How to shield your assets in a divorce
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Of all the risks to doctors, the most common threat to long-term financial security may be divorce. Yet, what can physicians do to protect from this risk?
Obviously, it is best to avoid divorce in the first place. But we have no advice in this regard. In terms of divorce protection, proper planning is not about hiding assets from a soon-to-be-former spouse. Nor is it about cheating or lying to keep your wealth. Rather, it concerns resolving issues of property ownership and distribution before things go sour. By agreeing in advance what will be yours and what will be your spouse’s, you save money, time and emotional distress in the long run. In fact, this type of asset protection planning inevitably benefits all parties (except divorce lawyers, of course).
There are two types of marital dissolution law in the country – equitable distribution and community property.
Equitable distribution states
Most states are called “equitable distribution” states because courts in these states have total discretion to divide property “equitably,” or fairly. The court will normally consider a number of factors in deciding what is “equitable,” including the length of the marriage, the ages and conduct of the parties, and the present earnings and future earning potential of each former spouse.
The danger of equitable divorces is that courts often distribute both nonmarital assets (those acquired before the marriage) and marital assets (those acquired during marriage) in order to create a “fair” arrangement. In this way, courts often split up property in ways that the ex-spouses never wanted or expected.
Community property states
Many of the country’s western states have community property law. Community property law stipulates that in a divorce, if there is no valid pre- or postmarital agreement, the court will equally divide any property acquired during the marriage other than inheritances or gifts to one spouse. Even the appreciation of one spouse’s separate property can be divided if the other spouse expended effort on that property during the marriage and the property appreciated concurrently with or after the effort being expended.
From these facts, it is obvious that how the asset is titled does not control who will receive it in a divorce. Rather, when the asset was acquired and how it was treated are far more important factors.
Using a pre-nup
A premarital agreement (also known as a prenuptial agreement, premarital contract or antenuptial agreement) is the foundation of divorce-related financial protection. The premarital agreement is a written contract between the spouses. It specifies the division of property and income upon divorce, including disposition of specific personal property, such as family heirlooms. It also states the responsibilities of each party with regard to their children after divorce.
Finally, these agreements lay out the parties’ responsibilities during marriage, such as the financial support each spouse can expect or the religion in which any children will be raised. The agreement cannot limit child support because the right to child support lies with the child and not the parent.
Each state differs slightly on what is required for an enforceable premarital agreement. Of course, you must get your state-specific advice from local family law counsel. But, for purposes of this article, generally:
1. The agreement must be in writing and signed.
Every state requires that a premarital agreement be written and signed. Many also require that it be notarized or witnessed.
Tip: Notarize your agreement, even if your state does not require it. This adds protection against claims of duress or forgery.
2. There must be a reasonable disclosure.
There must be a fair, accurate and reasonable disclosure of each party’s financial condition.
Tip: Attach financial statements to the agreement and have the spouse affirm knowledge of the other’s financial condition.
3. Each party must be advised by a separate attorney.
Many states either require separate legal advice explicitly or use it as a factor in determining whether or not the agreement was fair.
Tip: Hire separate lawyers and give enough time between the agreement and the wedding to avoid any appearance of duress. Courts frown on last-second premarital agreements.
4. The agreement must not be unconscionable.
Courts will not enforce a one-sided agreement. Also, the contract must not be structured to encourage divorce, as in the case of a contract stating that one spouse has no rights to property except upon divorce.
Tip: Avoid extremely one-sided agreements. It need not be a 50/50 split but should provide a fair balance.
5. The couple must follow the agreement during the marriage.
Courts disregard premarital agreements when the spouses blatantly disregarded it during their marriage, such as when property designated as the husband’s separate property is re-titled to the wife.
Tip: Treat designated separate property as separate. If loans are made from one spouse’s separate property to the marital unit, then those funds should not be commingled when repaid.
Protecting assets when already married
Many physicians have contacted us about protecting assets when they foresee a possible end to their marriage. Generally, there is not much one can do to shield assets if they are not already protected through a prenuptial agreement as previously discussed. However, all is not lost.
When implemented in a transaction with real economic substance (such as benefit, tax or estate planning), certain planning techniques may have a secondary benefit of lowering the value of an asset for marital dissolution purposes. This valuation benefit can end up being significant when the court eventually splits assets.
We have seen this work quite successfully for physicians when investing in certain types of benefit plans through the practice, non-traded real estate investment trusts and other temporarily illiquid investments, specific types of cash value life insurance and annuities.
Be aware of recent tax law changes
The Tax Cuts and Jobs Act of 2017 significantly changed how alimony is treated for tax purposes. For all divorce and separation agreements executed after Dec. 31, 2018, alimony is no longer deductible by the paying spouse nor is it taxable income for the receiving spouse.
Unlike some of the other provisions in the new tax law, this provision is not set to expire and thus will remain in place unless changed by Congress at some future date. Agreements that existed prior to Dec. 31, 2018, will still be treated as under prior law.
The new law also did away with personal exemptions, so divorcing spouses will not have to negotiate who gets to claim the children for exemption purposes, but they will still need to negotiate who may take the Child Tax Credit.
Whether you are considering planning before you get married, during your marriage or even for a family member, no one tactic or approach works well for everyone. It is essential that you consult with a local attorney who specializes in family law. Often, an expert in asset protection is also needed.
Reference:
Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or ebook formats by texting HEALIO to 47177 or at www.ojmgroup.com. Enter code HEALIO at checkout.
For more information:
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm, OJM Group, www.ojmgroup.com. He can be reached at mandell@ojmgroup.com or (877) 656-4362.
You should seek professional tax and legal advice before implementing any strategy discussed herein.
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