Remarital Finances Part 10: Private Trusts and Premarital Agreements In Remarriage

By Joseph Warren Kniskern, Esq.

Planning For A Family Merger — Not A Hostile Takeover

Part 10--Private Trusts and Premarital Agreements In Remarriage: A Minefield of Conflicting Feelings And Interests

Newlyweds gingerly tiptoe around the subject. Usually it takes a family crisis or divorce to become brutally honest. What am I talking about? It is the practical question nearly everyone dreads: "What happens to our family and assets if one of us dies, becomes disabled, or even if our remarriage fails?" It is an inevitable spin-off of the separateness issue we discussed earlier in this series of articles.

In 1970, prior to enactment of the "No Fault" Divorce Laws, the vast majority of individuals who married were wedded for the first time. But now the numbers are almost equally split between first marriages, and spouses entering a remarriage according to the Census Bureau. And a growing majority of remarried couples are using private trusts and/or premarital agreements. Perhaps this is why the best-selling book in Amazon.com's marriage category in 1999 was "How To Write Your Own Premarital Agreement."

In any event, if you are considering remarriage, using a private trust and/or a premarital agreement is an option for your consideration—especially if one or both spouses has children from a previous marriage, owns a personal residence, has retirement benefits accrued over many years, or has substantial savings and investments through family inheritances or otherwise. Never mind that Donald Trump believes that any wealthy individual who marries without a premarital agreement should be institutionalized.[1] Forget about those who justify themselves by stating that there is a time when romance must yield a little bit to a dose of realism. You must make your own decision about this matter, especially in light of God's Word and the material regarding biblical attitudes on wealth and possessions, discussed in the first article of this series.

It is true that some couples considering remarriage in recent years are using private trusts and premarital agreements to make their expectations and intentions clear from the beginning of the relationship and thereby minimize any misunderstandings later on. But such trusts and premarital agreements are an emotional powder-keg for some people. If the emotional upset and psychological distress of agreeing on these issues is too much for either or both spouses, these trusts and premarital agreements may cause more harm than good, as we shall see.

What Are Premarital Agreements? A premarital agreement between spouses considering remarriage outlines how property is to be divided, spouse support and other matters in the event of any future divorce. When spouses are not financially equal, such agreements also can protect spouses (and their lawyers) from exploiting each other.[2] But, as we shall see, there are many other purposes for such agreements.

Premarital agreements are a fairly recent development among married couples. Throughout the history of common law, courts generally would not recognize contracts between a husband and wife, based in part on society's interest in the family and the belief that marital rights cannot be subject to fair and imbalanced negotiations. But courts also began realizing the benefit of marital agreements dealing with spousal rights if death terminated a marriage. This led to using such agreements for other marital situations as well.

Then, in 1983, the National Conference of Commissioners on Uniform State Laws noted the increasing frequency of multiple marriages and growing popularity of premarital agreements. After addressing the concerns of many lawyers regarding the uncertainty and lack of uniformity in enforcement of premarital agreements, the Commissioners adopted the Uniform Premarital Agreement Act (UPAA).[3] Adopted in a majority of states as of 2002, this Act provides that virtually everything, except for child support and custody matters, may be contracted for in a premarital agreement, as long as it is, in the words of the Act, "not in violation of public policy".

What Are Private Trusts? We have already discussed some forms of these trusts in the estate planning section earlier in this series (Part 7). Trusts generally are legal agreements providing for dividing the ownership of assets from management of those assets. These trusts can be revocable trusts, where the person setting up the trust reserves the power to amend or revoke the trust, or irrevocable trusts, where this power has been surrendered.

Private trusts serve important practical purposes. For example, in the case of Roger and Vickie and use of the life insurance proceeds belonging to Vickie's children (discussed in Part 4 of this series), Vickie (or her deceased husband) might have made these funds "untouchable" by putting this money into an irrevocable private trust for the sole benefit of their children with a bank or other trusted person serving as trustee. The children would then be the rightful owners of these funds, but the trustee would have control over how those proceeds were invested and spent until the time came for the purpose of the trust to be fulfilled (paying for each child's college education). A private trust of this sort might have taken some of the pressure off Vickie in resisting Roger's demand that they dip into these funds to save his business. It would have been easier for Vickie to say, "But Sweetheart, we both knew in advance that neither of us would ever use this money for anything else but for the children. It's in trust for them—we can't touch it." Without any such private trust, the choice for Vickie was a lot more clouded and difficult to manage.

There are a number of different private trusts of this sort to choose from, with different income and estate tax consequences. Be sure to check with an experienced and competent estate planning advisor as to your options in this regard.

What Purposes Do Private Trusts And Premarital Agreements Serve? Here are a few possibilities:

• Spouses can agree on what each will bring into the remarriage and how it will be shared. Remarried couples will have many different ideas about how they want to account for the assets each brings into the marriage. They need to resolve how their personal premarital assets will be used and enjoyed. If a couple chooses to "throw everything into one pot," which would be most unusual in many blending family situations, then use of a premarital agreement may be appropriate for spelling everything out in writing, so there is no future misunderstanding. If some personal assets are to be set aside for specific persons or purposes, then a private trust could be helpful.

  For example, a couple may agree that property titled in each spouse's name will remain the same after remarriage and always be the property of the titleholder. But what if the non-titleholder spouse does something that makes the titleholder spouse's property dramatically increase in value beyond mere passive appreciation through inflation and normal market increases? The couple may want to reward that non-titleholder for his or her efforts in some way. Premarital agreements could serve this purpose.

  What about each spouse's individual retirement plan? Will each person's retirement plan remain their own asset? How will additional contributions be made from joint or personal funds? The couple can specify this in a private trust or a premarital agreement.

  If the couple purchases a new home in their joint names, but each spouse contributed unequal amounts of premarital funds to buy the home, they could agree that they would share in any appreciation in value in the same proportion as they contributed to the purchase price. For example, if the husband contributed 60 percent of the purchase price, while the wife put in 40 percent, on any resale of the home they would split the appreciation in the same percentages. Or they could agree to just reimburse themselves for their contributions and then split the appreciation 50/50 after that. All of these planning measures and agreements are appropriate in premarital agreements. The law does not help much in deciding these issues for you.

  How will the spouses treat untitled assets, such as furniture, jewelry and other property? Will these be kept by the spouse bringing the item into the remarriage, or divided equally whenever they are sold? If all of these matters were spelled out in a premarital agreement, or even in a non-legal letter agreement of understanding, it could help avoid misunderstandings and conflict later on.

• Spouses can agree as to how premarital debts will be handled. For example, both spouses could agree that each person is responsible for his or her own debts, incurred prior to the remarriage, as is typical in most premarital agreements. Or one spouse may commit to helping his or her mate pay off premarital debts in specified ways under certain conditions. There are many options available, as long as both spouses are fair and considerate of each other.

• Spouses can protect their children. Just as a private trust might have helped Vickie and Roger's situation, many older couples want to protect and provided for their children, and perhaps even grandchildren, from a prior marriage. They may not want anyone else to receive assets or monies earmarked for those children. Premarital agreements can list and categorize the non-marital property, and designate which particular children will have the right to receive those assets upon any disability, death or divorce. Alternatively, private trusts can keep these assets separate for the exclusive benefit of the children.

• Protects family businesses. With the greatest intergenerational transfer of wealth in history to occur in the United States over the next decade, an estimated $10 trillion dollars is expected to be passed along from parents to baby boomer children, with much of this wealth tied up in family business stock. Because of this fact, more and more private business trusts and premarital agreements are being designed and used to keep family businesses from becoming the spoils in divorce cases.

  Premarital agreements even include confidentiality clauses, which bar divorcing spouses from revealing family or corporate secrets. No family wants to have its business destroyed over a personal failing of one child and his or her spouse.[4]

• Spouses can agree to exceed what the law requires of them. For example, courts have the authority to require parents to support a child only until that child reaches the age of majority or is otherwise emancipated. But what about a child's college expenses? Private agreements help spouses mutually commit to expand their obligations beyond legal requirements by agreeing on such matters as: (a) how the expenses will be shared between the spouses (and the child, if desired); (b) whether there are any limitations on subsidizing college, such as choice of school, whether college must be completed by a certain date, minimum grade expectations; and (c) whether college expense commitments continue after the death of either or both spouses. The law will not help you map out all of these decisions, but premarital agreements can do it as you and your spouse mutually agree.

  In blending family situations, a stepparent usually has no legal duty to support a stepchild during a marriage or after his or her death or divorce. But remarried spouses in this case can assume various obligations in various private agreements that courts will recognize and enforce if it becomes necessary.

  There are numerous options and possibilities as to what remarried couples can agree upon, as long as the issues are not against public policy.

Advantages Of Private Trusts, Premarital Agreements And Other Private Agreements.

• Guard against future misunderstandings among remarriage partners. Guidelines and restrictions in private trusts and premarital agreements can resolve issues in advance—before emotions are running high after a death, disability or divorce occurs. It may make sense for a couple to decide these matters at the start of a remarriage, when each party is lovingly cooperative. Many believe it is better if a couple discusses these matters early in a serious dating relationship. This is especially true in states where the laws are not fair to both spouses. Partners begin with a partnership agreement. From a legal and economic standpoint, a remarriage partnership may be no different, as each "partner" brings in unequal assets and commitments into the relationship. If spouses resolve property matters in advance, divorces would be over in a short time. In fact, such agreements help insulate a couple from destruction of the marriage since many divorces thrive in situations where spouses are "surprised" by uncertainties and unrealistic expectations.

• Allow you to tailor your lives to your own family circumstances. Private trusts and premarital agreements provide you and your spouse with a wide range of options to consider in deciding how best to plan for the future. For example, one couple agreed in their premarital agreement that each spouse would keep separate bank accounts and trust funds but share living expenses. But if either spouse became ill and depleted his or her funds, the other would pay for the ill spouse's care. Another spouse wanted to ensure that his elderly parents and children from a first marriage were provided for in the event of his death. His premarital agreement provided for leaving his estate to his parents and children, but also required him to secure and maintain a suitable insurance policy in favor of his second wife. The possibilities are almost endless.

• Reduce interference from lawyers and courts. If you do not have such any such private agreements, you are conceding authority to dispassionate judges and warring lawyers who will decide your affairs during a low and most vulnerable time of your life (divorce) with little or no input from you! Therefore, you may want to retain some control over your life, by voluntarily expressing your desires in advance. You can express how you wish to use your resources, rather than having some judge say you must do something against your will.

  If there is no Will, private trust, premarital agreement or other private agreement stating to the contrary, State laws can override the intent of a remarried couple. This might occur if the couple truly wanted to elevate the interests of a stepparent in connection with a stepchild, if the biological parent dies for example.

Disadvantages Of Private Trusts, Premarital Agreements And Other Private Agreements.

• Bring an element of doubt into the remarriage. This single factor alone cannot be overemphasized—it is an extremely important disadvantage. To a couple in love, the entire issue can communicate "I don't trust you." The underlying message is that you are planning for a remarriage that may not last "until death do we part." It is one thing to enter a remarriage with the realistic understanding that, "Yes, divorces can happen, even to committed Christians like us." It is quite another to prepare for that eventuality with such an agreement. It can have the emotional effect of saying, "I'm hedging my bets on this marriage," a potentially cancerous message and attitude.

  Perceived mistrust also can become a self-fulfilling prophesy. If a spouse perceives mistrust, he or she may act accordingly. To spouses who are business-oriented, an agreement may be good. Although not pleasant to think about, planning is prudent—like making a will or buying life insurance. But there is no doubt that the emotional side of these agreements can be emotionally devastating to the most mature and secure person.

  For Christians, premarital agreements can send an even stronger negative message. Christians can, and should, view the remarriage as lasting for life. But, as we know all too well, Christians are not immune to the divorce disease—many times, because of hard hearts. If an agreement can be sensitively discussed by a couple before marriage, it may useful if needed in circumstances. However, if the agreement only fosters bitterness and emotional turmoil just before a remarriage, the couple will have to weigh whether using an agreement is worth the price, or even if pursuing the relationship is appropriate.

• Bring lawyers and legal concerns between a couple in love. Cartoonist Leo Cullum pictured a young woman seated at a bar addressing a young suitor, "I feel we're ready to take the next step, Michael. This weekend I'd like you to meet my attorney."[5] Another cartoon shows a couple at a wedding appearing before a minister reading from a script prepared by a lawyer standing by his side: "And now Mr. T.A. Hester of Fulton, Hestor & Parker will read a brief synopsis of the prenuptial agreement."[6] Still another cartoon shows a couple speeding down a highway with "Just Married" signs and dragging the traditional cans on the road while passing a bride driving another vehicle in the opposite direction plastered with a sign, "Just Read Prenuptial Agreement" and dragging her screaming tuxedoed groom behind her car![7]

  Legal matters like private trusts, premarital agreements and similar private agreements can be scary and intimidating. There are few couples who want to tangle with the hassle and expense of financial self-protection issues and lawyers at a time when weddings and relationships are on everyone's mind.

• Even extended family members can unreasonably pressure a couple into private agreements. Some parents are even going so far as insisting that their sons and daughters use private trusts and premarital agreements, or forfeit any stock in the family enterprise—often called "scotchguarding a business". Sometimes parental pressure becomes overwhelming. Billionaire financier Ronald O. Perelman, chairman of Revlon Inc., in a much-publicized feud, boycotted his son's wedding ostensibly because he refused to secure a premarital agreement from his bride.[8]

In our next installment, we'll investigate further into the significant psychological factors affecting these private agreements, as well as the many legal issues involved, and also suggest some practical ways to help take some of the "sting" out of these arrangements.

Next: Private Trusts and Premarital Agreements In Remarriage--Psychological and Legal Concerns

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