Keeping it in the Family: Do You Need a Parental Prenup?

By: Steven A. Widdes

Media Type: Alert

If you have questions about a Parental Prenup or estate planning, please contact a member of our estates and trusts department at 301-340-2020.

Here is a common scenario for parents of adult children: Your child is in his or her 20s or 30s and you are starting to think about that child getting into a long-term relationship or even getting married. With any luck, he or she will be blissfully wedded for 50 years (or more). Yet as we have heard far too often, marriages last only about half the time. Suggesting to your child that a Prenuptial Agreement may be a good idea prior to the marriage could cause him or her to become upset that such a document should even be considered to preserve the family’s assets. 

In our work preparing estate plans for clients who have children, we generally see three approaches leaving assets to children under a Will or Revocable Trust. This article first reviews two very common approaches to the distribution of assets through an estate plan. It then delves into the Parental Prenup and the use of a Lifetime or Generation Skipping Transfer (GST) Trust to protect assets from a current or future son- or daughter-in-law.

Assets Pass Outright

As a first option, parents may decide that, if their deaths occur when the applicable child has already reached a specified age such as 25, then the assets should be paid out to such child on an outright basis and not in Trust.

Assets Pass through a Trust

An alternative approach is for parents to leave the assets in Trust with the power in the Trustee(s) to pay for basic expenses such as education, health and living expenses but to provide that the child can require distributions at specified ages such as 30, 35 and 40, in equal or unequal portions. Until such designated ages, the Trustee(s) and not the beneficiary would decide on when distributions should be made. Usually in this “Staggered Age” approach, parents want to avoid dis-incentivizing a child by restricting him or her from receiving a lump sum distribution of his or her Trust all at once. 

In this approach, as in the first approach, until the beneficiary has met the requisite age or ages, the Trustee is given wide discretion to determine how and when the child is to receive distributions and may even permit the Trustee to make distributions indirectly by allowing the Trustee to pay “for” and not necessarily “to” the child. 

The Parental Prenup

Growing in popularity is another option that is especially beneficial in preserving family assets in case of a divorce. Parents can provide for a “Lifetime Trust” for the child without including specified ages. This is technically referred to as a Generation-Skipping Transfer (GST) Trust. For many years, use of a Lifetime Trust was considered most beneficial for families with names like Rockefeller or DuPont. Yet recently, for tax and asset protection reasons, Lifetime or GST Trusts have become part of the estate planning process for many families. 

Using a Lifetime Trust may well allay the fears of parents concerned that their child may not end up with Mr. (or Ms.) Right – hence our referring to it as a “Parental Prenuptial Agreement.” Under such an arrangement, rather than leaving material amounts to a child outright, or even in the Staggered Age Trust, a Lifetime Trust is set up for him or her. To the extent necessary, assets in the Trust can be accessed for specified purposes. Presumably, the ultimate beneficiaries will be the grandchildren following the passing of a child. 

The primary goal of a Parental Prenup is to have the Trust provide certain limited benefits for the child for his or her life but, on that child’s death, the remaining assets in the Trust pass without the control of his or her spouse. More importantly, in the event of a marital split-up, in most jurisdictions the Trust and any segregated proceeds would be beyond the spouse’s demand of a monetary award. 

For parents who wish to protect their assets for the benefit of their own children and grandchildren (and not the in-laws who have become outlaws), this article outlines basic techniques for limiting access to family assets by an unwelcome spouse (or ex-spouse). While beyond the focus of this article, a Lifetime Trust may also be considered to limit how much is subject to transfer taxes on the child’s death (by “skipping” his or her generation) and for protection of the child from other potential creditors. 

To learn more about whether a Parental Prenup may fit your estate planning needs, contact a member of Stein Sperling’s estate planning department at 301-340-2020.

Steve Widdes is a principal of Stein Sperling Bennett De Jong Driscoll PC and co-chair of the Estates and Trusts practice group. He works with clients in the areas of estate planning, estate and trust administration and tax and business succession planning. He also assists them in protecting assets for future generations through long-term trusts for children, as well as pre- and post-nuptial agreements.

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