The Best Prenup Isn't a Prenup

Mark Pierce 0:00 In my experience, and I can't emphasize this enough, is that with respect to family businesses, there's nothing that's has more dramatic and deleterious impact on a family business than divorces. And they always seem to come at the wrong time. They cost an incredible amount of money, and they're just disruptive to everything that goes on. And I think one of the reasons they're so disruptive is because people's emotions are so much involved in them. And as a result, I think that they're catastrophic. So if you can protect against that liability, why would you not protect yourself?

Maggie Pierce 0:36 This is Keep What You've Built. Every week I sit down with my dad, attorney Mark Pierce, and we break down the asset protection strategies nobody talks about publicly. If you're an entrepreneur or a high earner and you want to protect yourself and your family from the fallout of divorce, we are recording this episode for you. Today we are going to be talking about prenups and why a trust is the best prenup you can have. So um to start, can you define what a prenup is in the tr like what a traditional prenup is, and then how a trust can operate as a prenup?

Mark Pierce 1:10 Sure. I'd be glad to. Well, a prenuptial agreement is just that. It's an agreement or a contract between two individuals who are entering into a nuptial agreement, meaning they're getting married. And that prenuptial agreement says that each party has disclosed to the other party all of their assets and potential recoveries and assets moving forward that are anticipatory, and that they have agreed that in the event of divorce, that neither one of them will seek to have the assets of the other party included within their marital estate, so that they preserve the marital state for one another separate and apart from their partner. And uh say 30 years ago, it was predominantly men trying to protect their estate from the women they're proposing to marry. But I think it's become uh about 25% women now, as they've entered into the workforce and become much more successful over the last 30 years than they were allowed to be before that. So it's about 25% women, 75% men at this point in time. The difficulty with a prenuptial agreement is that you have an obligation to disclose fully and fairly all of your assets and the potential for assets into the future. Given that, it's a wealth spring of litigation opportunity in the event that one party decides that, gee, I was lied to and I was waiv waiv a piece of the pie that I did not know that I had. So they value it at $5 million. And so that woman's proposed spouse waives any right to a recovery in the event of a divorce against that $5 million. Subsequently, that technology company becomes very profitable, and that individual interest boosts up to $10, $20 million, $30 million. Well, at that point in time, the spouse who waived an interest in the $5 million asset said, Well, I thought it was a $5 million asset. I did not know it was going to be a $30 million asset. I want a piece of that additional $25 million. Then the other side said, wait a minute, you waive not only the right in the asset as it existed, but any potential profit in that asset. And then the spouse who would like a piece of the deal comes back and said, Well, that wasn't adequately explained to me. And at that point in time, then each party gets their attorneys lined up, they enter into litigation, and five years later, after numerous depositions and back and forth, they come to a settlement.

Maggie Pierce 4:24 That makes sense that the change in the assets over time would become an issue with a prenup. Can you contrast that to how that would work under a trust?

Mark Pierce 4:36 Yes, I'd be delighted. In the United States, the asset protection trust has been upheld in 35 states. The other 15 have not considered the asset protection trust that I know of. And what those states have said is that if you have an asset protection trust, such as a Wyoming asset protection trust, and you fully disclose the existence of that trust, and that trust has, as in Wyoming, a provision that says your beneficial interest in the trust is not a property interest, then that property interest isn't a part of the property of the estate in a divorce. So at the end of the day, it wouldn't make any difference what happened to the value of the assets in that trust. They're simply not a part of the marital estate. There's a second aspect to the asset protection trust, and this is something that has been going on for a while. Even in states that don't necessarily recognize the efficacy of the asset protection trust as against outside creditors, they will recognize the efficacy of that asset protection trust visa-vis, the efficacy on the inside individuals who are part of the trust agreement. For instance, I had a client of mine who came in with his wife and his three adult children and executed an asset protection trust in Wyoming. Then, about seven years later, his wife decided that she would like to divorce him, which of course she was entitled to do, and she wanted to take half of the trust. Well, it doesn't work that way. When you have seven five individuals who are parties to that trust, you have five beneficial interests outstanding, not two. So the idea that she thought she was entitled to 50% of the trust estate is a complete misapprehension of what her entitlement was to the property of the family. And in addition to that, because it's not part of the marital estate, it wasn't part of the marital property that goes into the state. So the court came back and said, look, you're bound by the terms of the contracts that you've set. If there are distributions out of this trust, as there probably will be in the course of the next 20, you get your percent, whatever they decided. But there's nothing that we have to divide here in the uh marital estate here in New Jersey.

Maggie Pierce 6:51 Okay, that's an interesting example, and it makes me wonder uh, because when you think of a prenup, it's normally before marriage, of course, and then your example is when two people were already married. So when do you typically recommend that people think about this type of planning and what should the timing look like in terms of what you do when you're single versus what you do when maybe you're engaged and what you do with your partner when you two are married?

Mark Pierce 7:20 Yeah, I think that if you're a young couple and you're successful and you've gotten into an arrangement where you would like to be married to someone, then you would like to continue with the aspects of your success and that the other party recognizes that, gee, I didn't have anything to do with the accumulation of that success up to this point. And I want to be completely fair and honest about this because I'll pursue my career, you pursue your career career, you keep the benefits of that, and I keep the benefit of mine. It seems to me that a successful company would want that to happen. And then eventually one comp one c one individual ends up being financially more successful than another, so be it. So they go their separate ways and they don't get a piece of the pie moving forward after they decide to divorce. And when you look at the percentage of divorces that occur in high-income families, I think it's very necessary to engage in that type of disclosure and that type of planning. That way you just don't have the level of acrimony going forward that you would otherwise have. The difference between a prenup and a trust process is in the prenuptial agreement, you recognize that you have assets that could be considered to be part of the marital estate, but you've elected not to include them in the marital estate. But then you come back to the court after you get divorced and somebody says, Look, I was taken advantage of. You know, let's do equity here, let's divide this up differently, and the court has the ability to come back and do that. With a trust, you don't have the ability to come back and do that because whatever's in the trust is not a property interest, is not prior to the marital estate. So that precludes any individual coming back and trying to get a piece of that. So the long and short is one's a contractual relationship, the other one is a trust relationship, and the trust relationship says you don't have a property interest. If you don't have a property interest, there's nothing to divide. So there's two aspects to that asset protection trust. First of all, the spouse that would like a piece of it isn't a part of the trust. He or she's not a beneficiary. Second aspect of it is the spouse that is a part of that trust has an interest, but not a property interest that's subject to a marital state and subject to division in the event of a divorce. So that's what that asset protection trust acts to operate on.

Maggie Pierce 9:35 Okay, so once you get divorced and you have a trust like this in place, uh is there anything within the trust that's uh reachable by the divorce proceeding or by your ex-spouse?

Mark Pierce 9:50 Not as an asset. Okay, if you get into a divorce proceeding with your soon-to-be ex-spouse, there's nothing in that trust that goes into the property settlement for that spouse. That's clear. Now, when you get into child support and you get into support payments for that individual spouse, typically you will have waived them as against those assets in that trust because they're not part of the marital estate and they shouldn't be considered for that. Now, what a court's going to do is they're going to say, yeah, well, wait a minute, you still have an obligation of support to the kid. So it depends on the state. Wyoming does not exempt child support obligations as a potential for an asset distribution out of that trust. Meaning, if an individual spouse comes in having child support obligations due from a beneficiary of a trust, the court can enforce against that beneficial interest distributions to that beneficiary to pay for the child support obligations.

Maggie Pierce 10:52 Okay. So speaking of how kids are um involved in this, can you explain a little bit uh about how a trust can be used for legacy planning and family planning in general and how to get your kids involved in that and that process?

Mark Pierce 11:09 Yes, absolutely. I think it's it's absolutely key for somebody that has a particularly a family business to get an asset protection trust and it provides for succession of interest in the management of that business. It also makes sure that in the event of divorce, either from the initial people who established the trust or the kids who subsequently come in the business and get married, it keeps those spouses out of the family business. I'll give you a specific example. I had a client who was worth about $20 million. He was heavily involved in real estate and the development of these self-storage facilities that you have. And he had a son and a very bright young man, and his son had gotten married to a woman, and those individuals were supposedly happily married. And the father gifted a portion of an LLC that was owning some of these storage facilities to the son, his proportional share. So they were married for a couple of years, she decided to divorce, and that proportional share that was given to the son then became part of their marital estate. She ended up with a fairly significant portion of that sum, about I think about half, almost half. So the value of that was about two and a half million dollars. So that young lady made about a million, one point two five million a year from being married to this kid. Not bad money for a 27-year-old.

Maggie Pierce 12:31 And can you just contrast that to how that situation would have gone if they would have had a an a trust in place for their legacy plan?

Mark Pierce 12:39 Absolutely. If they had come in and made the kids beneficiaries of the trust so that when the son got married to this woman, the beneficial interest that the son had in the trust would not be a property right, it'd be a family right, and it would not be part of the Maryland state, and she would have received nothing from the family estate.

Maggie Pierce 12:58 Um can you give any other examples or do you have any other examples of how different types of families with maybe different asset classes or different structures have used these trusts?

Mark Pierce 13:11 Yeah, I've had a number of clients who have come in after having been married for a number of years, and they want to make sure that their family is protected. So they come in, they put their family businesses into limited liability companies, and they put the limited liability company membership interest under the asset protection trust. And then that way they isolate liabilities from one LLC business from another LLC business from another LLC business. And then when they have excess cash flows, they can isolate those cash flows away from those businesses as well. In addition, you don't have any individuals who own those LLCs, so no individual debt can come back against those LLCs that get enforcement against those membership interests or against the trust. So it's a great way to accumulate family wealth and income into an asset protection trust and to act as a bit of an investment concern moving forward. You become your own private equity firm at the trust level because the underlying businesses in the LLCs are generating a lot of cash. So what you do is you leave a sufficient cash reserve in those LLCs to provide for the operation and management of the LLCs and any excess cash you put up into the trust. And then the trust invests those separately into additional LLCs and into additional business interests. That keeps the family involved in the trust, doing something interesting in the trust and keeps them together as a family planning. And I've seen this go on generationally, and I've seen a lot of people talk about it, but the trust and the underlying LLC interest is the most effective way in which to do that.

Maggie Pierce 14:44 Who would you recommend an asset protection trust to and who is not well suited for an asset protection trust?

Mark Pierce 14:51 Yeah. Any individual who is in a high-risk profession, such as an attorney or a doctor or a dentist these days, uh, needs to have an asset protection trust. I would also recommend an asset protection trust to any family business that's grossing more than a half a million dollars a year, because at that point in time you're going to start accumulating wealth, you're going to have to start accumulating additional ways in which to invest that wealth. And you need, first of all, to make sure that the wealth is protected, not just from outside creditors, but from the outside creditors of your kids and from the kids and the kids' wives or the kids' husbands, case may be, uh, in the event of a divorce. So you're guarding against unnecessary liabilities coming into the LLCs and into the family business, and you're guiding or guarding against uh divorces of yourself and your kids, and those divorces disrupting or destroying your family business. And I'll give you a specific example of that. I had a client of mine who had a good business and he had a good family, but one of his kids had a real drug and alcohol problem. And that kid was working within one of those LLCs and had money coming out of it. He had an income coming out of it, a salary. And he got drunk one night and headed the wrong way down the freeway, hit a couple, and killed him. And uh at that point in time, they didn't have sufficient insurance on the car, so they had excess liabilities coming in over the value of the car and over the value of the uh insurance that they had. But that kid had no interest in those LLCs other than employment uh opportunity. So those individual creditors that came from that slaughtered couple, if you will, had no access into the family business at that point. And I'll give you another example as well. I had a client that had uh five kids, and uh he was considering going into an asset protection trust. We worked with him for almost five years, and it just got to be ridiculous. He just couldn't pull the trigger. And one afternoon he called me and he had had a massive coronary incidence. He was in the ICU and he was heading in to get uh operated on, and he wanted to finish his trust. And I mean, there's just no way that you can get the trust accomplished at that point in time. And he ended up passing away that afternoon. And so I got a call from his attorney and his former attorney and his former attorney's secretary wanting to get my paperwork at seven in the morning. He called me at my house and wanted to come by my house, pick up the paperwork and get it done so that he could begin the estate administration process. I had put all of the assets together, everything together into file folders and whatnot. This guy took it, filed the schedules, and he ended up getting a 5% distribution out of like a $10 million estate, a half a million dollars, for doing almost nothing. But the most disturbing part of it was is that this man's one of this man's children had ended up in prison uh in Rollins. Uh it's like one of these worst prisons you can possibly imagine. He was in Rollins in prison, and he was part of this victim's compensation from because he had murdered somebody. So 20% of that estate, around $2 million, went into that victim's compensation fund. And that would not have happened if it had been a trust.

Maggie Pierce 18:20 Right. So I think that speaks to why you should get these things in place earlier rather than later.

Mark Pierce 18:27 Yeah. You know, and I had an interesting conversation with a young man who was uh had just gotten out of medical uh med school a couple years before, and he was putting together his own podcast, and he was uh he was getting it, he was a spinal surgeon, he was going into that sort of business. And, you know, these guys make a lot of money, and good for them. And he asked me the timing to do it, and I said, today. If you do it today, you'll develop the discipline to manage this thing going forward, because what I typically run into is that doctors are so busy being doctors that if they don't have these things in place and develop the discipline on the things in place, they don't get them done. And I just got a referral of a uh a couple doctors, cardiac, cardiologists, who came in, they had a management services organization, an MSO that they had established through a friend of mine six years ago. And you have to maintain those MSOs every year. You have to get valuations, you have to go back, you have to look at the transactions, you have to have a file together that says it's fair, it's reasonable, it's moving forward in the right direction. They hadn't done anything for five years. And so they came in and said, Well, how much will this cost? And I said, you know, first of all, let's just get one thing really straight, okay? You had an obligation to do this every year, and your excuse is that you didn't have the time. But that's not a valid excuse. So rather than develop the discipline to understand what's going on with this stuff, you probably didn't have enough time anyway, is that you didn't do it. So as a result, we have to go back and patch this up. But more importantly, you have to move it forward. And we need to do that year to year to year. And what you need to understand as cardiologists is you don't have the time, let alone probably the inclination. You don't have the time to do it. And you're gonna say it's simple, stupid stuff. Why am I paying so much? And the problem is it must not be that simple, stupid because you didn't get it done for five years. So here's what the cost is going to be. And it ended up being fairly substantial. But if you don't get it done, the IRS comes in, sets aside the deductions, and a half a million dollar tax liability. So tell me what you're willing to spend over the next couple of years getting this thing together to avoid that tax liability. So that's just the hardcore truth cold truth of it is that if you're going to do these things, then keep up with it. And if you don't have the time to do it, hire somebody who does. Because the amount of money that you save is far going to surpass the amount of money that you spend on the administration if you can't do it yourself. So lose the idea that you're a pauper because you're rich, and act like you're rich. People with money know how to act, and people with money make more money because they've been taught how to act. You pick the right fights, not the wrong ones. And chinsing on your administration is not the right fight.

Maggie Pierce 21:14 Okay, that makes sense. So for people who want to follow that advice, what would be the best first step for them to take?

Mark Pierce 21:22 Well, the best first step to take is I advise, you know, get yourself together. What do you want? And like for doctors and attorneys and dentists, I said, we need to put an MSO together so that you get the maximum amount of deductions. So you take yourself from a 40% bracket into a 20% bracket, and then we need to manage that 20% bracket. In addition to that, we need to establish an asset protection trust because that's your rainy day fund. And believe me, at some point in time, you are going to have a rainy day. And one of the things I think that we have a tendency to do as Americans is that when it's good, oh my God, it's always going to be good. Guess what? It's not always good. And I've sat around and I have watched during my lifetime five different catastrophes in the last 40 years that bankrupted people and they never recovered from. Some recovered from it. Other people are always planning for it and they have nothing to recover from. They're fine.

Maggie Pierce 22:18 So when you have referring to as nationwide catastrophes, not including personal catastrophes that people have.

Mark Pierce 22:26 Yes, nationwide catastrophes. And then you have the individual catastrophes as well. But you look at this stuff and you say, okay, at the end of the day, I have seen the people who plan for catastrophes and maintain proper proper working capital reserves. I have seen them capitalize on things that other people didn't have the money to do when everybody was willing to get rid of stuff for cheap. And like I think it was a marquee, oh, I know what it was. The Rothschilds. When the Napoleonic Wars were evolving, the Rothschilds developed a business strategy and it says when there's blood in the streets, there's opportunity on the market. And they had the money to capitalize on the opportunity of the market. So look at what happened to the Rothschilds. If you're in a position to do that, you're going to find yourself multiplying the net worth of your family exponentially during bad times because the recoveries always come. They may not be something that you want to get involved in, and you can choose not to be involved in it. But there are also things that come along where people are desperate for money. Well, you're make a good deal. And you don't have to make a deal. The people that need to get rid of something have to make a deal. And there was a guy by the name of T Boone Pickens who years ago got involved in the oil and gas industry and became very successful. And one of his mentors said, Boone, I'll tell you something. When you don't need to make a deal, you'll start making good deals. Well, these trusts and these MSOs and these tax structures put money in the bank so that when clo economies collapse or people have difficulties, you're in a position to make a good deal. And you make money when you make a good deal.

Maggie Pierce 24:16 What is the practical next step though? So somebody's decided that it makes sense for them to set up an asset protection trust. Who should they talk to? What would that conversation look like and how should they move forward?

Mark Pierce 24:28 Yeah, the actual step is you know, call in and got get a consultation from our law firm. There's absolutely no reason we we're not gonna sit here and ask you how the weather is in Cleveland. You know, we're not gonna invite you to our children's birthday parties, and we hope you don't invite us to yours because you know we're in Wyoming. I don't know where you are. Um so this is completely a professional relationship. We do it quickly, we do it efficiently, we do it on a basis of complete understanding of what it is that we're doing. So when people say, well, how do you get it done so quickly? When you've done five, six hundred of these, you have an interesting under a much better understanding of what's going on within the family and what's going on within the trust itself to get you where you need to go. And we've done it repetitively over and over and over again. We're highly trained, we're very skilled, and we have a system in place for doing this. If you go to your standard issue estate planning firm, say on the block, down the street, and walk in and get your guy to do it, it's gonna take you six to nine months, it's not gonna be done right, and your cash flow is gonna be all messed up. Come to us, we'll get you straightened out right away.

Maggie Pierce 25:39 Great. Um, any additional thoughts or things you want to add?

Mark Pierce 25:46 Yeah, I'll just be really frank with people. You know, the best time to do something is now. Put yourself into play, put yourself into the stream, get this thing done, and then 10 years from now you're gonna look back and say it's the best thing I ever did because now I'm actually to the point where I've really begun to understand what's going on in the market. I understand what's going on with my trust, with my businesses, with everything else. I'm managing this as a true professional. And at that point, you have what we call mailbox money. The money comes in. You don't have to go out and generate the money every day. It generates itself, it becomes self-perpetuating. If you're a doctor, go be a doctor. Let the rest of this stuff catch up with you. And it will, again and again, same way as a dentist. Attorneys should have this. Attorneys are attorneys, very few attorneys ever get this, but they should have one as well. Move it forward and do the right thing for yourself and your family. And do it today.

Maggie Pierce 26:44 Thank you for listening to Keep What You've Built. If you're interested in speaking with Mark, you can schedule a meeting with him through the link in the show notes or by visiting Wyoming TrustAttorney.com. If you've enjoyed the show, please rate it five stars or give us a like. We'll see you next time.