Denha & Associates, PLLC Blog

Prenups And Trust Planning-Match Made In Heaven?

By: Randall A. Denha, J.D., LL.M.

Prenuptial agreements are valid and enforceable in Michigan.  We frequently advise clients to have a prenuptial agreement in place if they have children from a prior relationship or this marriage will not be their first.  Also, if the parties have significant separately owned assets acquired before their marriage they may want to consider having a prenuptial agreement in place. When most people think about prenuptial agreements, they think in terms of divorce settlements. But prenuptial agreements are also useful in estate planning by determining in advance the terms of an inheritance, you can ensure that your spouse abides by your wishes in the event of your death. A prenuptial agreement can be used to avoid painful legal and emotional disagreements in the future, both for yourself and your loved ones.

According to a recent Wall Street Journal article (“Is a Prenup a Must for Most Couples?” March 1, 2015), between 2010 and 2013 the number of prenuptial agreements in the U.S. increased by 63%. The majority were used to protect property rights and estate issues.

Enforceability And Validity

Michigan favors prenuptial agreements and permits them by statute. MCLA 557.28. While prenuptial agreements were originally designed to bar rights after the death of one of the spouses, the Michigan Supreme Court ultimately held that they are enforceable in divorces also. Prenuptial agreements can be used to avoid a 50/50 or other distribution of property during a divorce or even have it apply to less than all the marital property.  The “pre-nup” can also include a waiver of spousal support in a divorce or limit the spousal support that can be awarded.

To be enforceable, the parties must disclose their assets to each other.  This is generally done by attaching exhibits to the pre-nuptial agreement.  Also, a pre-nuptial agreement should be signed prior to the marriage.

A prenuptial agreement is generally enforced unless (1) the agreement was obtained through fraud, duress or mistake, or misrepresentation or nondisclosure of material fact; (2) the agreement was unconscionable when executed; or (3) the facts and circumstances have changed since the agreement was executed, rendering its enforcement unfair and unreasonable.

In a recent Court of Appeals case, Allard v Allard, the Court of Appeals decided a case where the parties executed a pre-nuptial agreement before the marriage, and the wife contested it in their later divorce. During the marriage, the husband had used several LLC’s to purchase real estate. The pre-nuptial agreement provided that the husband would keep, as his separate property, any property he acquired during the marriage in his individual name.  The Court of Appeals held that an LLC is a separate entity under the law, and therefore the property owned by an LLC was not property owned by the husband individually. Further, since the pre-nuptial agreement did not exclude income earned during the marriage from the marital estate, the court could consider property acquired with marital income as marital property.  Why is this distinction so important? Because the Court of Appeals ruled that the trial court could consider the real estate assets when determining the division of property in the divorce. This case provides a tip: people are well-advised to address income that is received during a marriage in their pre-nuptial agreements.

When Is A Prenuptial Agreement Warranted

A Prenuptial Agreement should also be considered if any of the following exists:

  1. Children from a prior marriage. If you have children from a prior marriage, you can use a prenuptial to protect their inheritance by outlining how you want your estate divided. Having these agreements determined before you walk down the aisle helps ensure that you and your spouse enter the marriage with a clear understanding of expectations and that the children from the prior marriage will be provided for according to your wishes. A prenuptial also can provide a legal shield to protect the children’s inheritance from future lawsuits filed against a surviving spouse.
  2. Expected Inheritance. If you expect to gain assets from a trust or inheritance, a prenuptial agreement can ensure that the inheritance does not fall victim to a division of assets in a divorce settlement or fall victim to other life events.
  3. Ownership of Property. A prenuptial agreement can help determine ownership and inheritance of property. For example, if you own a home purchased in a previous marriage and want to retain the property as rental income or as a future inheritance for the children from that marriage, a prenuptial agreement takes care of that negotiation up front.
  4. Family Business. If you stand to inherit partial ownership or control of a family business, a prenuptial agreement can ensure that your interest is secure for both yourself and your loved ones.
  5. Life Insurance and Retirement Income. A prenuptial can be used to designate life insurance and retirement beneficiaries. Whether there is a certain portion to be set aside for previous spouses, children from a prior relationship, or for a new spouse, a prenuptial gets that amount in writing.
  6. Spousal Maintenance and Child Support. If you have been married before, a prenuptial is an excellent way to ensure that the newest spouse agrees to abide by financial obligations you have made to a third party. It can also ensure that, in the event of death or divorce, both parties agree in advance to the terms of support for the surviving spouse (or ex-spouse) or for children.

Some argue that prenuptial agreement have taken a hit in Michigan and may not provide the assurances they once did.  Since the court ruled the way it did in the Allard decision, many practitioners now find themselves shying away from prenuptial agreements.  Only time will tell whether this practice tool provides the desired protection sought.

Irrevocable Trusts

Because of the possibility of a court rewriting the intent of the parties based on equitable principles, a better way to ensure protection of separate property prior to a marriage includes the use of irrevocable trusts, including Michigan’s new Domestic Asset Protection Trust (“DAPT’), which can be used by either party to provide enhanced asset protection for separate assets.

I would argue that while a prenuptial agreement and DAPT are similar tools, a DAPT is superior and more powerful tool.  Why?  Prenuptial agreements are contracts and like any contract, can be misconstrued or equitably rewritten by a judge.

Since a DAPT is an irrevocable trust, when you get in a bind, a creditor cannot come after any assets that you have control over.  In fact, unlike a typical irrevocable trust, a DAPT allows the trust creator to be a discretionary beneficiary, and yet the trust assets are still protected from the creator’s/beneficiary’s creditors. Michigan is one of 17 states that statutorily permit this structure.

Michigan law expressly states that any property transferred into a DAPT at least thirty (30 days) prior to a trust beneficiary’s marriage is excluded from marital property. Michigan law also provides that the parties to the marriage can agree (in a separate writing) that these transfers to the DAPT are to be treated as such. This can serve as a form of a prenuptial agreement.

One strategy for consideration is for clients to consider using both a DAPT and a prenuptial agreement. This “belt and suspenders” approach puts two barriers instead of one between a client’s money and his/her prospective spouse.

Another strategy and for added protection, one could layer or combine additional levels of asset protection.  For example, one could establish an LLC (or two) and have an LLC (or two) owned by a DAPT and transfer property to the LLC (or two) and have the LLC interests owned by the DAPT.  This not only provides superior protection from creditors but also safety from a failed marriage (if all steps are properly taken.)

If discussing a prenuptial agreement with a future spouse makes a client too uncomfortable, a DAPT can be a safer and less stressful way to protect one’s assets.