If you have children and are getting married, get a prenup?

A Fort Collins couple raised their family on a farm in Larimer County.  The father and his sons worked the fields and animals together for decades.  When Mom and Dad got old, they sold the farm for over a million dollars.  To protect their new found wealth they had first class wills with trusts prepared by the the top local estate planning attorney.   Those documents stated that when either Mom or Dad passed a way the family fortune was to be used by the survivor and then upon the survivor's death, it would be divided among the children in equal shares.

At 75, Mom died.  Dad got lonely and married a 60 year old.  Dad and the new wife decided to use the money to buy a mansion which the Realtor marked on the contract should be owned by the couple as joint tenants, because that is how it is usually done.  A few years later Dad died.  The new wife then owned the home solely in her name.  Upon her passing it went  to her children from a prior marriage.  Not a dime went to the farmer's family who helped earn that money.  The entire inheritance from the original farm family went to the family of the new wife.

The farmer's children were shocked.  They thought that everything was done correctly.  They had made sure that Mom and Dad met with the best estate planning attorney in Fort Collins, after the farm was sold.

A couple of good ideas to prevent this tragedy are the use of a prenuptial agreement and the use of a trust. 

I like the prenuptial agreement, because before the marriage to the new wife, she would agree with Dad that the assets brought into the second marriage by each would upon divorce or death remain separate property which would be eventually inherited by their separate children, as if the second marriage had never occurred.

Because of the financial advantage of selling trusts, there are many attorneys who would recommend using the trust instead.  Their best argument is that if the farm or its proceeds had been placed in a trust prior to the second marriage it would never have been at risk of passing to someone outside of the original farm family.  That theory is absolutely correct.   I have counseled with many families who purchased a trust for three to five thousand dollars.  Those trusts are beautiful documents (at least to an estate planning attorney who understands all the good things that each section was designed to do).  Unfortunately, most of those wonderful documents have been stored in basements for decades before they are dusted off and brought to my office.  During those decades, farms have been sold, spouses have died, new marriages have been entered into, etc.  Life has been lived, but properties, etc. have not been transferred to the trust and have not been actively managed by the trust.

If you decide to use a trust...use it.  Make sure that all of your property is transferred to the trust and that all of it is actively managed by the trustee of that trust.  Make the trust the central feature of your financial world.  Even with a trust, it would be an excellent idea to enter into a prenuptial agreement disclosing the trust and its effect, prior to entering a second marriage.  That way everything would be out in the open.  The new wife could not claim that she was defrauded by a failure to disclose the trust ownership. 

If you are not committed to using a trust, then a prenuptial agreement is essential.  When it is prepared redo your wills consistent with that agreement.  Be sure to learn from the sad experience of my farmer friends.

Posted on November 16, 2013 .