Adam Chodos Esq., CPA
Most families envision eventually transitioning family wealth to younger generations to empower them to achieve. However, a child’s divorce potential is a serious threat to family wealth. If a child or grandchild was divorced, how much of the assets we gave to them could be taken?
We cherish our family. However, we understand that they may be seen for what they have, or may have, rather than who they are. It is difficult for younger family members to fully grasp the concept of legacy and that their actions impact the family unit. The greater the assets the more magnified this fact often becomes. A divorce risks half, or more, of the assets that could belong to someone no longer part of the family.
We cannot control who our children or grandchildren love and marry, but there are proactive steps available to protect the assets we plan on transferring (whether alive or after death). The most common tool is the prenuptial agreement, and while useful, is not as effective as most believe.
A prenuptial agreement is essentially a relationship exit agreement which specifies how assets will be divided upon divorce. Simple in concept, but complicated in application. Most mistakenly believe a prenuptial agreement to be a binding contract however it is merely expression of intent only upheld if approved by a family court judge. Generally speaking, to be enforceable a prenuptial agreement must pass a five-part test: (a) each party had separate, competent counsel, (b) full disclosure of assets, (c) adequate time to consider, (d) agreement was fair at the time it was entered into, and (e) agreement was fair at the time it was being enforced. The last two prongs are essentially subjective, which makes enforcement uncertain. Even some of the best drafted agreements are subject to risk; Jack Welch’s divorce settlement is a vivid example.
It is often difficult to share with an adult child or grandchild financial concerns or views of the family legacy. Surfacing a prenuptial agreement can be taken as an insult, causing relationship strains and resistance. Even when a prenuptial agreement can be a useful tool, it can become difficult to implement.
Insulating assets offers the most favorable results through the use of several techniques, usually in an interlocking fashion. Legal entities and structures — such as limited liability entities, family limited partnerships, trusts, — can be used to take advantage of their anti-creditor characteristics and insulate. One cannot lose assets that they do not own. For example, a trust may own a residence and the child lives in the property with his spouse and children, but if there is divorce, a well designed trust precludes the creditor from reaching the home. From a relationship perspective, entity and structure based programs only require parental involvement and coordinate with tax planning goals, and thus avoid intruding.
Prenuptial agreements have value and a place in the asset protection program, but cannot be relied upon exclusively. A well designed program should include a blend of strategies to provide protection along with flexibility to adjust to changing views and circumstances. Most attorneys and advisors are not asset protection specialists and many plans have their shortcomings exposed only after a creditor attack. Once a family understands its options, it is much simpler to choose insulation options in a comfortable, manageable fashion which not only preserves family legacy, but harmony.
Adam Chodos, Esq., CPA
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