Premarital Planning: What to Know and Do Before ‘Going to the Chapel’

“Premarital Planning: What to Know and Do Before ‘Going to the Chapel’,” that is the subject of today’s ACTEC Trust and Estate Talk.

This is ACTEC Fellow Travis Hayes of Naples, Florida. In this segment, we focus on how to prepare the client and the client’s family for the premarital process, when it would or would not be appropriate in a high-net-worth family situation, the two major categories of premarital, some basic property laws relating to matrimonial planning, and an introduction to the interaction of divorce with SLAT and DAPT planning.

ACTEC Fellow Lou Harrison of Chicago joins us today to share his expertise on the estate planning issues that advisors and their clients should consider before a client’s marriage begins. Welcome, Lou.

Lou Harrison:  Thank you, Travis. Like many of you listening to this podcast, I am an estate planner. I do not consider myself a full-time matrimonial lawyer, but I get involved, again, like many of us, in premarital planning. I do have the advantage, and at times disadvantage, of having matrimonial partners who are full-time and they have a whole different view of the process than we as estate planners have as to premarital planning. And so, today, you get to hear in this segment my biases, and I try to incorporate a couple of their biases as to what constitutes effective premarital planning.

Two Types of Premarital Planning for High-Net-Worth Families

I want to start by indicating my view of what we typically see in the premarital world for high-network planning, what the two categories really are; and they can be divided into, essentially, the second marriage situation where you have older couples getting married who have established families, kids from prior marriages, established lives, businesses, and maybe they’re in the 40 to 80 range age-wise. So, we call that second marriage planning.

That, to me, is quite different than what I want to call the legacy planning, which is your high-net worth client has children that are getting married, and they want to preserve and protect legacy assets before that first marriage of their young adult children. And that’s a whole different flavor.

Preparing Clients for the Premarital Planning Process

So, with those two in mind, the first item I want to mention on premarital planning is, essentially, how difficult this is for us, because we’re dealing with perceptions coming into this process by our clients that have to be disabused, changed, or otherwise somewhat modified to match what our expectations are. For us on premarital planning, we know this is going to be a challenging process. We know what we want to achieve. We know that there’s lots of sensitivities to achieving that and we know it’s not as easy as going to AI, producing a form, and saying, here are parties that are getting married, sign this AI-produced product.

The reason I say that is, guess what? Guess what, our client coming into the process thinks that that AI-produced premarital agreement is sufficient. They do not know the complexity that their family is about to enter into in the premarital process. So, what is that complexity? Well, essentially, you have to cover all sorts of grounds in terms of disclosure of assets. What is maintenance? What is marital property? What is separate property, community property? What happens when you change jurisdictions? What are the expectations of the parties at death? And you’re entering into a regime where there’s a lot of emotional considerations driving the process that are not completely tied to the legacy results. And so, you have to prepare your client going in as to what to expect in this process.

What I’m going to advise you is, as you enter into the premarital planning with your clients, the world 10 years ago is not what it is today. This is an important area just about for every high-net-worth client where their kids are getting married or they’re involved in that second marriage. Second marriage is not as bad in terms of the expectations, the couple’s been around, maybe their spouse passed away, maybe there was a divorce. They know what’s involved in that premarital process. But when their child is, their younger adult child is getting married for the first time, they don’t know what’s involved in the process. So, you have to coach them, you have to educate them, you should have marketing materials, you should have educational materials, you should explain to them that the laws in each of these states are quite different and that you don’t know where a couple’s going to end up getting divorced if their marriage doesn’t work out.

So, there’s a lot going on here in this process and even before you get into, all right, let me talk to your son, daughter, child about the process; talk to the parent about the process. Make sure they know how difficult this is going to be. And here’s an easy one, mention the disclosure of assets. A lot of high-net-worth families are a little bit persnickety about what is disclosed and what is not and you get to get into the conversation of if we don’t have adequate disclosure, we may not have a valid agreement and listen, Mr. X, what is adequate disclosure, we can choreograph that a little bit but it’s going to require a lot of effort by all of us during the process.

That’s just one example. You can mention also that both spouses are going to be represented by attorneys and so you can’t predict what the other attorney’s attitude in the process is going to be and that could further complicate it. And then you can actually go over provisions in the document and why you’re going to cover a lot of different areas and why the process is actually going to result in more than a two-page AI document. So, prep your client, that’s more than a one-hour meeting but that’s the beginning of the process.

Why Premarital Agreements Matter for Legacy Planning

For our high-net-worth clients, what is the answer in terms of, let’s talk about legacy planning for a second, whether they’re adult children, young adult children need a premarital. And here again, we go back 10 years and you go, well, we have these third party created trusts and these third party created trusts are pre-protective, right? We know that third party created trusts have creditor and spousal protection, preserves the nature of the property, which is really nice as separate property as quote legacy property. That’s fairly solid and you’re talking to your client, let’s say he’s a 60-year-old parent and she goes, yeah, these premarital processes are really tough, and I just rely on third party trust. Well, 10 years ago, I think I may have been more inclined to say yes. Today, I don’t think that can be the answer anymore and it’s really for a lot of reasons.

Why Trusts Alone May Not Protect Legacy Assets

One is that courts have a lot of equitable discretion, independent of what the state statutes say. A state statute may protect separate property to separate property, not really capable of being divided as mural or community property and doors. Nevertheless, that state court judge could also say, “Yeah, but you have so much separate property, I think I’m going to modify what the maintenance looks like.” Or child support, which is never covered in a premarital, like the judge could say, “Well, I’m going to twerk up this child support as well.” Or, unfortunately I’ve been there on the following a few times, the judge could just ignore the law and now you’re forced to have to appeal. Number one, equitable discretion.

Number two is you don’t know where these parties are going to end up if their marriage ends up in a divorce. Are they in Texas, where income from community property is separate property? Are they in Wyoming, where it’s all equitable distribution, whether it’s separate property or not our marital property? Are they in Colorado or appreciation on separate property, maybe marital property? You just don’t know. And so we can’t rely on third party created trust anymore. So you’re going to have to go through the process and for your high-net-worth clients, you’re going to have to, again, create the value of the premarital process to them.

Protecting Separate Property Through Premarital Planning

What are you doing on legacy property planning? You’re basically saying separate property remains separate property for all time, including appreciation and income and changes in the asset from an investment to a new investment, still separate property. You’re going to want to argue that separate property is not going to be part of the determination of maintenance. And then finally, you’re going to want to argue that separate property is not subject to the statutory rights of a spouse at death. That’s what you want to do on legacy planning.

Premarital Planning for Second Marriages

On the older couple that’s getting married, that’s getting married for the second time with pre-established families, well, that’s going to be more involved. There you’re going to want to do a waiver, probably of all rights, but the non-moneyed spouse may be entitled at certain amounts at certain times. So that gets into a different process. I think as estate planners, probably most of us are dealing with the legacy asset protection, the majority of the time. And that is the trickier one to navigate, again, because of human behavior.

Understanding Separate, Marital, and Community Property

So that’s the process. You need to know a few certain basics in this process. In terms of moral property laws, I think most of us, if you’re listening to this or you have a pretty good understanding of that; separate property is property that you received by inheritance or gift or that you’ve acquired prior to marriage. Separate property, usually, depending on what state you’re in, includes income and appreciation and new investments from that separate property, but not always, as we mentioned earlier. That separate property, marital property, on the other hand, is property acquired after you get married, usually through employment, and does not include, of course, gifts and inheritance that you received during the marriage. That’s property that you are creating after the marriage through your own efforts. Community property, same as marital property, essentially. And then you have non-marital property, which is property that you have given away to your children, grandchildren, legacy truss, during the marriage. So you got community property, marital property. Usually those are pretty much divided equally unless one spouse in the marital property regime has substantially less. You have separate property, which you want to, in the premarital planning, keep with the spouse that has or will have that separate property, and then community property is usually divided into half. So those are the general rules on the nature of property.

How Joint Ownership Can Change the Nature of Property

When spouses take property and they put it in joint tendency, they’re very important. It’s usually changing the nature of the property. If it’s separate and they put it in joint tendency during marriage, usually, not always, some jurisdictions — I believe California is one of them, hold otherwise — but it usually changes the property into marital or community property. So, you got to be careful with that.

And then finally, just changing the title of property during marriage from one spouse to another doesn’t necessarily change it from separate property of the transfer or spouse to separate property of the transfer spouse, nor does it make it marital property. So joint is one thing, could be marital property when it’s transferred, separate to separate, it’s not.

SLAT and DAPT Considerations in Matrimonial Planning

Now, two items to think about when you’re doing estate planning and you’re in the premarital world or even after you’re married, and that is SLAT planning and DAPT planning. With slats, when you’re doing slat planning, be very careful not to use the separate property of one spouse to put it into a SLAT. Once you do that, that, at a minimum, should change the separate property of that donor spouse into the non-separate property of the donor spouse. So, unless the donor spouse knows that’s going to happen, you want to avoid that.

And then finally, with DAPTs, they have become the subject of much litigation in the matrimonial area, post matrimonial area. We need to be a little bit more careful on DAPTs. DAPTs are not intended to transmute property from separate to marital, from marital to separate. And so in order to make sure that property transferred to a DAPT is preserved in terms of marital, the marital nature of that property, there should be a provision in the DAPT indicating an intent by the party transferring the property that there’s no transmutation. There should also be a provision in the DAPT, I’m assuming that you’re representing both spouses in the DAPT, there should be a provision that the non-beneficiary spouse can remove and replace the trustee and a provision that the non-beneficiary spouse can request slightest change as well. Just a couple ideas on DAPT planning.

The Key Takeaway for Premarital Planning

You’re going to hear more in an upcoming podcast on testamentary planning as it applies to estate planning strategies, but this is for lifetime planning. And I would say as you leave this podcast, the absolute number one takeaway that you want to do in premarital planning is to get your mindset wrapped around the fact that you’re about to enter into a new area of expertise, and that is you will become an expert marketer to your client as to the importance of premarital agreements in the planning, the sophistication of premarital planning, the difficulty of negotiating premarital planning, and therefore suddenly or directly the expected cost of premarital planning is likely to be something that if not introduced along with these marketing materials would be a surprise to your clients. Better to get them vested up front with what’s going to be a challenging and important and oftentimes sophisticated process than to surprise them down the road. As we know, clients are not real happy with surprises. So fasten your seat belt, get ready for an incredibly important area for high net-worth-planning, and good luck with your premarital is going forward. Thank you.

Travis Hayes:  Thank you, Lou, for providing us with your expertise on premarital planning. This is an important topic for estate planning advisors who work with high-net-worth families, and we greatly appreciate you sharing your valuable insights on preparing clients and their families for the premarital process.

 

You may also be interested in

• Mistakes Made in Premarital Agreements by Estate Planning and Family Law Lawyers (Apr 2022)
• Practical Considerations in Representing the (Un)Happily Married (Pt. 1 of 3) (Aug 2023)

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