Divorce Asset Protection

Amy Newman
prenup agreement

With approximately half of all first time marriages ending in divorce, many couples want to protect themselves financially in the event their marriage fails. Couples can protect their individual assets prior to the marriage, during the marriage, or even in the midst of separation, in one of several ways.

Asset Protection Prior to Marriage

Taking steps to protect your assets prior to marriage is the best and easiest way to ensure that you're protected in the event of a divorce. Since no assets have been commingled, there will be little to no argument over what is, or is not, separate property.

Pre-Nuptial Agreements

Although considered unromantic, many people sign a pre-nuptial agreement to protect their assets. In order for the agreement to be considered valid, it must meet specific requirements set by each state. Pre-marital agreements can cover a variety of issues, including:

  • The division of property in the event of divorce
  • Property that will remain separate during the marriage
  • Payment of accumulated debt
  • Alimony payments.

Assuming neither spouse was forced into signing the agreement, and both spouses disclosed their financial information accurately prior to entering the agreement, the court will look to the pre-nuptial agreement to determine how assets should be divided in the event of divorce.

Placing Assets in a Trust

A trust is a legal document created to hold property, including real estate, a business, stocks and other investments or cash. Distributions of trust assets are made by the trustee to one or more beneficiaries, based on the terms of the trust. Once assets are placed in a trust, they are owned by the trust, not the person who transferred them in to trust.

Trustee Doesn't Have to Distribute Funds

Trusts can include language stating distributions to the beneficiary are discretionary, which means the trustee can make distributions at whatever time and in whatever amounts he wishes - including making no distributions at all. Unless the trustee abuses his discretion, the beneficiary cannot force the trustee to make a distribution.

The Trust Is Not Marital Property

This makes the creation of a trust an attractive option for protecting assets in the event of divorce. Courts have ruled that if one spouse is a discretionary beneficiary of a trust, the trust assets are not considered part of the marital estate, and are therefore not eligible for division between the spouses in the event of a divorce. For example, if a husband's parents established a discretionary trust for him, the wife would not be entitled to receive any of the trust's assets as part of the divorce settlement. This is true even if the husband created the trust and funded it with his own assets prior to marriage, so long as he did not also serve as trustee.

Distributions Can Be Marital Property

However, it is important to note that the distributions themselves may be considered marital property and subject to division between the spouses. For example, if a husband received a discretionary distribution he deposited into a joint account he shared with his wife, the distribution becomes marital property because the husband commingled his separate and marital assets. If, however, he receives the distribution and places it into a separate account in his name, then it remains his separate property and cannot be divided during a divorce.

Asset Protection During Marriage

If you failed to enter into a pre-nuptial agreement or create a trust prior to marriage, it is still possible to protect your separate assets in the event of a divorce.

Post-Nuptial Agreements

Post-nuptial agreements are the same as pre-marital agreements, except they are entered into after the marriage. Because you may have commingled assets since the marriage, this agreement may include how the marital property will be divided in the event of divorce.

Maintaining Separate Property

During marriage property is classified as either separate or marital. Separate property can become marital property if it was commingled with marital funds.

It is therefore important that any assets one spouse came into the marriage with be kept completely separate from marital assets, and that the owner not add her spouse's name to any accounts or other property that they wish to remain separate property.

Asset Protection Following Separation

If the marriage is headed toward divorce, there are still steps you can take to protect assets following the separation:

  • Open a checking and/or savings account in your sole name
  • Do not place an inheritance in a joint account
  • Deposit paychecks and earnings earned after the separation date in a separate account
  • Don't use marital assets to buy separate property. For example, the spouse who moves out should not use marital funds to buy a new house because the new house would be considered marital property and subject to division in the divorce.

Protecting Your Assets

Nobody starts a marriage with the idea that it will end in divorce. However, it's a fact that divorce does happen, and it is important for both spouses to protect their assets, particularly if children from prior relationships are involved. Before taking steps to protect your assets in the event of a divorce, it is important to meet with and discuss your options with an attorney, as laws vary amongst states.

Divorce Asset Protection