Planning for the end of life—much like planning for the end of a marriage—is something nobody wants to think about. My experience has shown me that going through the process of creating a prenuptial agreement can actually be helpful in keeping a marriage together—it’s almost as if being prepared for an unwanted outcome makes a couple more likely to work hard to avoid it. But when it comes to estate planning, the odds aren’t in our favor. Completing a will, trust, and other essential documents OR avoiding the process entirely will have no effect whatsoever on whether or not we die. We can prevent divorce, but none of us will avoid death!
What’s the difference between a will and a trust?
While estate planning is not my area of specialty, it’s certainly something I encourage my clients to learn about. Both a will and a trust ensure your assets are protected and will go to your heirs upon your death. A will is necessary if you have young children and want to dictate who their guardians will be upon your passing. A trust is necessary if you want your assets to go to your heirs when you die–without going through probate first (probate is lengthy and time-consuming so it’s worth avoiding).
Does everyone have a will or a trust?
If you don’t have a will or a trust and you’re already feeling overwhelmed by the terminology or daunted by the idea of going through the process, you’re not alone. A shockingly small minority of Americans have ANY estate planning documents prepared. According to a recent survey by Caring.com, the number of Americans who have a will (the easiest document to prepare) are low in every age range:
Ages 18-34: 26.8%
Ages 35-54: 22.5
Ages 55+: 44%
Does it surprise you that so many people over 55 don’t have a will? It surprises me! Then again, I know how unpleasant it is for most people to face their own mortality. But that’s not the only reason people don’t have a will.
AARP reports that the primary reasons people give for NOT having their essential documents in place are predictable: when asked, 47% say they just “hadn’t gotten around to it” and 29% say they “don’t have enough assets to leave to anyone” (29%).
I don’t even know where to get started.
When it comes to setting up a trust, I’m sure the numbers are even lower. After all, there are many different types of trusts, and if you don’t have one yet, just getting started can be confusing. Creating a trust is NOT something you can do on your own—you’ll definitely need the help of an estate planning attorney. But if the topic is completely new to you, perhaps you’ll find it useful to familiarize yourself with a few basics on your own before you meet with an attorney. A little online research will only take you a few minutes. This Investopedia article about the differences between wills and trusts is a nice primer, as is this one from NerdWallet.
Warning: Keep in mind a lot of the resources available online will NOT give you information that’s specific to California, and websites aren’t always kept up-to-date, so don’t rely on online research for anything other than some basics. You really do need to speak with an experienced and licensed estate planning attorney to make sure you make the right decisions for you. If you would like a referral, contact me and I’ll be happy to refer you to someone in the Santa Rosa area I know you can trust.
So, if I have a trust, do I still need a prenuptial agreement to protect what’s in the trust?
The short answer: probably. Trusts and prenuptial agreements are different documents that serve distinctly different purposes. A trust protects your assets in many ways, but in California the laws can be complicated, and there are many potential areas of conflict between a trust and a pre- or post-marital agreement. In fact, sometimes when a change is made to a trust, it can actually affect the terms of your prenuptial agreement and require that amendments be made.
Unfortunately, this can create a problem your estate planning attorney may not even realize exists!
But I thought a trust would protect me from practically anything and everything, right?
Occasionally I’ll meet a client who has the idea that “my trust protects everything that’s mine and keeps it from becoming available to my spouse, no matter what.” They’re always shocked when I tell them that this is an overly simplistic idea of how much a trust protects you, and this idea can get them into a messy situation down the road.
Let me share with you a pretty common scenario that helps illustrate why you need the expertise of a family law attorney even if you have a great estate planning attorney when both a trust and a prenuptial agreement are involved.
The Story of Tony and Teresa and the Trust (names and some details have been changed)
Meet Tony and Teresa. Both Tony and Teresa were married when they were younger, and now, both having lost their spouses, they find themselves blessed to find love again with each other.
Decades earlier, Tony had worked with an estate planning attorney to establish a trust which protected several of his assets, including his primary residence, a rental property, and several investments. When his wife died, the parameters of the trust were unaffected. Now approaching retirement age, Tony learns he’ll be receiving a $50,000 golden parachute package from his company. Tony is obviously excited about this windfall, and he wants to place it into his trust. From his perspective, this is his money. After all, it’s payoff for many years of hard work in his industry and loyalty to his employer.
When he meets with his estate planning attorney to discuss amending the trust to include this big bonus, he brings along his beautiful bride of just under a year. Amending his trust will require an extra step because Tony is now a married man. But it’s no problem, the attorney assures him: they have a handy-dandy contract ready for situations just like this.
By signing this contract, the attorney explains, Teresa acknowledges that there are no conflicts of interest and she waives all rights to that money—both during the marriage and in the unfortunate event the marriage dissolves. It’s a short contract, simple and straightforward. Teresa and Tony sign it, both feeling assured they’ve done everything right. They have followed the advice of an attorney, after all.
By the way, in some estate planning firms, this is very common practice–to handle a very complicated process with an overly simplified solution that actually puts everyone at risk.
Now let’s look at a few ways this story might unfold….
Scenario 1 – Tony and Teresa have a happy marriage, and always have plenty of money in their joint account. They never experience any significant financial troubles, and they remain together until one of them passes away. The trust is never challenged, and the handy-dandy contract they signed years ago turned out to be a formality that stayed neatly filed away, never to be read or referenced again.
Scenario 2 – Tony and Teresa hit some bumps in the road and decide to part ways and get a divorce. They’re pretty upset with each other, and there are arguments about how to divide their assets. Tony assumes that everything in his trust is protected and that Teresa has no claim to it. Imagine his surprise when Teresa demands half of that $50,000 retirement bonus he got! Impossible, he thinks…we signed a contract.
Unfortunately for Tony, his estate planning attorney didn’t understand California community property laws well enough to make sure Tony had the protection he wanted. There are really two issues here:
- The $50,000 bonus was received from an employer and is therefore considered income earned during the marriage, and by California law, is community property.
- That handy-dandy contract wherein Teresa waived her rights to that $50,000 is useless. Why? Because contracts like that signed by spouses during a marriage have to follow the rules for California marital agreements. The attorney had the right idea, but he didn’t have the knowledge he needed to make sure they did things right.
See how messy things can get? Let’s take it a step further, just for further illustration.
Remember those real estate properties that were in Tony’s trust when he and Teresa got married? Surely those are his and protected from Teresa’s greedy fingers, right? Not so fast. For many years, the couple used joint funds to pay the mortgage on the house—that they lived in together. And at one point, they pooled money from their separate investments to make renovations to the rental property. Teresa thinks she now has some claim to the house—she lived in it and contributed to the mortgage. And it doesn’t seem fair to her that Tony will continue to collect rental income on the other property when he’s pulling in a lot more than he did before she helped pay for the renovations and upgrades!
So, who’s right? Does Tony get to walk away with the two properties? Does Teresa have some claim to them?
As soon as finances comingle, things get messy, and this is a perfect example of a VERY messy situation! Tony won’t like it, but Teresa is going to get some of the value of the house—the fact that it’s in a trust has nothing to do with the fact that joint finances paid the mortgage. While Tony could potentially walk away with the rental property, he may have to repay Teresa for her investment in upgrading it—not to mention the resulting increased value might also have to be shared with Teresa. If Tony doesn’t have the funds to pay Teresa what she’s owed, then one or both of his properties could be at risk. The trust doesn’t protect them.
The Bottom Line
Every situation is different and there are an infinite number of variables that can affect your outcomes. As the scenario above shows, things can get messy pretty quickly. Overall, there are three very important lessons I hope you’ll take away from this:
- Trusts protect assets from the government and from probate so you can pass them on to your children and heirs after you’re gone, but trusts don’t necessarily protect your assets from a spouse if a marriage dissolves.
- Agreements made between you during marriage need to comply with California law, and they often require independent legal counsel to be valid. Otherwise, you open yourself up to unanticipated loss during a divorce.
- Always seek the professional advice of attorneys who specialize in their fields—you may need to hire both an estate planning attorney AND a family law attorney to protect your interests and assets.
California law is complicated and changing constantly, and when it comes to specialty areas like estate planning and prenuptial agreements, it’s important to be armed with knowledge and the support of experienced attorneys who will help you navigate the terrain and avoid pitfalls. Please reach out if I can help you with a prenuptial agreement or give you a referral to a trusted estate planning attorney.