Can Asset Protection be used to protect assets from your spouse in a divorce?
As you might imagine, I get this question all the time! The answer is – it depends.
Generally asset protection refers to situations where individuals or married couples are seeking to protect their assets and property from third parties, such as creditors and potential lawsuits. In terms of one spouse desiring to protect assets from the other spouse a different analysis must be done. The short answer is that if asset protection has been completed PRIOR to the marriage and properly maintained, then yes it can be effective to ensure that those assets are not included in any settlement to an ex-spouse.
Post Marriage Asset Protection Planning
On the other hand, if the planning is being considered after the fact, then we look to the rights of ownership and state laws regarding division of property and the State’s Domestic Relations Courts. With respect to separate assets, it is possible to create an asset protection plan after the marriage but prior to divorce, as long as the spouse is doing so only with clear sole and separate assets.
If the planning is being contemplated at virtually the same time as the divorce itself, then the general rule is that this is probably too late. In this case one needs to recognize that a Domestic Relations Judge has considerable power and can very effectively use its power, especially that of the Domestic Relations Order (DRO). One also needs to recognize the difference between the laws of the ten Community property States and the remaining forty non community property states. The various legal presumptions require the advice of competent legal counsel in your state.
Division of Assets Are Determined by State Laws
Also, you should look at what is the likely division of assets under the state law. As a general rule assets owned or titled by one spouse prior to marriage may be considered as sole and separate and may retain that character during the marriage and not be subject to division in divorce, irrespective of being in a community property state or non community property state.
To be effective the sole and separate property should never be co-mingled or mixed with property owned or titled in the name of both spouses. Doing this may defeat the sole and separate character and might be considered as a gift by one spouse to the other. This includes inheritances and gift from others to one spouse.
Persons with significant assets considering marriage often execute a prenuptial agreement which may further define property rights and expectations in the event of divorce. Courts generally respect such agreements, especially if both parties have independent counsel. Given that almost one half of all marriages end in divorce a prenuptial may be an appropriate measure in some situations.
The property which is subject to division in a divorce is considered Marital Property. Marital property consists of all income and assets acquired by either spouse during the marriage, except gifts and inheritances to one spouse which are not co-mingled.
It is important to note that actions on the part of one spouse to hide assets or avoid an equitable division of property are generally not only ineffective but can incur the wrath of the Court and its considerable powers, among them the all powerful DRO. In short the best planning for protecting the rights of each party in a marriage is to begin with competent counsel, know your rights and implement effective choices.
Try to Avoid Divorce Lawyers and the Courts
The best advice I can give anyone facing a divorce after witnessing many, many cases is to not submit yourself to the interests of divorce lawyers and courts at all. Both spouses lose in a long and hard-fought case and in the end the only winners are the divorce attorneys who have been billing the whole time.
If the marriage is truly over, find out what the law says about the division of property, divide the estate using that as a guideline and do it yourselves. Not only will you both save a significant amount of legal fees, but likely come through it emotionally much better as well.
I am a medical student about to enter residency (in 1 year) and get married (in 2 years, maybe). At this point I ONLY have debt. I don’t know which states I will bounce around between for residency and beyond. What can I do now to protect all future earnings and assets from a potential divorce? Thanks!
Tiffany,
A well-drafted prenuptial agreement is one of the few ways to separate future earnings and assets from a spouse. Generally, assets accumulated during a marriage are considered “marital property” or “community property” and will typically be divided more or less equally in the event of a divorce. Any property you bring to the marriage is your separate property and can remain as such. Also, any gifts or inheritances received by you during marriage are generally considered your separate property (as long as you keep them separate from marital assets). You will want to consult with a local attorney prior to marriage to get state-specific advice on a pre-nup as the law can vary dramatically from one state to another. For example, there are a few “Community Property” states that treat marital debt and assets differently from non-Community Property States.
Once you start to practice and are earning and accumulating assets, there are effective legal tools for protecting assets from future frivolous lawsuits and similar financial predators that we can help you with.