Before your wedding day, putting the proper legal arrangements in place to protect your assets can save you a lot of stress and headaches down the line. People often think of prenuptial agreements as the only pre-marriage asset protection plans. But did you know an asset protection trust may accomplish the same goals — and then some?
Learn the similarities and differences between a prenup vs. trust and how each could protect your assets.
What Are Prenuptial Agreements and Trusts?
A prenuptial agreement (or premarital agreement) is a legal contract you and your future spouse sign together dictating how you would approach property division, debt allocation, spousal support, and other legal matters during a divorce.
A prenup can include as much or as little detail as you and your spouse would like. It can also specify how you will approach financial matters during the marriage, such as if one spouse owes significant debt.
In contrast, a trust is a legal entity that holds assets on behalf of beneficiaries. When you transfer property into a trust, it is no longer technically “your” property. Putting assets in a trust can protect them from property division in a divorce.
Similarities Between Prenups and Trusts
When comparing a prenup vs. trust, you’ll see some similarities. Prenuptial agreements and trusts are both legal arrangements. They must use specific language and follow specific protocols to hold up in court. In other words, you can’t create a prenup or a trust at home and expect it to meet your needs.
Trusts and prenups both protect specific assets in a divorce. You can dictate in a prenuptial agreement that you want certain property to be “separate” property, meaning that it belongs to only one spouse and will not come up in a divorce. Meanwhile, trusts accomplish this same goal in a roundabout way, separating specific assets from the marital property.
Prenups and certain kinds of trusts are both revocable. If you set up your trust to allow for changes, you can alter it should you change your mind about the trust’s assets or terms. You and your spouse can also choose to alter a prenup if you both agree on the changes.
Differences Between Prenups and Trusts
Aside from these similarities, prenups and trusts are vastly different legal arrangements.
Both spouses must agree to a prenup, but only one spouse needs to create a trust, so the purpose of these two arrangements is usually different. The prenup protects both spouses’ assets, while a trust separates one spouse’s property from the other’s.
You must create a prenuptial agreement before marriage, but either spouse can create a trust at any time.
Creating a prenuptial agreement involves the consent of both spouses and the assistance of at least one attorney. (Ideally, both spouses retain their own attorney to ensure that they represent their wishes and needs.)
Meanwhile, trusts involve three distinct roles:
- Grantor: The person creating the trust
- Trustee: A person named to oversee the property in the trust
- Beneficiary: The person whom the assets will go to upon the grantor’s death or at a specific time
Prenups and trusts can both address assets like real estate, businesses, investments, bank accounts, cryptocurrency, and vehicles. However, prenups can also address debts, and the possibility of future expenses, such as spousal support.
A legally enforceable prenuptial agreement must meet these requirements:
- Be in written form
- Fully disclose both party’s finances
- Not be created under duress or coercion
- Be signed by both parties
The legal requirements for trust creation are different:
- The grantor must have the mental capacity to create the trust.
- The trust must include a definite beneficiary and trustee.
- The trust must have a lawful purpose.
Prenups are revocable and amendable at any time as long as both spouses agree to the change. In contrast, only one type of trust (a revocable or living trust) is amendable; you often cannot make changes to an irrevocable trust after creating it. However, in some circumstances an irrevocable trust can still be amended.
When To Use a Prenup or Trust for Asset Protection
When should you use a prenup vs. a trust to protect your assets in the event of divorce? A prenup may be the better option if any of the following are true:
- You and your spouse are both fully on board with creating this legal arrangement.
- You want to address topics like debt allocation and spousal support alongside asset protection.
- You’re only interested in marital asset protection — not protecting your property from creditors or other legal issues.
You may wish to create a trust instead if any of the following apply to you:
- You want to keep certain assets separate from your partner’s.
- You’ve acquired a significant inheritance that you want to designate as separate property.
- You want this legal arrangement to benefit your larger estate plan.
- You want to protect property from creditors or lawsuits.
Can a Prenup and a Trust Be Used for Estate Planning?
Estate planning is a general term for making arrangements for the end of your life. Prenups and trusts can both benefit your estate plan, but if your main goal is estate planning, a trust will likely be the better option.
Prenuptial agreements dictate what will happen when a marriage ends in divorce, but they can also account for the other event that ends marriages — death. You can consult your attorney about structuring your prenup with estate planning in mind.
Trusts are more common estate planning tools. Many people use them in place of wills to distribute assets and property to beneficiaries after their death. Placing assets in a living trust allows your beneficiaries to avoid probate after you pass away.
In some cases, creating both a prenuptial agreement and a trust makes sense. You can use a prenup to define marital and separate property in relation to your marriage, then use a trust for other estate planning matters.
List of the Pros and Cons of Prenups and Trusts
Pros and Cons of Prenups
|Defines separate and marital property
|Requires agreement from both spouses
|Reduces stress and confusion in the event of divorce
|Is not enforceable if it does not meet specific legal requirements
|Covers matters like spousal support and debt allocation, if desired
|Cannot be used to enforce future child support, visitation, or custody
Pros and Cons of Trusts
|Does not require the other spouse’s consent
|Requires recurring maintenance fees
|Offers many estate planning benefits beyond marital property division
|May be irrevocable, depending on the type you create
|Can be created at any time
|Technically removes assets from your direct ownership
What Are the Tax Implications of Prenups and Trusts?
The tax implications of a prenuptial agreement depend on the terms of the agreement. You can include information about your filing status and tax liability before and after the marriage, if desired. If you and your spouse designate any property as separate property, the titled owner will owe taxes on that property (instead of splitting them between both spouses).
As a trust creator, you will often owe taxes on any income the assets in the trust generate. When your beneficiaries take distributions from the trust, they will owe taxes on that income.
Can You Change or Revoke a Prenup or a Trust?
You can change or revoke your prenup as long as you and your spouse both agree to do so. You can also change a revocable trust. It can be more complicated or impossible to change an irrevocable trust.
Which One Can Protect Your Assets from Your Spouse’s Debt?
If you want to protect your marital assets from any pre-marriage obligations or debts your spouse owes, a prenuptial agreement may be a more suitable choice. You and your spouse can create an agreement to owe marital property credits in the event of divorce.
For instance, if your spouse owes $10,000 in credit card debt from before the marriage then uses your shared income to make payments during your marriage, you can request $5,000 in marital property credits in the event of divorce.
Prenup vs. Trust: Which One Offers Better Asset Protection?
The level of asset protection that a prenup or trust offers depends on how you structure the arrangement. You must include specific, descriptive language in your prenuptial agreement for it to hold up in court. If you do, a judge should honor the terms you and your spouse created in the event of a contested divorce.
Placing assets in a trust doesn’t always protect them from marital property division. Judges use discretion when dividing property, and a judge may distribute income from the assets in your trust to both spouses in a divorce.
If you’re more worried about protecting assets from your spouse, a trust, especially an offshore trust if better.
Creating both agreements could cover all your bases. Speak with an asset protection attorney to learn more about creating a prenup vs. trust; call Blake Harris Law for legal advice today.