Do Prenuptial Agreements Work?

 I was recently brought into a case involving the second marriage for a couple who were in their seventies.  They had the foresight to set up a prenuptial agreement that outlined a minimal division of assets at the time of death or if the marriage failed.  It appeared the couple had taken the appropriate steps by signing a prenuptial agreement prior to saying the ‘I Dos’.  What happened later was unfortunate and was not discovered until the husband’s death which occurred about three years after they married.  Shortly after his death, the wife informed his family that he had taken about ninety percent of his assets and purchased an annuity with the wife as the beneficiary.  As you would imagine his children were unhappy and felt that the wife may have exerted undue influence on their father.

I’m reminded of the famous case of Anna Nicole Smith; the American model, actress and TV personality who was once Playboy’s Playmate of the Year.  At age twenty-six, she married eighty-nine-year-old oil mogul J. Howard Marshall of Houston Texas who was reportedly worth $1.6 billion.  A young, pretty woman marrying a lot older rich man…It wouldn’t be hard to jump to the conclusion that money was at least a partial motivator!  He died thirteen months after they were married and Anna Nicole immediately brought a lawsuit claiming she was due one-half of his estate.  Anna Nicole died in 2007 of an overdose of prescription drugs but the legal case continues to this day.

These types of cases beg the question, “Are prenuptial agreements worthwhile?”  In Anna Nicole Smith’s case there was no prenuptial agreement, but only Mr. Marshall’s verbal promise that she would receive half of his estate.  In fact, she wasn’t included in his will. 

First, I strongly endorse the use of prenuptial agreements in appropriate situations such as second marriages or marriages where one person has substantially more assets than the other.  I’ve seen numerous cases where a marriage failed and the prenuptial agreement effectively and efficiently resolved the division of assets and income.  But it’s clear that having a prenuptial agreement is not a perfect solution in every case.  The prenuptial agreement assumes that there will be no post-marriage agreements or transfer of assets.  That being the case, are there strategies that can be implemented to strengthen the intent under the prenuptial agreement?  While this list is not exhaustive, here are two possibilities:

1.     Establish a revocable living trust.  In my first case example, the husband (and wife for that matter) could have set up a revocable living trust and moved all of his assets into the trust.  Even though the trust is revocable, meaning the husband can do anything he wants at any time, the word ‘trust’ often sends a message that the money is ‘untouchable’.  To further strengthen this concept, instead of having the father as trustee of his own trust, which is typical, he could have chosen to have an adult child as the trustee.  Now the child, as trustee, acts as a ‘buffer’ to impulsive behavior by the father.  If he were to request a large sum of money be transferred to his wife, the child would know about it and may be able to intervene.

2.      Establish an irrevocable trust.  This is how we handled a recent case.  The parent had seen up close the effects of Alzheimer’s and dementia and wanted to be certain that his assets were preserved for his children and grandchildren.  One of the adult children was named the trustee and, as trustee, would be responsible for providing for all of the financial needs of the parent.  This can be as simple as making certain that there is enough money in the parent’s personal checking account to take care of his monthly bills and being prepared to pay for any out-of-the-ordinary expenses.  Obviously, this strategy presumes that the parent fully trusts the child.  In this case it required the filing of a gift tax return and used a portion of the parent’s $5.25 million lifetime gift tax exemption.