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Estate PlanninG

What’s the Difference Between a Prenup and a Will or Trust? How Do I Know Which One I Need?

Prenuptial agreements are gaining popularity. Gone are the days when most people had only heard about them while watching a soap opera or a movie featuring an ultra-wealthy family. Today, prenuptial agreements make sense for many couples, especially in the case of a second marriage.

Similarly, wills and trusts are no longer reserved only for those with massive amounts of wealth. Having a will or a trust is just the responsible thing to do.

But despite all of these things gaining popularity, there are many people who still don’t understand the difference between creating a will or trust and the reasons for entering a prenuptial agreement.

Let’s discuss what these different legal documents do, and when it makes sense to use them.

Wills and Trusts

It’s important to many married couples to make sure their property passes to their heirs and other beneficiaries according to their wishes. A will or trust provides a way for the couple to record those wishes and provide clarity about who should get what, when they should get it, and how they can receive it. Additionally, a trust can help a married couple manage their property if they become incapacitated, and can allow them to avoid the probate process for passing on their property when they die.

In most cases, a will or trust is all that’s needed to carry out the deceased individual’s wishes for passing their property on to their heirs or beneficiaries. This is especially true if most of their wealth was accumulated during their marriage.

However, there are some cases where a will or trust is inadequate to carry out the married couple’s wishes. This is especially true if one of the spouses has much more wealth than the other, and consider it to be their own separate property that they don’t necessarily want their spouse to have.

Elective Share Rights of Spouses

Imagine that a faithful spouse spent twenty-five years working at home, taking care of children, running the household, and making sure that their income-earning spouse didn’t have to worry about any domestic responsibility.

Imagine that during that time, the bread-winning spouse never took any steps to jointly title any of their property with the at-home spouse. They then secretly signed a will with the person they were having an affair with. When they died, their surviving spouse was left penniless.

Most people would agree that this is terribly unjust, and that the at-home spouse should have the right to reclaim some, if not all, of the property passing to the new romantic partner of the now-deceased spouse.

Luckily, every state has laws designed to protect a surviving spouse from being completely disinherited by their deceased spouse. This legislature is typically referred to as “elective share statutes.” Most of these statutes allow a spouse to reclaim a certain percentage of any property that passes from a deceased spouse to someone else. The amount that can be reclaimed is often referred to as an “elective share” and varies from state to state. But the idea is generally the same: to prevent the type of injustices like the above scenario.

Where Application of Elective Share Laws Can Go Wrong

Sometimes, elective share statutes can actually produce an unjust result.

For example, imagine that an elderly single individual had worked their entire life to save money and leave their home and savings as a gift to the orphanage that raised them. Further imagine that, as time went on, this individual met a somewhat younger romantic interest who had substantial property of their own as well as a generous income that would provide a comfortable living for the rest of their life. The two individuals decide to marry and verbally agree that the orphan spouse would still leave their property to the orphanage as planned. However, upon the orphan’s death, because of the state’s elective share law, the new spouse changes their mind and files a claim in court against the property that the deceased spouse’s will has directed to the orphanage, thereby overriding the will so that the surviving spouse now inherits a substantial portion of the property that was intended for the orphanage.

This is certainly not what the orphan spouse would have wanted. But unfortunately, the deceased spouse’s ignorance of the law will most likely be an ineffective argument for the orphanage to make in court.

Prenuptial Agreements

Here is where a prenuptial agreement could save the day.

A prenuptial agreement is essentially a contract between two individuals preparing to marry that details how property will be owned throughout the marriage and what rights each spouse has to the property of the other. The agreement specifies the nature and extent of the property that each spouse is bringing into the marriage as well as how that property will be divided if the couple ever divorce or one spouse dies during the marriage. The agreement can outline the extent to which a spouse has the right to give their property to their children from a different relationship or to charities or other beneficiaries through estate planning. It also allows each spouse to waive certain rights to the property of the other spouse, such as elective share rights.

Why would a spouse ever give up an elective share right in a prenuptial agreement? It could be for a variety of reasons. Perhaps the spouse would like the other spouse to waive their right to certain separate property of their own. Or perhaps the marriage simply cannot move forward unless these rights are waived because the nature and extent of the wealth is so substantial that one spouse (or more commonly, the family of the wealthier spouse) will worry that, without a signed prenuptial agreement, it would be unclear whether the marriage was based on genuine affection for the wealthier spouse or merely affection for that spouse’s money.

In addition, with a prenuptial agreement, both spouses can reserve the right to leave property to each other in their subsequent estate planning via a will or a trust. Thus, a prenuptial agreement does not necessarily require that each spouse waive forever all claims to the separate property of the other spouse. Prenuptial agreements can be renegotiated over time as circumstances in the relationship change and if both spouses agree. Ultimately, a prenuptial agreement allows an individual who plans to marry to settle the uncertainty surrounding property rights issues that often come with marriage and the corresponding legal rights that attach to married couples.

When Should You Consider Getting a Prenuptial Agreement?

In general, a prenup is helpful under the following circumstances:

  • You are marrying or remarrying and would like to keep your finances separate from your spouse’s.

  • You want to make sure that your estate plan is not disrupted by the legal rights to your property that your new spouse automatically receives upon your death.

  • You want to make sure that your property passes to your children, to a charity, or to someone other than your spouse when you die.

  • You want to spell out exactly what property you will give your spouse (or what you will get from your spouse) if you divorce.

  • You and your spouse each want to be protected from the other’s individual debts (such as business debts or student loans).

  • You want to make clear who will be responsible for what (financially, legally, or otherwise) during your marriage.

Prenuptial agreements, wills, and trusts can be powerful legal documents that can play a crucial role in helping you achieve your financial goals and protect you and your loved ones from unfortunate surprises when it comes to passing on your property to those you care about. Properly implemented, they can provide significant peace of mind. If you would like to learn more about this topic, contact Santaella Legal Group, serving San Ramon, Danville, Dublin, Pleasanton & the Tri-Valley area, at (888) 698-3951.