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How Can Asset Protection Planning Be Used to Protect Separate Property in Divorce?

June 8, 2023

Asset protection planning is the mechanism whereby an individual attempts to safeguard property from potential creditors. However, in the context of a divorce, it refers to one spouse’s ability or attempt to protect his or her assets from the other spouse. Some couples hesitate to engage in asset protection planning because they may worry it is setting the marriage up for failure. However, discussing financial issues and expectations before marriage can help avoid disputes during marriage that can lead to divorce. If a divorce does occur, proper planning can help minimize litigation over how to divide property and provide support.

How Can Asset Protection Planning Safeguard Your Separate Assets? 

Generally, assets acquired before marriage or during marriage as a gift or inheritance to one spouse only are considered separate property and are not divided in divorce. However, if separate assets are commingled with joint property or used to pay for marital expenses, they may become marital property subject to equitable distribution.

As part of a divorce, your assets, your spouse’s assets, and assets held jointly will be reviewed to determine whether they are marital property that should be divided equitably. The best way to ensure that your separate assets are not distributed to your spouse is to engage in asset protection planning that maintains your property’s separate designation.

What Asset Protection Planning Tactics Are Recommended in Divorce?

There are three main ways to protect your assets from your spouse in divorce:

1. Trusts

Assets in a trust belong to the trust, not to an individual. As a result, transferring your separate property into a trust can help to ensure that the assets do not become joint marital property. However, it is important to pay attention to the type of trust you create, the timing of the trust, and your level of control over the assets in the trust to limit the possibility of the trust assets being distributed as part of a divorce. An experienced attorney can help you draft an appropriate trust.

2. Prenuptial or Postnuptial Agreement

Another option is to enter into a prenuptial agreement prior to getting married, or a postnuptial agreement after marriage. In the prenup or postnup, you and your spouse can carve out what assets will and will not be divided in the event of divorce. However, these agreements are not foolproof and can be set aside in certain instances. 

3. Use Both a Trust and Prenuptial/Postnuptial Agreement

By employing both tactics, you can ensure that you protect assets both inside and outside the trust. Further, you can address issues in the prenup/postnup that you would not ordinarily have in a trust document. 

When Should You Engage in Asset Protection Planning?

The right timing is crucial in planning. The more time between the completion of any asset protection planning and your divorce, the better. Ideally, you want to plan before getting married. If a court finds that you put assets into a trust when contemplating divorce as a way to prevent your spouse from having access to the assets, it may consider this a fraudulent transfer and may void the trust funding. 

If you are getting married or already married but considering the best way to protect your separate property and income, contact us for a consultation. Our attorneys can assist you in taking appropriate steps to protect your assets from distribution in the event of divorce.

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