careful about how you title your assets, depending on your circumstances, there are estate planning tools that can be used to address various concerns about protection from his creditors, including gifting or placing monies in an irrevocable inter vivos trust.

Second Marriage with Young Children

In the case of couples who remarry with children from a prior marriage, planning might address thorny issues of how income, obligations and assets will be allocated among children and step-children for things ranging from medical expenses to college tuition to child support.

The above is not an exhaustive list of issues.  It is a sampling to help us plan for issues that may arise in our lives.

Family Law Litigation

And, if marital or partnership matters go awry you may need to confront the possibility of litigation.

We encourage a Step-by-Step Approach:

Step one.    Collect information; discuss rights, obligations & claims.

Step two.    Explore opportunity for resolution.

Step three.  Proceed to court if and to the extent necessary.

Step four.    Remain open to resolution along the way.

Please be in touch for a common sense evaluation of your situation.

The information posted on www.strongfirm.com is for general information and is not to be used as or considered legal advice.  For more information, please contact Emory A. Wyant, Jr. ewaynt@strongfirm.com, or Deborah B. Miller at dmiller@strongfirm.com.