Modern marriage can be a minefield for both estate planners and their clients. In 2016, a majority of marriages end in divorce, second, third, or fourth marriages are common, and blended families represent the norm. Frequently, the estate planner advises families where the husband brings in children from a prior marriage, the wife brings in kids from a prior marriage, and (if industrious enough) the new couple adds new kids of their own to the mix. And, unfortunately, divorce lawyers are more litigious and aggressive than ever.
Growing up in South Texas, I learned a saying about the rugged Texas landscape which sticks in my mind: “Everything in Texas either bites, stings, sticks, or breaks your heart.” Although funny at first, that statement conveys honesty. Despite their best intentions, I know that many of my clients approaching marriage will have their hearts broken by their partner one day.
Thus, here is my financial advice to star-crossed lovers contemplating marriage in 2016: A) It is both highly ethical and appropriate to protect your separate assets against an unanticipated divorce when entering a new marriage; B) It is conversely both ethical and appropriate to take care of your spouse, provide him or her with a home, and reward the spouse who stuck with you, with part or all of your assets, when you die.
Here are 10 ways to financially and legally prepare for a new marriage:
- Keep your individual assets separate. If you want to preserve assets which you bring to a marriage, keep those assets separate. If you commingle your separate funds with funds that come from your spouse, or with your and your spouse’s joint funds, it’s easy for an opposing attorney to argue later that the whole pot has now become divisible marital funds because of the commingling.
- Keep gifts separate. If you receive financial gifts from your family or anyone else during your marriage, that property will be considered separate property unless those assets are commingled with your spouse’s funds or marital funds. You should keep such gifts in a separate account, or if you have an individual revocable living trust, have such gifts made directly to your revocable trust.
- Keep inheritance separate. If you receive financial assets from an inheritance, these assets are normally considered separate property within a marriage, unless these assets are commingled with marital property, or with your spouse’s separate funds. So keep such inheritance assets in a separate account, and keep separate financial records for your inheritance assets. If you have an individual revocable living trust, it makes sense to have inheritance bequests made directly to your individual trust.
- Keep your real estate separate. If you bring separate real estate into a marriage, keep that real estate separate, and do not add your spouse’s name to the deed. No matter what the purpose, if you add your spouse’s name to the deed, an opposing divorce lawyer can later successfully argue that by adding your spouse to the deed, you intended him or her to own up to 50% of your real property.
If you want your spouse to later have your home or other separate real property when you die, it is best to will it to her in your will, or distribute it to her from your trust document after your death.
- Get your business valued shortly before marriage. If you bring a business into the marriage, and if your spouse later divorces you, a court may later award your spouse up to 50% of the value that your non-marital business appreciated during your marriage.
Thus you should have your business professionally valued shortly before marriage. That way, you may be able to subtract the value of your business that you brought into the marriage from any portion that a court divides with your divorcing spouse.
A proper premarital agreement (see below) may help to keep such business assets separate.
- Maintain separate property with non-marital funds. When maintaining a home or other separate property brought into the marriage, maintain the property only with your separate funds. If you use your spouse’s or your marital property to maintain your separate property, you will be commingling these assets so that your spouse’s attorney may be able to get a portion of them upon divorce.
- Keep retirement account records as of the date of your marriage. Upon divorce, individual retirement accounts such as 401Ks, IRAs, and pension accounts may be considered marital property subject to division. If you keep the statements close to your marriage date for these retirement accounts that you bring into the marriage, a court may later let you subtract those amounts from the marital retirement assets that are divided.
- Place your assets into a revocable living trust before marriage. An individual revocable living trust may provide valuable prenuptial protection for separate property added to that trust before marriage. Because a trust is an individual stand-alone legal entity (like a corporation), individual property becomes trust property when properly added to the trust. It is then much harder for an opposing lawyer to later successfully argue that such trust property should be divided with the opposing spouse.
- Use separate revocable living trusts (RLTs) during marriage, not a joint trust. Most estate planning attorneys now utilize separate revocable living trusts (one for the husband and one for the wife) for estate planning, because they provide better protection against spousal creditor or spousal liability events, and more easily allow spouses from blended families to pass down their assets differently. Such separate revocable living trusts are also much better at not commingling marital or spousal assets.
Couples (and their estate planning attorneys) may, however, choose to use a joint RLT to hold a couple’s assets for estate planning purposes. Even though some joint RLTs purport to separately identify individual assets within the joint trust and keep them separate, in reality an opposing divorce attorney can later argue that any property placed into a joint trust was intended to become joint property.
- Use a prenuptial agreement. A prenuptial agreement may provide an important tool for defining and protecting separate property during the marriage, and in providing for how property will be divided in case of divorce. Even though couples may consider a prenup highly unromantic, later divorce is completely unromantic. The couple may prevent later agony by defining their rights in advance.
North Carolina case law provides that a prenuptial agreement may be more enforceable if: A) both parties disclose their premarital assets to each other in writing; B) each party is advised by their own attorney; C) there is no pressure or coercion used on either party before signing the agreement.
Rebecca Zung, 5 Ways to Protect Your Money Without a Prenup (May 10, 2015) Credit.com/ABC News, http://abcnews.go.com/Business/ways-protect-money-prenup/story?id=30908390 .