Asset Protection in Case of Divorce
Considering that currently, more than 50% of marriages end in divorce in the United States, asset protection structures are becoming increasingly important. Even if you are not married, but have kids, planning the future is mandatory, especially when it comes to minor children.
In the U.S., spouses can hold title to assets under two categories: marital and separate. Separate properties, basically, are those acquired before marriage, by inheritance or gifts. All other properties are considered martial. However, if separate property is mixed or commingled with marital property, they can lose their status. In some jurisdictions, the appreciation of separate property may also be considered marital property.
In the states that adopt the equitable distribution rules, marital property will be settled equitably, which means settlements need to be fair, not equal. In community property states, which includes Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington e Wisconsin, marital property is considered to belong 50/50 to each spouse, regardless of who has acquired the assets or in whose name the assets are titled.
Pre-nuptial agreements are the most common strategy adopted in order to protect assets acquired before the marriage, including business ownership. The pre-nuptial agreement needs to be executed before the marriage and it specifies, in case of divorce, spouses’ property rights and expectation, including alimony. If the couple is already married, however, there is the possibility of a postnuptial agreement. Such agreements, nonetheless, are not recognized in some states and even in those that do, postnuptial agreements are more commonly challenged and invalidated than prenuptial agreements.
Other protective measures may also be considered before entering into marriage. If the asset to be protected is a business, it is possible to implement protective measures at the incorporation of the business, by the inclusion of specific clauses in the articles of association, such as a requirement that unmarried shareholders provide the company with a prenuptial agreement in which the spouse-to-be waive her/his future interest in the business or even a prohibition against the transfer of shares without the approval of the other shareholders and their right to purchase the interest of the divorcing party.
Placing assets in a trust is also a good strategy to protect assets in case of divorce. Depending on the type of trust, the assets will be legally owned by the trust, not the person who transferred them. In that sense, there are court decisions ruling that 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. Even if the husband created and funded the trust with his own assets prior to marriage, the assets held under the trust would be protected in case of divorce, so long as the husband did not also serve as trustee.
Creating a will is also an important asset protection measure to be considered by spouses-to-be, especially if they have minor children and/or children from previous marriages.
The election of the best strategy, however, needs to take into consideration the specific circumstances of each person, as well as the assets that may be subject to classification as marital property. There is not a uniform solution, but the law provides spouses-to-be with a variety of measures and with competent advice, it is possible to reach the desired goals.