Asset protection is an essential consideration for individuals and couples looking to safeguard their wealth from potential creditors, lawsuits, and other financial threats. However, when it comes to marital situations, particularly regarding protecting assets from a spouse, the legal landscape becomes more complex. This blog post aims to clarify how asset protection strategies can be effectively implemented before and during a marriage, as well as the implications of divorce.
Protecting Assets Before Marriage
If you have taken steps to protect your assets prior to getting married and have maintained those protections properly, you may be able to shield those assets from being included in a settlement or division of property in the event of a divorce. This proactive approach is crucial; it underscores the importance of legal guidance tailored to your specific situation and state laws.
Planning After the Marriage
When considering asset protection strategies after the marriage has begun, particularly if divorce is on the horizon, the analysis shifts significantly. Different states have varying laws concerning property division, and understanding these can be vital in your planning. If you wish to create an asset protection plan during the marriage, it must involve only clearly identified sole and separate assets.
However, if you’re contemplating asset protection strategies at the same time as the divorce, time may be running short. In such situations, a Domestic Relations Judge has considerable authority and can potentially override late-arriving asset protection efforts. It’s important to grasp the implications of Domestic Relations Orders (DROs) at this stage, as they can greatly influence the outcomes of property division.
Community Property vs. Separate Property
The laws governing asset division also vary significantly depending on whether you reside in a community property state or a non-community property state. In general, assets owned by one spouse prior to the marriage are typically classified as sole and separate property and retain that designation throughout the marriage, provided they are not co-mingled with marital assets. Co-mingling can severely undermine the integrity of separate property, as it can be construed as a gift to the other spouse, complicating asset protection efforts.
The Role of Prenuptial Agreements
For those with substantial assets contemplating marriage, a prenuptial agreement can be a prudent strategy. This legal document can clearly define property rights and expectations, significantly simplifying matters should a divorce occur. Courts tend to uphold prenuptial agreements, particularly when both parties have received independent legal counsel.
Given that nearly half of all marriages end in divorce, entering into a prenuptial agreement may be a wise choice for many couples. Understanding what constitutes marital property—which includes any income or assets acquired during the marriage, unless classified as a gift or inheritance to one spouse—is vital in these circumstances.
Case Study: Mr. Green’s Asset Protection Plan
To illustrate the complexities of asset protection planning in a marital context, consider the case of Mr. Green. Mr. Green is a successful businessman with $9 million in assets, all in his name, despite having built his wealth from very little. He is married to his wife of 25 years, with whom he has three grown children. While he is current with his creditors, he is concerned about how an asset protection plan could be beneficial in the event of a divorce.
The challenge here lies in the nature of Mr. Green’s assets. While he expresses interest in establishing a plan solely for himself, it’s crucial to recognize that, given the dynamics of his long-term marriage and shared life, any asset protection strategy centered on him alone could be problematic. The family home is valued at $1.3 million, and Mr. Green has set aside $500,000 in an IRA for his wife; yet all major assets are under his name.
Given these circumstances, we would advise caution. There are three potential paths for Mr. Green:
1. Plan Individually with Separate Assets: Mr. Green could establish a plan using solely separate assets while defining these assets clearly in an agreement with his wife, potentially as part of a post-nuptial agreement.
2. Joint Planning with Spouse: Alternatively, he might consider an asset protection plan that includes his wife, clearly detailing the character of any assets contributed.
3. Individual Planning with Exemption Clauses: Lastly, Mr. Green could create an asset protection plan that specifically excludes its protections from any divorce proceedings, ensuring he does not attempt to leverage this plan during potential divorce settlements.
In our view, it is unwise to try to classify co-mingled assets as separate and shield them through a unilateral asset protection plan. Therefore, our strong recommendation is to choose from one of the aforementioned options or forgo the plan altogether.
When it comes to asset protection, early and informed planning is essential. Whether considering a prenuptial agreement or managing separate assets, consulting with a knowledgeable attorney can help ensure that your assets remain safeguarded. Effective legal measures taken before and during marriage can significantly impact the outcome in the event of a divorce, preserving your wealth in an uncertain world. If you’re interested in learning more about asset protection strategies tailored to your unique circumstances, please reach out to our firm for expert guidance.
Call for a legal consultation to speak with an asset protection lawyer at (888) 773-9399
By: Brian T. Bradley, Esq.
