Premarital Estate Planning: When Marriage Is a Merger

By Ryan Scharber

When Michael and Jessica, a 40-something engaged couple, made an appointment for premarital estate planning, we assumed (OK, I assumed) that they would want to create a prenuptial agreement.

Wrong assumption. The couple made clear from the beginning of our meeting that they wanted nothing to do with a traditional prenuptial (or premarital) agreement, which they viewed as a divisive “what’s mine is mine” step in planning for a failed marriage and a divorce.

What they did want was for their marriage to be a union in all respects, including, to the greatest practicable extent, conveying into the marital community the ownership of all of their sole and separate assets. And they wanted a comprehensive estate plan that would go into effect immediately after their wedding.

“We’re getting married in three months, we’re in it for life, and we want to do things right,” Jessica explained. “We don’t want to have any secrets, separate property, or hidden assets. We want what we bring into the marriage to belong to both of us, with equal ownership, access, and control.”

Michael added this historical analogy: “When the Spanish explorer Cortés arrived in the New World, he burned his ships to eliminate any possibility of turning back. We want you to help us burn our ships.”

Having vividly stated their objectives, they moved on to a description of their assets and situations:

• This would be the second marriage for both, and neither had children.
• Each of them was a homeowner. They planned for Jessica to move into Michael’s home after their wedding and to turn Jessica’s home into a rental property.
• Michael was a self-employed landscape architect, and his business was held in a single-member limited liability company (LLC).
• Jessica was a salaried employee, but she was also the sole member of an LLC that owned one asset: the rights to several musical compositions for which she earned royalties.
• Michael’s financial assets consisted of a personal checking account, business checking account, Simplified Employee Pension (SEP) IRA, and mutual fund shares held in a brokerage account.
• Jessica also had personal and business checking accounts, plus a money market account and a 401(k).
• Both had credit card balances that they would pay off shortly before the wedding, but Michael owed a substantial debt that he would not be able to pay off by that time.

Planning the Marital Merger

Opportunities to lead a couple through this type of planning do not come along every day, and helping them achieve their well-defined objectives was an enjoyable experience that encompassed many interesting aspects of estate planning.

We began by identifying steps that they could take on their own, either just before or immediately after the wedding. Their action items:

• open a joint personal checking account, transfer to that account the balances from their individual checking accounts, and then close those accounts;
• open an interest-bearing account to which Jessica would transfer her money market balance;
• add the other as a signer on their business checking accounts;
• designate the other as the beneficiary on Michael’s SEP-IRA and Jessica’s 401(k);
• open a joint brokerage account to which Michael would transfer his investment portfolio; and
• pay off their credit card balances, cancel the individual credit cards, and get new personal and business credit cards.

We then turned our attention to the structuring of their estate plan.

First, it was clear that the centerpiece of their plan would be a revocable living trust, which would (a) allow their estates to avoid probate after each of their deaths and (b) support Michael and Jessica’s objective of shared ownership and control of their assets.

In general, their trust would be the titled owner of:

• their personal bank accounts,
• their brokerage account,
• their motor vehicles,
• their existing LLCs (that was the original plan, but we ultimately took a detour described below),
• Michael’s home, and
• a new LLC that would own Jessica’s home, serve as the operating entity for its rental, and add a liability shield between the couple and their tenants.

Michael’s business and the renting of Jessica’s home combined to make asset protection a priority. To achieve an extra measure of protection, and because the couple would have multiple LLCs, in this case it made sense to create a holding company. Their holding company became the sole member of the three LLCs, and their trust was made the sole member of the holding company.

By that point we had checked all the boxes but one: insulating Jessica from liability for Michael’s financial debt. As that is somewhat hard to do in a community property state such as Arizona, they accepted one deviation from their “no prenup” mandate and executed an agreement stating that Michael’s debt was his sole and separate obligation for which Jessica had no liability. The existence of such an agreement does not make the non-debtor spouse bulletproof from collection efforts, but it does create a legal hurdle for creditors.

Executing the Plan. Because Michael and Jessica wanted their estate plan to go into effect on or right after their wedding day, we discussed two options for putting it in motion: (1) sign everything in advance, with instructions for all documents to go into effect on the wedding day, or (2) prepare the documents in advance and sign them immediately after the wedding day. They chose option 2, which they viewed as the simpler and less risky course.

Conclusion. For the purposes of this article, the clients are fictitious, and the details of their situations and objectives were adapted from multiple estate planning engagements.

However, the value of the strategies described above is very real, and the underlying issues are sufficiently common as to provide a planning template for many couples who are coming into a marriage with sophisticated asset scenarios.