One thing that many people, understandably, worry about when they are getting ready to go through a divorce is protecting their assets. While not all assets are divided or split in a divorce, some certainly may be, and that leads people to wonder what strategies they can use pre-divorce, to protect as many assets as they can from being divided.
Asset Protection in Divorce is Different
Remember that asset protection, in the context of a divorce, is different than traditional asset protection that you may do to protect your property from creditors.
The laws that make certain property “exempt” from collections do not necessarily apply to a divorce (at least, not to spousal support obligation); the law may let you shield property from Chase Bank, but it does not want you to hide property from your spouse.
The other thing to remember is that when we talk about asset protection, we are talking about property—not income. In other words, it is one thing to use a strategy to try to ensure that property, like a business, a car, or a boat, is not divided. But that does not mean that your income will be hidden or lowered, income that is often used to determine things like alimony and child support.
Many asset protection strategies, when planning for divorce, have an inherent contradiction to them. To be effective, many of them need to be established or set up early—long before you file for a divorce. Of course, too long before a divorce, and you may not even be thinking about a divorce, and thus, it may not even dawn on you to start to implement these strategies.
Separating Assets and Property
One strategy is to keep your separate property separate from marital funds, paying marital bills, or buying things for the marriage. If there is truly money you want to protect from division upon divorce, it should be kept in a separate bank account and not used for things that benefit both spouses jointly. This is called “commingling,” and it can turn property or money that is yours and yours alone into property that a divorce court can divide in a divorce.
Using Pre and Post Nuptials
Another strategy is to have a prenuptial or postnuptial. Whil effective, these two things do have inherent practical problems: If you have not already drafted a prenuptial agreement and you are married, it is too late. You can still do a postnuptial agreement, but that, of course, may signal that you are considering divorcing your spouse.
Smaller businesses may benefit from getting a business valuation. The valuation will give an estimate of what the business is worth.
This can be beneficial because some spouses have an inflated idea of the worth and value of a business. If the valuation comes back with a low value, or even a negative value (some businesses simply are not worth money), it can be a helpful tool for you to negotiate keeping the family business.
In some situations, putting assets in a trust could be helpful to you. This is usually done with trusts that are irrevocable.
Domestic Asset Protection Trusts and other offshore accounts can be helpful and effective. Offshore accounts are not necessarily automatically shielded from division in a divorce, but they that are hard for spouses to find and difficult for attorneys to collect against if a judgment is entered.
However, with many of these trusts, you do not have ready access to the funds and property put there, so you should be careful about putting money there that you need to access to pay regular, daily expenses.
Tradeoffs of Assets and Debts
One way that you can protect a particular asset that you absolutely cannot bear to part with in a divorce is to make a tradeoff.
For example, if your spouse’s interest in the marital boat is $30,000, and you really want to keep the boat, you could opt to just buy out your spouse for that amount or increase payments to your spouse to pay off that amount over time. You could even “trade” assets—for example, give your spouse 100% of Asset A, and you keep 100% of Asset B.
You can even agree to take on marital debt or your spouse’s debt that normally would be divided in return for keeping certain property. So, if you agreed that you will be responsible for $10,000 worth of debt that would normally be the obligation of your spouse post-divorce, you could then ask to keep an additional $10,000 worth of property to balance that out.
Support and Assets: Be Clear
Some payments and providing of assets to a spouse in a divorce are considered spousal support.
If you agree that your wife will get 50% of a vacation home to aid in her support, then that asset is treated like alimony or child support would. This kind of support gets special treatment in the law; it is almost impossible to wipe out in bankruptcy, and traditional collection protections (exemptions) will not help you avoid paying it. You could even be held in contempt of court for not paying.
If you make sure that division of assets and property is just that—the division of property—and not part of your support to your wife, then financial obligations could, later on, be discharged in bankruptcy if needed. And, those payments would not get the same protections as support would. You would be able to use traditional collection protections as a defense against any collection action.
Negotiating and Settling Can Help
Note that these “give and take” arrangements, such as trades and payoffs over time, are really only possible through negotiation and a settlement reached by the parties inside or outside of mediation. A judge in your family law trial will usually not work out these kinds of arrangements, making an amicable settlement beneficial to you, if you are seeking to keep certain property in your divorce.
Contact us for help in planning for your divorce and so you know what to expect. We can help you start the process early and understand how your divorce may affect you.