Combining finances after marriage can simplify things like paying bills and saving. But sharing commingled assets can lead to complications if you later end up divorcing. Establishing a prenuptial agreement can help you to head off tricky financial arguments if the marriage doesn’t work out. But when you don’t have a prenup, it’s helpful to know how to protect assets from divorce should you and your spouse break up.
A financial advisor can help you evaluate different settlements proposals and create a financial plan for life after divorce.
How Assets Are Treated in Divorce
The first step in protecting assets from a divorce is knowing who owns what and which property distribution rules apply in your state. Divorce courts look at what is considered to be marital property and what is considered to be separate property when deciding who gets what.
Marital property is any property that you and your spouse acquired after the marriage took place. For example, that might include things like:
Your primary residence
Vacation homes or rental properties
Retirement accounts, including 401k plans and IRAs
Taxable investment accounts
Pensions or annuities
College savings accounts established on behalf of your children
Antiques or collectibles
Separate property is property either of you owned prior to the marriage. Depending on the laws in your state, the court may also recognize certain assets received after marriage as separate property. For example, if a relative passes away and leaves $1 million to you alone the court may view that inheritance as being separate property.
Community Property vs. Equitable Distribution
Aside from knowing who owns what, it’s also important to understand how state law dictates that assets should be divided between divorcing spouses. States can follow community property rules or equitable distribution rules.
If you live in a community property state, then marital property must be deemed community property or separate property. Community property is divided equally between spouses, while each spouse keeps their separate property. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states.
Other states follow equitable distribution rules, which state that the division of property needs to be fair based on the circumstances. So when dividing assets, a judge might look at whether one or both spouses work, how much they earn, the estimated financial obligations for each spouse post-divorce and the circumstances surrounding the dissolution of the marriage.
How to Protect Assets From Divorce
As noted, a prenuptial agreement can be one of the best ways to protect assets if you have concerns that a marriage may eventually end in divorce. A prenup can specify which assets each spouse is entitled to should the marriage end and what type of spousal or child support may be provided.
Absent a prenuptial agreement, there are other measures divorcing spouses may take to protect assets. First, it’s helpful to create an inventory of assets that you own jointly and individually. In the case of bank accounts, retirement accounts and investment accounts, it’s important to know where those are held, who has access to them and the most recent balances.
It may be tempting to take money from joint bank accounts if you’re worried about your soon-to-be-former spouse draining shared resources but you may want to talk to a divorce attorney first. Withdrawing funds from those accounts, selling off assets or retitling them in your name only could causes problems during the proceedings and it may even be prohibited by your state’s divorce laws. The same goes for trying to hide assets.
You may want to open a separate bank account in your name only if you don’t already have one. If your attorney advises you to withdraw amounts from a joint account to fund your new individual accounts, be transparent with your spouse about your intentions. And carefully document any transfers of money from shared bank accounts.
With regard to retirement accounts, these may be subject to a division as part of your divorce decree if they’re considered to be marital property. If you have a 401k or IRA, for example, the court might order that half of the money in those accounts must go to your spouse. A qualified domestic relations order (QDRO) is required to enforce the division of 401k assets.
You’ll likely want to change the beneficiaries on retirement accounts once the divorce is final but you may not be able to do so without your spouse’s consent as long as you’re still married. Consent may also be required if you’d like to take out a 401k loan before the divorce is finalized.
If you have a pension, you may reach an agreement with your spouse to share in any annuity payments you’re scheduled to receive in retirement. Or you may “buy out” their share of the pension by offering them a lump sum, based on the pension’s present value. The same rules may apply if you purchased an annuity for retirement during the marriage.
Consider a Trust for Divorce Planning
Trusts are legal arrangements that can hold assets that are managed by a trustee on behalf of one or more named beneficiaries. An irrevocable trust is a type of trust which allows for the permanent transfer of assets to the control of a trustee.
If you’re looking for ways to shield assets from a spouse during divorce, you may consider setting up an irrevocable trust. A domestic asset protection trust (DAPT), for example, could be used to transfer assets to a trustee on behalf of your children. The assets wouldn’t be considered marital property at this point so your spouse would not be entitled to them.
Of course, this means you wouldn’t be able to go back and cancel the trust later to reclaim the assets. So you’d need to be fairly certain that you wouldn’t need any of the assets that you plan to place in the trust down the line. Talking to an estate planning attorney or a financial advisor can help you decide if an irrevocable trust makes sense.
Getting divorced can bring headaches if you and your spouse disagree about how to divide assets. Hiring a good divorce attorney can help, as they can advise you on what you can and can’t do with regard to moving or selling off assets. And even if the marriage seems to be coming along without a hitch, it may be worth it to consult an attorney about drawing up a post-nuptial agreement to protect assets just in case things don’t work out.
Financial Planning Tips During a Divorce
Consider talking to your financial advisor about how to protect assets from divorce and what you can do to prepare if you think divorce is imminent. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Remember to consider liabilities during divorce as well. If you have a shared mortgage loan or cosigned student loans, for example, it’s important to have your divorce attorney address who will be responsible for those debts going forward. Once your divorce is finalized, you can continue to protect yourself financially by closing joint credit card accounts, building an emergency fund and obtaining life insurance in your name.
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