Planning for a Spouse Within a "Prenup" Marriage

While I usually like to provide variety in blog topics, I have been on a deadline to put together the new book in time for a launch at a national conference.  There just isn't time right now to divert attention away from the topic of protective planning against the financial downsides of a divorce. In this case, the topic is about how you can estate plan for a spouse where you have a "Divorce Firewall Strategy" premarital agreement and trusts in place without disturbing the rest of the plan. Here is an outtake from the upcoming book about how to do that: 

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The Divorce Firewall Strategy is about planning ahead of a marriage to make sure that a divorce won’t destroy your own finances. After all, there is a 50% or so divorce rate out there. But that also means that there are also successful marriages where spouses may want to provide for the other. In addition as the years go on and the premarital agreement is revised over time, there may be some negotiating going on regarding estate wishes. This doesn’t have to be accomplished by undoing any of the protective steps you have taken so far, and it doesn’t mean abandoning the Domestic Asset Protection Trust naming your children (or their Asset Management Trusts) as beneficiary, but it could mean adding a few elements:

Life Insurance with Revocable Living Trust: Providing for your spouse if they survive you can be as simple as buying and maintaining a life insurance policy. However, rather than simply providing a payout directly to your spouse, it possible to provide benefits to your spouse in a protected way through the revocable living trust you are setting up anyway. Now, there is no one way this must be done, and a lot may depend on whether this is done through the goodness of your heart or as a negotiated point when refreshing a premarital agreement during the course of the marriage. Here are some possibilities:

• The life insurance can pay into the revocable living trust, and the revocable living trust simply states that if your spouse outlives you, that the life insurance pays to the spouse. If your spouse dies before you, then the life insurance is directed to be paid to your other beneficiaries, likely your children, along with everything else;
• The life insurance proceeds are to be used by the Trustee to buy an immediate annuity to provide lifetime income to the spouse;
• The life insurance payout is to be held in trust to be used for the spouse in sole discretion of the Trustee so they have a safety cushion, but the money is not controlled by the spouse nor given to them outright; and
• The life insurance death benefit is to be held in trust and used in sole discretion of the Trustee as above, but there can be a different list of trustees and successor trustees just overseeing the life insurance who are more acceptable to the spouse, such as one of the kids, their siblings, or the spouse’s other family members.

The premarital agreement should mention whether or not the insurance is to be maintained after a divorce or not, if the beneficiary can be changed after a divorce or not, and if the policy is to be transferred to the spouse after a divorce so the future premiums are their responsibility.

Spousal IRA Trust: Another way to provide for a spouse using assets outside of the Domestic Asset Protection Trust could be letting the spouse inherit one or more retirement accounts. However, rather than simply naming the spouse as the beneficiary of the account, it can be directed to an IRA Trust for the spouse’s benefit. The trust can then mandatorily distribute required distributions each year (or more often, or leave it in the discretion of the Trustee) to the spouse. The Trustee can also be given discretion to provide more money if the spouse requests it. But what benefits are there to handling it through the IRA Trust?

• If your spouse dies before you, the contingent beneficiaries of the trust can “redirect” the IRA funds to the other beneficiaries you have chosen;
• If your spouse dies after you but before all of the funds are used, then the remainder of the IRA Trust goes to your other chosen beneficiaries; and
• The trust funds are protected from your spouse’s creditors, bankruptcy, lawsuits, and other outside legal forces.

If the retirement account goes directly to your spouse, then they can spend it all, choose different beneficiaries than you should they pass on before the money is gone, and while there are some legal protections for spousal IRAs during their lifetime the creditors can come after the remainder when they pass on. With the Spousal IRA Trust, these unwanted contingencies are eliminated.

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Just because you and a spouse have agreed to have separate finances and bypass each other for your individual estates doesn't mean you can't find ways to specifically protect and benefit each other without disturbing the main plan.