Should I Use a Prenuptial Agreement or a Trust?

If you’re getting married and are thinking about asset protection, trusts and prenuptial agreements are two tools you’ve likely heard or read about. You might be wondering, “Should I use a prenuptial agreement or a trust?” While both trusts and prenuptial agreements are instruments used to structure and protect pre-marital assets, each tool serves its own specific purpose and function.

Depending on your unique situation, you will use a prenuptial agreement, a trust, or both.
In this Truce Law article, we will explore the purpose of each tool in depth and delve into the diverse situations where trusts and prenups are used.

• What is a Prenuptial Agreement?
• What is a Trust?
• How Prenuptial Agreements and Trusts Work Together
• Key Differences Between a Prenuptial Agreement and Trust
• How the Family Lawyers at Truce Law Can Help

What is a Prenuptial Agreement?

A prenuptial agreement is a contract created between two individuals before they get married that offers clarity about the ownership of assets, debts, and property, and specifies how these assets, debts, and property would get divided if the couple were to get divorced, or if one partner were to pass away.

Without a prenuptial agreement in place, Washington state’s default laws on separate and community property will govern how assets, property, income, and debts are owned in the marriage.

Property owned before the marriage is typically considered separate property and property or income acquired, purchased, or earned during the marriage is considered shared marital property under Washington state’s default community property laws (see RCW 26.16.030, where community property is defined, and RCW 26.16.010, which defines separate property).

Yet there are certain exceptions. Inheritance acquired during the marriage is typically considered separate property. Gifts made to only one spouse would generally be considered that spouse’s separate property. Separate property can sometimes convert into marital property in certain circumstances.

For example, putting separate funds in a shared savings account after you get married could make it difficult to separate marital savings from your separate savings, especially if you do not keep detailed records or if your marriage lasts a long time.

Other actions can also lead to your spouse having a claim on separate property. An example would be a situation where one spouse owns their own home before marriage. After getting married, their spouse moves in, helps pay the mortgage with marital income, and helps make repairs and improvements to the home. The spouse may have a claim on a portion of the home’s value or appreciation.

Debts acquired before marriage are considered separate debts. But, because Washington is a community property state, if your spouse opens a credit card in their own name after you are married, any debts on this card might be considered marital debt, unless there is a clear prenuptial agreement in place that clarifies that debt held in only one partner’s name is that spouse’s debt.

This can be confusing for people moving to Washington state from common law states, where debt held in only one partner’s name is considered their sole responsibility. Different states handle debt differently, so if you plan to move around after you get married, a prenuptial agreement can create a consistent plan for how finances will be managed during your marriage—regardless of where you happen to move.

While prior property ownership and debts are common situations where ambiguity can arise under Washington’s default marriage laws, Washington state’s default laws can create ambiguity in more complex situations.

For example, a business in one spouse’s name can end up getting wrapped up in marital property and assets if the business is not carefully structured or if a prenuptial agreement is not in place. If you bring significant investments or a real estate portfolio into your marriage, contributions or acquisitions during your marriage could get comingled with marital property without careful structuring or a prenuptial agreement.

If you own property, own your own business, have significant wealth, anticipate that you’ll face significant debt during your marriage (either due to pursuing higher education, because you plan to start a business, or because one partner’s health puts them at risk of facing medical debt), a prenuptial agreement is a legal contract that can offer greater clarity about who owns what in your marriage. It can also offer both spouses some degree of financial protection from one another’s debts, or business issues.

With a prenuptial agreement, you, and not the state of Washington, get to decide what property you want to keep separate and what property you want to share. It gives both you and your partner the chance to have a serious conversation about how you want to structure your marital finances. And it gives you a greater deal of control over your marital and separate finances.

A prenuptial agreement must be signed before you get married, ideally months before. You should aim to draft and sign a prenuptial agreement before either spouse has made any significant investment in the wedding (so, before you send out invites, and before anyone spends thousands of dollars on a venue, dress, or cake). Ideally, you and your spouse should aim to work on your prenup with your respective attorneys as soon as possible after you get engaged.

What is a Trust?

A trust is a financial and estate planning tool used to hold, manage, and distribute assets for beneficiaries. A trust can hold cash, stocks, bonds, property, or even a business for the benefit of a specified party or multiple parties.

Trusts are popular estate planning tools. They help individuals and families avoid probate and allow them to structure their wealth in a manner that can reduce their tax liability.

Probate is a legal process by which the court reviews a will, addresses any issues, and then oversees the distribution of assets. Because probate happens on the public record, an estate’s holdings can become public knowledge. When a will ends up in court, there’s also the risk that family members might contest the will (dispute its validity) or start litigating against one another. Transferring wealth through a trust can protect privacy and help beneficiaries and heirs avoid probate.

Yet trusts also have other purposes and benefits beyond estate planning. A trust can be used to protect wealth from creditors, can be used to control distributions of wealth to children or young adults, and can be used to protect a disabled family member’s ability to continue to be able to access disability, social security, and nursing home benefits, while still receiving their inheritance. Trusts can be used to transfer money, assets, and property for heirs. They can be established to benefit charitable causes.

Finally, trusts can be used in family law contexts to keep separate assets separate from marital assets. When you put assets in a trust, you no longer technically “own” those assets anymore. Because the assets are not yours, they also aren’t your partner’s assets to claim, either. Putting property you own into a trust before you get married can protect it from accidentally being comingled with marital funds.

You can open a trust at any time, before or even after you are married. But, if you do want to create a trust after you are married, you might want to speak to a family lawyer about your intentions. If you put marital funds or assets in a separately held trust, those assets and funds could still be considered marital assets under Washington law.

How Prenuptial Agreements and Trusts Work Together

Prenuptial agreements and trusts can work in concert with one another to achieve your goals. Trusts effectively keep separate property distinct from marital property using an estate planning and financial tool, while a prenuptial agreement is a contract that clearly lists the property each spouse brings into the marriage and their intention to keep the property separate.

It might sound that both tools achieve the same ends—ensuring that separate property is kept distinct from marital property, but the two tools work together. The trust structure ensures that any property or asset in the trust won’t accidentally get blended in (or comingled) with marital property. It effectively “locks” this property away, keeping it clearly distinct from marital income and property.

But the prenuptial agreement is still important, because it goes a step further. It can clarify that each spouse’s income is separate and their own to use as they want. Recall that under Washington state default laws, income earned during the marriage is considered shared marital property.

So, if you want to put your hard-earned income into your own separate trust, you can do so if you have a prenuptial agreement in place that allows for this. Otherwise, putting marital income into a trust could create complications should you end up getting divorced, especially if your spouse claims that your trust was funded with marital income. The prenuptial agreement offers added protection, and reduces the need to trace marital funds in the event of a divorce.

There are many situations where a trust and prenuptial agreement can be particularly useful. Consider the following:

• You have children from a first marriage and want to set aside money you earn during your second marriage for their inheritance, college, or other purposes. Establishing a trust in your child’s name and then having a prenuptial agreement that makes clear that your income earned during the marriage is your separate property, can allow you to set aside a part of your income for child support or your child’s trust. Alternatively, you can specify in your prenuptial agreement that a percentage of your income will go to support your children.
• You started a business before you were married with a co-investor who is not your spouse. A trust can ensure that your co-investor has immediate access to the business after you pass away and establish clear and distinct ownership and succession plans. A prenuptial agreement can offer added clarity about business ownership and what rights, if any, your spouse might have to share business profits or appreciation.
• You have a portfolio of real estate investments and stocks. By establishing a trust before you get married, you can keep this investment and portfolio distinct from marital property. A prenuptial agreement can offer greater clarity if you plan to add to your portfolio or make additional investments while you are married. Provisions that keep marital income, earnings, new acquisitions, and capital gains separate can offer added protection and peace of mind.
• You are two high net worth individuals planning to get married. You each already have sophisticated financial tools in place to manage your wealth, including trusts. A prenuptial agreement is a contractual agreement that offers clarity about how you want to run the financial aspects of your marriage.
• One spouse brings significant wealth into the marriage. Trusts can protect that wealth from a spouse’s creditors or other claims, while offering clarity about separate and shared marital assets. A prenuptial agreement protects both parties, by offering provisions to ensure that a lower-earning spouse’s standard of living is preserved if the marriage were to end, while protecting the wealthier spouse’s assets and portfolio.
• One spouse has significant debt and will likely get into significant debt during the marriage. The other spouse owns a home, or other assets. Establishing a trust can protect these assets from a spouse’s creditors, and a prenuptial agreement can clarify that debt solely in one spouse’s name is considered their sole responsibility.
• Trusts, used alongside prenuptial agreements, can protect a wealthy spouse from getting “trapped” in a prenup if their lower-earning spouse becomes wealthier or if circumstances change during the marriage. A wealthier spouse can choose to treat all income and assets acquired after marriage as shared marital property, while still shielding previously owned assets, income, property, or businesses using a trust that they then carefully manage with the help of their family lawyer and estate planning attorney to avoid risk of comingling funds.

These are just some scenarios where a trust and prenuptial agreement can work together, but every situation is different and these scenarios do not constitute legal advice. The prenuptial agreement and trust attorneys at Truce Law can help. We can learn more about your situation and can help you create a plan that works for your specific situation.

Key Differences Between a Prenuptial Agreement and Trust

Trusts are financial and estate planning tools, while a prenuptial agreement is a family law contract governed by contract law.
There are some significant differences between trusts and prenuptial agreements.
Let’s explore this in greater detail:

Timing

• A trust can be established at any point before you are married (and afterward, too, but with some cautionary notes, especially if you want to use the trust to protect separate assets from being considered marital assets).
• To be valid, a prenuptial agreement should be signed well before you get married.

If for some reason your family lawyer says it is too late to create a prenup, you can always use a trust to shield your separate assets and then create a postnuptial agreement later (a postnuptial agreement is a contract signed after you get married). While you likely won’t be able to sign a prenuptial agreement too soon before you get married, there is no similar deadline governing when a trust must be established.

While you can establish a trust whenever you want, it is still a good idea to speak to your family lawyer before doing so, especially if you want to establish a trust to keep your assets distinct from marital assets.

Cost

• Trusts often involve initial set up costs and ongoing costs to maintain.
• To draft a prenuptial agreement, you will need to pay a lawyer, and your spouse will also need to hire their own family law attorney, but after your prenup is signed, you won’t have any ongoing costs unless you want to change the prenup.

Buy-In

• A trust is an asset protection tool that doesn’t require buy-in from your future spouse. If you create a trust before you are married, you can use this asset protection tool without needing to have a potentially uncomfortable conversation with your future spouse. And, if done with careful consultation with your family lawyer and trust lawyer, you may even be able to put separate assets into a trust after you are married without needing to consult your spouse, but you’ll want to check with your family law attorney that the assets you are putting into the trust are truly considered separate assets and income. Finally, it’s important to note that all this can change if you plan to get divorced soon or if you are in the process of getting divorced.
• To get a prenup, both parties must agree to the contract. You need buy-in from both parties.

Spousal Support

• A trust won’t protect you from having to pay spousal support.
• A prenuptial agreement can include the option for both parties to opt out of spousal support.

Debts

• A trust cannot specify which debts acquired during your marriage will be considered separate or marital property, but a trust can protect separate assets from your spouse’s creditors.
• A prenuptial agreement can specify which debts are separate and distinct, as long as both parties’ names aren’t listed on promissory notes.

Flexibility

• Some trusts are irrevocable, meaning they cannot be changed, while some trusts are revocable, meaning it can be changed. If a trust is revocable and only in your name, then you won’t need your spouse’s permission to make changes, but you still might want to consult with your lawyer about the legal and financial implications of any changes you choose to make during your marriage.
• A prenuptial agreement can be changed if both parties agree to a postnuptial agreement.

Tax Implications

• A trust could change your tax liability and, in some instances, protect you from higher tax liability.
• A prenuptial agreement can clarify each spouse’s responsibilities regarding tax liability and even impact each spouse’s tax liability, especially if some income or debts are classified as separate or shared.

These are just some key differences between prenups and trusts. If you have questions about how these differences might apply in your specific situation, consider reaching out to the trust and prenuptial agreement lawyers in Washington state at Truce Law today.

How the Collaborative Family Lawyers at Truce Law Can Help

Establishing a trust that works in concert with your prenuptial agreement will require the coordination between your trust attorney, estate planning lawyer, your family lawyer, and likely other professionals including your financial planner, business lawyer, and more. The collaborative family lawyers at Truce Law utilize a team-based approach to family law. Things work better when professionals work together.

When you choose Truce Law to help you with your prenuptial agreement, our family lawyers can work with you and your estate planning lawyer, trust attorney, and other professionals to craft a prenuptial agreement and estate plan that works for you.
If you want to learn more about how we can help you craft a robust asset protection plan in conjunction with a trust and prenuptial agreement, reach out to the Washington state collaborative family lawyers at Truce Law today for a free discovery call.