Both prenups and estate planning protect your assets in the event of divorce or death, but they do have a few key differences.
To better understand these legal documents, let’s first discuss the difference between separate and community property.
Separate vs. Community Property
In community property states like California, anything you own prior to marriage is considered separate property. On the other hand, any income, debts, or assets acquired once you marry are considered community property between you and your spouse. The only exceptions to this are gifts or inheritances.
Basically, once you legally marry, your assets combine into a marital estate. Anything acquired after that is community property.
Estate Planning vs. Prenuptial Agreement
At a base level, both estate planning and prenuptial agreements establish boundaries between separate and community property.
Perhaps you received an inheritance prior to your marriage that you want to keep separate. Or maybe your spouse aims to shield you from potential debt incurred from their business. In cases like these, estate plans and prenups are the vehicles for clearly defining your assets.
Prenups and estate planning are also similar in that without them, default state laws kick in.
For example, without a prenup, the court will decide how your marital assets are split. Similarly, without an estate plan, it is determined that a person has died “intestate” and the courts must use state probate laws to determine division of assets. Both of these scenarios set the stage for confusion, ambiguity, and in many cases, conflict.
While there is some overlap in functionality between the two, the main difference is that a prenup is a mutually crafted document between you and your spouse-to-be while an estate plan is a comprehensive package that encompasses not only asset distribution, but also end of life planning and legal guardianship.
What is in an Estate Plan?
An estate plan encompasses a variety of legal documents that help inform what happens to you and your assets in the event of death. It’s highly customizable and most commonly includes a Trust, Last Will & Testament, Living Will, and/or Power of Attorney.
Some of these documents determine property and asset ownership, while others outline preferential topics, like whether you’d like to be cremated or buried after death.
Let’s review the differences.
A trust is a legal agreement that clearly defines who receives your assets when you pass away. In a trust, you (the trustor) transfer ownership of your assets into a trust (the trustee) to be held for a specific person or people (the beneficiaries) that will acquire ownership of those named assets upon your death.
When setting up a trust, you effectively transfer ownership of the selected property and assets to the trust itself. This is in contrast to a prenuptial agreement, which establishes ownership of assets between both you and your spouse.
Last Will & Testament
A Last Will & Testament outlines distribution of your assets upon death, naming who gets what and in what amount. This may sound similar to a trust. However, with a will, you maintain ownership of your assets until death.
A will also establishes your last wishes in regards to end-of-life arrangements. For example, your will would document whether you want a funeral, be cremated, or donate your body to science.
Wills also establish a guardian for minor children or naming a person to handle your financial affairs after death.
A Living Will establishes your healthcare plan should you become seriously incapacitated or terminally ill. This may entail identifying what life-saving interventions you do or do not want, or establishing whether or not you’d like to be put on life support.
Power of Attorney
The power of attorney gives one person the authority to make financial and medical decisions on your behalf. It’s a legal document that must be signed by both parties.
What is a Prenuptial Agreement?
A prenuptial agreement, or prenup, is a legally binding contract between you and your partner where you clearly outline what happens to your assets in the event of divorce or death.
Prenups are great tools for you and your spouse-to-be to have a healthy dialogue around money. The best part is that you can tailor it to your specific needs. By creating this document before your marriage, you ensure that you’re on the same page about your respective income and debts and general expectations around finances.
A prenup is created with you and your spouse top of mind, focusing mainly on which one of you takes ownership of specific assets. This is in contrast to an estate plan, which defines who else in your life is entitled to your assets outside of your marriage, and only once you’ve passed away.
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Which is Better: A Prenup or an Estate Plan?
Because prenups and estate plans operate slightly differently, one is not necessarily better than the other.
In fact, establishing both a prenup and estate plan is a foolproof way to remove any mystery from asset ownership and distribution in a worst-case scenario.
If you create both an estate plan and a prenup, then you’ve not only collaboratively outlined asset ownership with your future spouse, you’ve also clearly defined who inherits your separate property upon death. Prenups may include a number of clauses including a death clause. The death clause points to the Will or Trust within your estate plan for guidance on who gets property in the event of death.
It’s important to ensure that your estate plan does not conflict with your prenup, however. For example, if your prenup establishes that your estate will be split 50/50 with your spouse, but your Will or Trust leaves 100% of your estate to a sibling, this gives your spouse grounds for filing a claim against your estate. This can be mitigated by drawing up both documents as a coordinated effort with your spouse.
The purpose of having both a prenup and an estate plan is that these documents work in tandem to achieve your desired financial goals. Done correctly, they both work as a means to bring clarity to asset ownership and division with your spouse.
Plan Today for a Peaceful Tomorrow
Both estate planning and prenups exist to bring you and your spouse peace of mind. They are useful tools to carefully define asset ownership and provide extra assurance that your finances and belongings are mindfully divided in the event of death.
Schedule a consultation with me to learn more about how establishing a prenup can not only help to protect assets but also lay the groundwork for a healthy marriage.