People spend a lot of time, energy and money planning how to protect their assets from taxes and probate fees. However, the financial consequences of a divorce are much greater than any tax bill or probate fee. A divorce could cause you to lose your home, your business, your standard of living and many of the things that you have worked so hard to earn.
To start, you should understand how property is divided upon separation.
Now, here are seven steps to protect your assets from a divorce:
Step #1: Make sure your exclusions remain excludable. When calculating your net family property, you may exclude the value of certain items. These items include gifts from third parties, inheritances, personal injury awards and life insurance proceeds. When you receive funds from any of these sources, you should keep them separate from all of your other property. Otherwise, you risk losing your exclusion.
The burden of proof is on you to show that you are entitled to an exclusion. So make sure you keep detailed records of all financial transactions involving excluded property. Then, if you ever separate, you can prove that the property is excluded. If you cannot prove the exclusion, you will not get it.
Step #2: Make sure your deductions remain deductible. When calculating your net family property, you are entitled to deduct your net worth on your day of marriage. Over time, you may not remember what you owned on your marriage day, much less be able to prove it. If you wish to take advantage of a deduction, keep a record of your property’s value on the day of your marriage. As with exclusions, the burden of proof is on you. If you cannot show that you are entitled to the deduction, you will not get it.
Step #3: Beware the matrimonial home. The value of a matrimonial home is an exception to the rules of dividing property on separation. The home’s value is always divided equally between the parties, no matter what. This is obviously a big exception because, for most couples, their matrimonial home is one of their largest assets. Therefore, be careful about which funds you use to purchase your home. Do not use excluded property because you will lose your exclusion. Similarly, when buying a matrimonial home, you should ensure that you have other assets at least equal in value to what your net worth was on your day of marriage. Otherwise, you will lose your deduction for this.
Note that you can have more than one matrimonial home. A retired couple may even have three matrimonial homes: a home in the city, a cottage and a winter residence in Florida.
Step #4: Move out of the matrimonial home. If you owned a home on the day you married, and you are living in it now, if you separated, then you would lose half of the home to your spouse. The law allows you to deduct from your net family property the value of assets you owned on your date of marriage; however, this does not include the value of a matrimonial home.
Step #5: Buy life insurance. Life insurance proceeds are excluded from the calculation of your net family property. You can use this fact to convert property that must be included in your net family property to create an exclusion. By purchasing life insurance on others — such as your parents, grandparents or business partners — you make a long-term investment in assets that you need not share with your spouse if you separate or divorce.
Step #6: Enhance excluded property. Let’s assume you have kept your excluded property separate from your other property. If you can enhance the excluded property, e.g. by fixing up an inherited cottage, you are enhancing the value of your excluded property.
Step #7: Use a marriage contract. A marriage contract is the best way to protect your assets from divorce. If you’re entering a second marriage, or if you have substantial assets, you may not like the way the law divides your assets when you separate. By entering into a marriage contract, you and your spouse agree in advance on how you will divide the assets if you divorce.
The problem is, not every spouse will enter into a marriage contract. Negotiating a marriage contract can put a strain on even the best relationships. What’s more, family law sets specific limits regarding what you can put into a marriage contract. And if the agreement is not properly drafted by an experienced family law lawyer, it may not stand up in court.
One note of caution. You should take these steps to protect your assets from divorce long before your marriage starts to deteriorate. If you take any of these steps on the eve of a separation, the court could find that you acted in an unconscionable manner. As a result, the court could award your spouse a larger share of the property.
In addition to these techniques, your family law lawyer can suggest more sophisticated methods to protect your assets from divorce that involve the use of corporations and trusts. These techniques can be complicated and may be used only in certain situations. So make sure you discuss other planning methods with your divorce lawyer.
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