From The Desk Of Herb

It is reported that 40% to 50% of first marriages and 60% of second marriages end in divorce. Without appropriate planning, a soon to be ex-spouse will likely be entitled to a material share of the couple’s marital assets, which could include assets held by the other spouse before the marriage and even assets inherited during the marriage. If a couple fails to adequately plan, the decision regarding the division of assets may be left to a sometimes unpredictable judge. Moreover, putting these assets into play increases the probability that the divorce will be a more expensive contested proceeding.

A recent survey found that only 3% of all married or engaged couples have a prenuptial agreement, now also commonly called a premarital agreement. There are numerous ways in which a premarital agreement can be challenged, which means that even if you have such an agreement in place, there is no assurance that it will not be invalidated, in whole or in part, by a judge.

The subject of a premarital agreement is often difficult to raise with a prospective spouse. As an alternative to, or in addition to, a premarital agreement to preserve personal wealth in the event of a divorce, an engaged individual can consider an Asset Protection Trust. Asset Protection Trusts can be formed offshore, but for simplicity most prefer a trust established in the United States. Assets owned by the trust are not considered assets of the trust beneficiaries or the transferor (e.g. trust settlor), and are not includable on their personal financial statements. Thus, they are not marital assets subject to equitable division in a divorce.

Fifteen states have laws allowing for the formation of a self-settled Asset Protection Trust. These are trusts where the individual setting up the trust is also the beneficiary of the trust. In contrast, a trust in which the individual’s children and/or grandchildren (but not the individual) are the beneficiaries are sometimes called Bloodline Preservation Trusts. For estate tax savings and asset preservation purposes, Bloodline Preservation Trusts are typically multi-generational trusts also referred to as Dynasty Trusts. Unlike self-settled trusts, Bloodline Preservation Trusts for the benefit of descendants can be formed in every state as an asset protection vehicle for the trust beneficiaries under standard state spendthrift trust rules.

Most young engaged children with little personal wealth are not concerned about entering into a premarital agreement. It is most often the parents who are concerned because it is the assets of the parents to be inherited by the child which are at risk. However, it can be damaging to the parents’ relationship with their child’s spouse to force the issue of a premarital agreement.

Leaving an inheritance to a trust for the benefit of your child who is to be or who is married can mitigate the risks of the child not having a premarital agreement and can even more securely preserve your assets for your child and grandchildren by allowing you to dictate where the trust assets pass at your child’s death (i.e. to your child’s children, rather than the child’s spouse). Typically, the trust for your child will be set up as part of your estate plan and will be funded upon your passing. However, lifetime gifts to your children can and should be made through trusts as well. In this connection, a parent who is re-marrying may want to fund a trust for the child before re-marrying to make sure the assets used to fund the trust are not marital assets in the parent’s new marriage.

If you would like any information on protecting your assets or your child’s inheritance from a divorce, and would also like to learn more about the corresponding estate tax savings for your heirs, please feel free to contact me.

ABOUT HERBERT A. FINEBURG

Herbert A. Fineburg, a firm shareholder and co-managing principal of the firm’s Philadelphia office, concentrates his practice in the areas of Business Law and Transactions,Mergers and Acquisitions, Estate planning, Estates and Trusts, and Tax Consulting. He is recognized as one of Philadelphia’s most respected business lawyers whose substantial knowledge of tax law provides clients with strategic and cost-saving benefits in connection with commercial transactions, taxation and wills, trusts and estates matters. Known for his ability to resolve complicated matters effectively, Mr. Fineburg has assisted businesses and individuals with the organization of their finances, business and real estate affairs, and the structure of their assets (i.e., in LLCs, partnerships, corporations, trusts or joint ownership). He has substantial expertise in the preparation of buy-sell agreements for co-owners who are family members or are unrelated business partners. In addition, to working on bank financings, business contracts and employment matters for his business clients, Mr. Fineburg also provides advice on business acquisitions and sales, and the resolution of shareholder and partner disputes and buy-outs.

ABOUT OFFIT KURMAN

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