TYING THE KNOT WITHOUT TYING UP FAMILY WEALTH
by Julia A. Panchot, BBR Partners & Adria S. Hillman, Attorney at Law, P.C
May 2025
When a member of one of our client families gets engaged, we are often asked about the need for a prenuptial agreement, especially when most of his or her assets are held in trust. Though trusts play an essential role in protecting multigenerational wealth, their assets can be vulnerable to division between spouses during a divorce. Having the right support and knowledge can help families effectively navigate this personal and nuanced topic.
We encourage our clients to have an “all-hands” meeting with their advisor, attorney, and accountant to evaluate their financial picture and make an educated decision on whether to pursue a prenuptial agreement or other asset protection strategies. In this piece, we will explore how individual and trust assets are treated in a divorce and approaches to safeguarding family wealth before and during marriage.
DIVISION OF ASSETS
As a starting point, it’s helpful to understand the definition of marital and community assets and how they may be divided at divorce. Broadly, marital and community assets, as defined by state law, are the assets, income or property acquired or earned by either spouse during a marriage. Their division at divorce is largely dependent on whether the applicable jurisdiction is a “Community Property” or “Equitable Distribution” state.
- Community Property States – Divides community assets 50/50 between spouses at divorce. Includes California, Texas, Arizona, Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin.
- Equitable Distribution States – Encompasses 41 states, including all states in the Northeast. Divides marital assets in a way that is “fair” but not necessarily equal, considering factors like the length of the marriage, financial and non-financial contributions of each spouse, and type of asset being considered (business vs. personal). Even in equitable distribution states, however, there is often a presumption of 50/50, supported by case law or statute.
VULNERABILITIES OF IRREVOCABLE TRUSTS
A common strategy to protect family wealth is to fund irrevocable trusts for the benefit of children and grandchildren but over which they have no control. However, even some irrevocable trusts can expose assets to the risk of being categorized as “marital” in the event of a beneficiary’s divorce. Accordingly, prenuptial agreements are often used even in situations where most of an individual’s assets may appear to be protected in irrevocable trusts. Such trust weaknesses include:
- Distributions are made to the Beneficiary Spouse During Marriage – Trust distributions can and will be looked at to help determine maintenance and child support. It is also possible that all trust income (not just distributed income) is classified as marital property. If a beneficiary avoids making or taking distributions from the trust during marriage, the assets likely are protected. However, this may not be sustainable if the beneficiary relies on trust distributions for his or her lifestyle now or in the future.
- The Beneficiary Spouse is Co-Trustee – Courts can argue that the beneficiary had some level of control over trust distributions, which may change the character of the property to marital. Families can avoid this potential issue by ensuring that beneficiaries do not serve as trustees.
- The Beneficiary Spouse is Actively Growing Trust Assets – For example, if a trust owns a family business that employs the spouse, the appreciation and income of that business may be considered marital property since the spouse played an active role.
PRENUP AGREEMENTS: DEFINITION & DOWNSIDES
A prenup is intended to override the default property division laws of the state in which a couple resides by defining property rights and support obligations during and at the end of marriage, either through divorce or death. Though prenups may be the best way for wealthy families and individuals to protect wealth from divorce, prenups are often avoided for two core reasons:
- Mandatory Disclosure of Trust and Non-Trust Assets Between Both Spouses – often includes trust assets for which a spouse is beneficiary
- Risk of Intrafamily Conflict
PRENUP CONSIDERATIONS #1: MANDATORY DISCLOSURE OF DISCLOSURE OF ASSETS
A prenup requires full disclosure of assets between both parties ahead of a marriage to ensure both parties have equal negotiating power. Both individual and trust assets for which a spouse is beneficiary are disclosed. In fact, a lack of financial disclosure between parties can invalidate a prenup.
Not only is a prenup often the first time that a future spouse will see the full scope of his or her spouse’s assets, but it is often the first time the beneficiary themselves will learn about his or her own family wealth. This reality is often the most stressful part of the process, and avoiding disclosure may deter families from pursuing a prenup.
In our experience, educating your children around their finances well in advance of the prenup conversation can mitigate any adverse reactions. Attorneys, investment advisors, and family wealth experts have experience with these matters and can serve as helpful partners to families.
PRENUP CONSIDERATION #2: RISK OF INTRAFAMILY CONFLICT
The risk of intrafamily conflict is another reason prenups are often avoided. Particularly given their portrayal in the media, the mere suggestion of one can be taken as a personal affront. One way to get ahead of this is the early introduction of the concept of prenups to children – even before they have a partner – as a best practice and protection for them and their family.
For parents, it is also important to recognize that every prenup should be tailored to a couple’s specific circumstances. Facts such as their pre-existing wealth, employment status, future state of residence, and earnings potential may differ. Therefore, different contracts for each of your children are to be expected. Siblings and parents should avoid comparing agreements, which can become another source of conflict.
In situations where a child is marrying someone with significantly less wealth, we often recommend the wealthier spouse’s family help pay for their future daughter or son-in law’s attorney. For a prenup to be valid, it is critical that both parties have separate legal counsel.
BASIC PROTECTIONS WITHOUT A PRENUP OR TRUSTS
If there is not a vast discrepancy between two parties’ current and future assets, they often decide not to pursue any protection strategies ahead of their marriage in favor of simplicity. For individuals who experience a significant change in their financial situation during marriage and did not pursue a prenup, a post-nuptial agreement is worth considering.
Even if nuptial agreements and trusts are not part of your family’s wealth structure, there are still methods to protect separate assets from being converted to marital or community property. Some practical tips include:
- Keep separate bank and investment accounts (Individual vs. Joint)
- Avoid gifting between spouses or adding to a joint account
- Ensure your tax preparer does not file a Joint Tax Return
- Ensure your tax preparer does not indicate a gift as Joint on a Gift Tax Return
- Don’t include your spouse on individual debts or liabilities
THE PATH FORWARD
We have seen many families harbor anxiety about initiating discussions regarding protecting multigenerational wealth prior to marriage, often leading them to sidestep the topic entirely. We encourage families to involve their advisors and attorneys to find any potential vulnerabilities and guide them through these complex discussions and decisions. The right path is unique to each family and will ultimately depend on their objectives, values, structure, and wealth circumstances. Our teams are here to support you in navigating these conversations with clarity and confidence.
Julia A. Panchot is a Director of Portfolio & Wealth Advisory at BBR Partners. She works with clients to develop their overall financial strategy, manage their investments, and integrate their investment, tax, and estate planning into a cohesive wealth management plan. Prior to joining BBR, Julia worked as an Analyst at Barclays Investment Bank on the Debt Capital Markets team. Julia graduated magna cum laude from Georgetown University’s McDonough School of Business with a Bachelor of Science degree in Finance.
Adria S. Hillman is the founding partner of Adria S. Hillman, Attorney at Law, P.C., where she focuses exclusively on family law, including high-asset divorce, custody matters, and complex financial litigation. With decades of experience, Adria provides her clients with strategic guidance and dedicated representation during some of life’s most challenging transitions.
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