When a couple divorces, only their marital property is divided between them. Separate property is not split. Separate property is property that is acquired before the parties’ wedding date, through inheritance, or a gift made directly to a party during the marriage, provided it remains titled solely in that party’s name. Marital property is property that is acquired from the date of the marriage to the date a divorce action is commenced or an antenuptial agreement is signed. Unfortunately, it is easy to make a mistake with separate property and inadvertently change it into marital property. To avoid this result, there are several tactics, including trusts and prenuptial agreements, that can help protect separate property assets in divorce.
How can trusts protect your assets?
Trusts provide a useful vehicle for securing assets and income acquired prior to marriage or during marriage if the property was received as a gift or inheritance – even if those assets are used by both parties during the marriage. A trust is an asset protection device whereby property is held and managed by a trustee for the benefit of a beneficiary. In a marital setting, the beneficiary spouse does not own the trust, so the trust assets cannot become marital property. Further, any income and principal paid from the trust to the beneficiary spouse remains the separate property of that spouse provided it is not maintained in an account containing the name of the spouse of the beneficiary nor used to pay for marital expenses.
For trust income and distributions to maintain their separate property distinction, it is crucial to remember that they should not be commingled with marital funds. Accordingly, do not deposit such funds into a joint account. While there is a convenience rule which allows money to be temporarily transferred to a joint account for up to 24-48 hours, this should be eschewed wherever possible to avoid any kind of transmutation claim by the spouse of the beneficiary.
While trusts offer many benefits, they cannot protect income acquired during the marriage or assets purchased with marital funds. For example, each spouse has a 100% right to the income of the other because of the economic partnership which arises from the marital bond. Consequently, to protect marital income and the assets purchased with marital income, the parties should enter into a prenuptial or post-nuptial agreement.
How do prenup and post-nup agreements protect your assets?
Prenups and post-nups allow parties to specify what income, assets, and debts will be deemed separate property regardless of the existence of a marriage. The downside of these agreements, however, is the awkwardness of negotiating it with a loved one. Unlike with a trust, both spouses in a prenup or post-nup are involved in deciding what will be separate and marital property. While it may be uncomfortable to talk about these issues because it feels like planning for divorce, it can actually be helpful to a marriage because it requires discussion of difficult issues that many people avoid in a marriage which can subsequently give rise to a future separation and/or divorce. It is important for couples to share their financial expectations and values before marriage or a serious conflict arises. If they leave these matters to handle in a divorce setting, it will be much more costly emotionally and financially.
If you are getting married or already married and want to protect your separate property, consider using both a trust and prenup or post-nup agreements. If one of these is challenged legally, you will still have the protection of the other asset protection device.
To discuss the best option in your case, please contact us for a consultation.