by: Chris McGraw, JD, LL.M., Senior Wealth Strategist

Introduction
High divorce rates and a general concern about preserving wealth across generations can make prenuptial planning a key wealth management consideration for successful individuals and families. However, state courts construe prenuptial agreements according to contract law and may not enforce them when needed at the time of divorce if they are found to be invalidly formed at the outset. Like any other contract, requirements and surrounding circumstances may increase or decrease the likelihood of it later being upheld by a court. Failure to satisfy a contractual requirement or a negative fact pattern can give a court a valid reason to find a prenuptial agreement to be unenforceable. Thus, a prenuptial agreement is not always a bulletproof asset protection tool. States with favorable personal trust laws, like Delaware, have made a self-settled Domestic Asset Protection Trust (DAPT) a valuable premarital planning tool that may be used with or instead of a prenuptial agreement.

Limitations of Prenuptial Agreements
For various reasons, a prenuptial agreement may simply never be presented or entered into. The future spouse being presented with the agreement may refuse to execute the contract because of a belief that it is unromantic and cold, perceives its presence means there is a lack of trust, makes divorce a self-fulfilling prophecy or it is against his/her culture. The spouse who is to present the prenuptial contract may decide not to because of a fear of offending the other or causing an argument. Also, money may be considered an issue — the cost of two attorneys (one for each future spouse) may become very expensive.
Generally speaking, for an executed prenuptial agreement to later be enforceable, certain requirements should be met:

• A prenuptial agreement must be free of fraud, undue influence, duress or overreaching;
• Each spouse should be advised by separate counsel;
• Full financial disclosure of assets and liabilities of each spouse, including an attached schedule with a line-by-line inventory of the assets and liabilities of each spouse;
• There should be sufficient lead time for the prenuptial agreement to be entered into prior to a wedding (preferably before the wedding invitations are sent out); and
• The signatures of both future spouses should be witnessed.

Often a prenuptial agreement is presented to the future spouse shortly before marriage. For example, the wedding invitations have been sent and two weeks before the wedding day the prenuptial agreement is presented. The short notice may be problematic for a couple of reasons. First, haste may lead to oversights and mistakes, which in turn may result in a failure to fully disclose one’s financial picture. Next, as noted above, courts often want to see that there has been sufficient time between the presentation of the prenuptial agreement and the wedding date so that the future spouse has ample time to consult with counsel and thoughtfully consider the impact of signing the agreement. When a prenuptial agreement is presented shortly before the wedding and the sense of urgency for execution is obvious, or appears obvious, the courts often find it was signed under duress, and thus, not enforceable. For those reluctant to broach the prenuptial topic with the future spouse or have procrastinated to the point of making timing a concern, there is an alternative.

Domestic Asset Protection Trusts
Domestic Asset Protection Trusts (DAPTs) are commonly used by successful individuals and families for protection from creditors and estate planning. A DAPT may also be used as an alternative to a prenuptial agreement or in combination with a prenuptial agreement (a “belt-and-suspenders” approach), to protect premarital assets in the event of a divorce. States like Delaware, with favorable personal trust statutes allowing for self-settled trusts or DAPTS, may not include the aforementioned contract requirements for a valid prenuptial agreement such as consent of the future spouse, full financial disclosure or adequate and timely notice to the future spouse. Instead, assets transferred to a DAPT prior to the wedding are likely to be protected from a claim of a divorcing spouse regardless of whether he/she knew about the transfer, consented to the transfer or was provided financial disclosure.

Example
Parents own 85% of the family business. Their son and daughter each own outright 7.5% through prior estate planning. The son is getting married in two weeks. The family attorney drafted a prenuptial agreement shortly after the engagement announcement, but the son has never presented the prenuptial agreement to his future spouse. The parents and sister are excited about the upcoming marriage but are concerned about the son’s ownership interest in the family business if there is a later divorce. If the prenuptial agreement is not executed prior to the marriage or if it is executed too close to the marriage, the family stock may be unprotected in the event a divorce should later occur.

Solution: A Delaware attorney creates a self-settled DAPT in Delaware for the son. Without any discussion with his future spouse, the son transfers his interest in the family business to the Delaware DAPT prior to the wedding day. Generally, as long as the Delaware state trust law requirements were followed or complied with, the ownership interest in the family business should be protected in the event of a subsequent failed marriage. Even if within the two weeks before the marriage the son presents and the future spouse executes the prenuptial agreement, the DAPT planning for the family business stock may still be undertaken to provide a “safety net” for the stock in case the prenuptial agreement is later found to be invalid.

Conclusion
Given the hurdles associated with the enforcement of prenuptial agreements, a Domestic Asset Protection Trust may be a prudent addition to a family’s overall wealth management and prenuptial planning. Your Oxford team is well positioned to ensure that your wealth management strategy is developed, implemented and optimized. 

The information contained in this report is confidential and proprietary to Oxford and is provided solely for use by Oxford clients and prospective clients. The opinions expressed are those of Oxford Financial Group, Ltd. The opinions are as of date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice. Tax and legal counsel should be engaged before taking any action. OFG-2410-34