Marriage is an emotional commitment and a vow to share your life with a loving companion. However, in the eyes of the law, a marriage is also a legal contract. When divorce becomes the inevitable end of a marriage, breaking the contract has legal consequences, especially in community property states like California where all marital assets are subject to equal distribution during divorce. But what if you have assets that you feel are yours alone, either because they belonged to you before the marriage, or they have sentimental value to you? Remember, once one party files a petition and the other party receives the summons, automatic restraining orders listed in the paperwork prohibit specific actions to protect your assets. Are there ways to legally protect important assets when preparing for divorce?
1. Protect Your Assets Before Your Marriage
The best protection for your assets is to proactively protect them before your marriage. There are two important protections you can put into place for assets you wish to keep as your own:
- Draft a prenuptial agreement protecting both party’s separate assets during the marriage
- Prevent commingling assets during the marriage
Instead of trying to protect assets when divorce is on the horizon and risk the appearance of hiding/transmuting assets, it’s best to keep your most important assets separate throughout the marriage.
2. Identify Your Assets
Before you can even begin the process of protecting/dividing assets, you have to clearly identify all of your assets. It’s important to know what you have and where your money is. Once you have the full financial scope of your assets and those of your spouse you can identify assets that are yours separately vs. marital assets that are subject to division.
3. Understand Community vs. Separate Property
Before you make any decisions about your assets, it’s important to understand the difference between separate assets and marital or community property in a marriage. Your separate assets include:
- Any property or financial asset that was yours before the marriage
- Property or assets you inherited during the marriage
- Assets or property gifted solely to you during the marriage
Marital assets include:
- Assets and property acquired during the marriage
- Bank accounts, including both joint accounts and individual accounts
- Any separate assets you intentionally or unintentionally commingled with your spouse, such as individual property that your spouse invested money or time in improving or any individual accounts to which you granted your spouse access
4. Open Separate Bank Accounts
Sometimes angry spouses drain all money out of joint checking and savings accounts the moment divorce becomes inevitable. While it’s important to avoid the appearance of hiding or dissipating assets during divorce, you can protect yourself by opening your own bank accounts and transferring no more than half of your joint account balances into your new, individual accounts. Typically, anything you earn after your separation is your separate property and can go into your new accounts. Be sure to speak to your attorney about the legalities of moving funds during your divorce and carefully document all transfers. It’s best to be open and honest about this with your spouse whenever possible.
5. Open a Trust Before Filing for Divorce
One way to protect assets you intend to leave to your children is to create an irrevocable trust. Trusts are a legal way to hold assets for the benefit of one or more beneficiaries while also protecting them from becoming marital assets subject to 50/50 division. Keep in mind that you’ll no longer have access to the funds once they’re held in an irrevocable trust for your children.
6. Consider a Transmutation Agreement
If you have an important asset that you wish to remain yours alone, consider asking your spouse to sign a transmutation agreement transferring the property from belonging to the marital community to your separate property. If your spouse is particularly contentious, this may not be a viable option, but in many cases, a spouse will agree to transmute an asset in exchange for one that the spouse wishes to keep as their separate property.
7. Create an Offshore Trust
If you have important assets you wish to protect, you could consider creating an offshore trust. However, it’s best to do this before marriage or well before there are any indications of an imminent divorce in order to avoid the appearance of hiding assets in a fraudulent transfer. Most offshore trusts are untouchable during a divorce, but it’s important to speak to a high-asset divorce attorney about the timing of your transfer.
8. Hire a Divorce Financial Expert
For those with important assets to protect or in high-asset divorces, it’s a good idea to hire not only a skilled divorce attorney but also a financial expert with extensive experience in navigating the protection and distribution of marital assets during divorce.
