Yours, Mine and Ours: Blending Families and Finances by Judy Tuggle

Executing a prenuptial agreement does not mean a person cannot do as much as they want for their new spouse; it means the government or the couples’ children or other relatives may not control their estate plan. If a couple contemplates marriage and each has acquired property prior to the marriage, or if either anticipates inheritance of property, a prenuptial agreement can make clear the right of that party to decide who will benefit from that property and in what way.

Often individuals come to a marriage with indebtedness, and a prenuptial agreement makes clear who will be responsible for the payment of that debt. This can actually result in asset protection for the new couple by sheltering the non-indebted spouse’s assets from the creditors of the other. prenuptial agreements should be viewed as a way to enhance the marital relationship and a way to promote harmony between the couple as well as their heirs because the agreement works to avoid misunderstanding or “ugly surprises”.

A valid prenuptial agreement must include a full disclosure by both parties of the assets and liabilities each brings to the new marriage. It is best not to execute the agreement too close to the wedding date, and my preference is at least one month prior to the wedding date. It is also preferable for each party to have their own separate representation. In this way the real or imagined claims of duress or lack of understanding should be avoided.

One of the issues to address in a prenuptial agreement is the identification of joint or separate property as well as how appreciation on separate property will be characterized. In the event of death or divorce, this understanding can avoid costly litigation. The agreement will define with specificity the assets to which each spouse is entitled under various scenarios. Again, it does not mean a spouse cannot choose to give as much as they want to their spouse. One can always give more but not less than the agreement states. This should be seen as a positive rather than negative consequence of having a prenuptial agreement because it should reduce the potential for conflict.

If a person were to become incapacitated, the prenuptial agreement can address how a person’s property will be used for the benefit of each family member and by whom. This can be very important when the incapacitated spouse is primarily responsible for the payment of certain bills of the marriage. It can also make clear the obligations with which an agent or successor trustee must comply for an incapacitated spouse. For example, if one spouse owns separate real estate and their spouse is incapacitated, the prenuptial agreement can make clear the obligation of the incapacitated spouse’s agent or guardian to join in the deeds required to transfer or sell that separate property.

Those contemplating marriage should not hesitate to at least discuss the possibility of a prenuptial agreement with their prospective spouse, or to seek professional assistance in that discussion. Open and honest communication is essential for good relationships and ideally financial as well as personal matters should be discussed prior to entering the marriage relationship.

Use of Bypass and QTIP TRUSTS

A comprehensive estate plan will often include the use of revocable trusts that can incorporate tax planning with accomplishing the personal goals of a settlor or creator of the trust. Often provisions are included in the trust for a surviving spouse in such a way as to assure the settlor’s wishes are honored regarding the use of the trust property by the surviving spouse for the remainder of his or her life, but then ensure ultimate distribution to the children or other designated beneficiaries of that first spouse to die. This often involves the use of Bypass and QTIP trusts, which provide tax advantages and asset protection along with this assurance of ultimate beneficiaries. The Bypass trust typically utilize the settlor’s remaining exemption from federal estate tax while the QTIP trust receives any additional trust property over the available exemption. This arrangement is often suited to couples who have children from former marriages or different wishes regarding the ultimate beneficiaries of their respective trusts.

QTIP trusts can provide the surviving spouse with as much or as little flexibility as the settlor of the trust desires. A surviving spouse may be the sole or a co-trustee, or another trustee may be appropriate. The surviving spouse may be beneficiary of income and principal or merely the income beneficiary. He or she may be given special powers to appoint the remainder among a certain group of beneficiaries, or no flexibility to alter the ultimate beneficiaries. These trusts may be structured in a way to best accommodate the specific family circumstances.

While many couples are comfortable with leaving the survivor completely in charge of ultimate distribution of the combined estate, blended families are often best served by the structure and certainty provided in the bypass and QTIP trust arrangements described above. The ultimate goal of good estate planning is to avoid “ugly surprises”.