This is one of the more important questions individuals should ask themselves if they intend to make an outright gift of significant assets to their children or grandchildren.
Oftentimes, older generations wish to make these gifts when children or grandchildren are about to marry. Yet, on that happy occasion, proud parents or grandparents are not thinking about what might happen if the marriage ends in divorce.
Although there is debate about the current divorce rate (with some questioning the long-held view of 50 percent), this potential loss should be top of mind, if you plan to make gifts to your family’s younger generations.
After all, should the marriage end in divorce, you’ll feel regret—perhaps worse—when your gifted wealth is unintentionally lost to the other spouse. Here’s why:
All too often, wealth held by one spouse individually becomes marital property. This happens when assets are retitled into the joint family name, following the couple’s marriage. Similarly, this occurs when the newlyweds buy a new home and use previously nonmarital assets for the purchase. The new home is often titled in both the husband’s and wife’s names, potentially making the new home marital property (depending upon state law).
Individuals who have been provided with good advice will most often transfer wealth to their children or grandchildren via a trust, not an outright gift. Conventional wisdom holds that this approach of transferring wealth via trust is all that is needed to protect the assets from a failed marriage. But, in reality, more may be necessary.
All too often, wealth held by one spouse individually becomes marital property.
Here is where a prenuptial agreement can add the extra layer of protection needed to ensure that nonmarital assets remain as such, after the wedding and honeymoon are over.
A prenuptial agreement provides the following protections:
• Protects assets owned before the marriage in the event of death, annulment, separation or divorce.
• Protects assets acquired during the marriage in the event of death, annulment, separation or divorce.
• Defines, fixes and/or limits spousal support obligations in the event of annulment, separation or divorce.
• Formally identifies and values assets owned as of the date of the marriage.
If a couple does not enter into a prenuptial agreement before the marriage and winds up getting divorced, the laws of the jurisdiction in which they reside will dictate support obligations and the manner in which assets and debts will be divided.
People are sometimes unhappy with how the law resolves these issues. So it makes sense for the betrothed couple to plan ahead and tailor the outcome to their personalized viewpoints, in the event of separation, divorce or death. A prenuptial agreement, coupled with a properly drafted trust, can help mitigate either spouse’s risk of losing assets in a divorce.
To ensure that assets gifted to children or grandchildren are properly protected from a divorce, you, as the presenter, should turn to your championship team of experts for counsel: a wealth advisor who is also a CPA, for financial planning and tax planning advice; a family law attorney, for legal advice and help drafting a prenuptial agreement; and a trust and estate attorney for an appropriate trust.
As Al Zdenek writes in his book, Master Your Cash Flow, “Having a championship team in place helps individuals make the best financial decisions for themselves, build and preserve the wealth they need and manage it more effectively.”
When you rely on your championship team, you’ll know that any wealth given to family members will remain with them and not run the risk of being lost due to a divorce, potentially putting your loved ones’ financial plans injeopardy.
This essay was co-authored by Brian M. Picariello, executive vice president of Traust Sollus and Charles F. Vuotto, Jr., Esq., managing partner of Tonneman, Vuotto, Enis & White, LLC, family law attorneys, with offices in Cedar Knolls and Matawan, New Jersey.
This article was originally published in the August/September 2016 issue of Worth.