Over the last few months, several people have approached me about planning to protect them from a marriage that could go wrong. After watching videos and the course on In-Law Protection Planning, they asked about how they could guard against the negatives of a divorce from a possible marriage rather than how their parents could protect an inheritance for them. After all, shouldn’t they also be able to set things up to protect what they earn in life as well?
To be clear, the people asking were not already married and thinking of divorce; they were in relationships but had not yet broached the subject of marriage. This actually makes them ideal clients for us because they are looking to proactively prevent problems rather than clean up a mess after.
So what steps can a person take to secure their own assets and income even in a marriage? There are some powerful tools, but they have to be applied right and with the understanding that nothing is absolute once it gets into a divorce court.
Pre-Marital Agreement: The most basic tool to shield yourself and your assets during a divorce is a properly executed pre-marital agreement. This means it is drafted by an experienced family law attorney on your side, created months before the marriage, and the future spouse must also have their own attorney to represent them in creating this agreement. Here are some major points:
* The assets owned by each should be detailed so there is nothing hidden.
* The separate assets owned by each person and all that is earned or grown from each assets shall also belong to that individual.
* The income contributions each person shall make to the monthly budget should be listed, and the excess belongs to the person who earned it. This can be in the form of a percentage of the paycheck or a dollar amount from each going into a joint account.
* Additional expenses, vacations, etc. and who should pay for them should also be detailed.
* Terms regarding alimony, or more specifically that there should be no alimony in the event of a divorce should be explained.
* Other terms should include that under no circumstances should either person ask the other not to work, that custody of any children be joint with details explained, each person can determine their own estate plans while waiving an elective share against the other’s estate, and that division of all marital assets (which should be minimal) are to be equal.
A good family law attorney will know all of the ins and outs that I can’t explain in a single blog. However, one absolute is that the terms of a pre-marital agreement should be followed, and that includes not letting the other spouse get behind on their obligations to pay, that they continue to contribute in all the ways explained in the agreement, and that you continually keep things separate. Another absolute is that the pre-marital agreement should be periodically renewed, usually every 3-5 years, so that in a divorce the spouse can’t claim the agreement is “obsolete” because it was enacted decades ago. As you will read below, part of your job includes regularly diverting your excess income into a protective trust and its accompanying investments.
Self-Settled Irrevocable Asset Protection Trust. There are several states that allow people to create their own trust with themselves as beneficiary, appoint a separate and independent trustee to manage allocations and distributions, and yet still allow you to manage investments inside the trust. This is where all of your excess income should be transferred and managed so it is outside of your name.
For all of my law office clients, no, North Carolina doesn’t allow these particular trusts to be based here, but that doesn’t mean you can’t utilize one situated in Nevada, Wyoming, or one of the other states. This does require there at least be one trustee and some assets situated in that state, but there are services that can handle this residency requirement for the trust even if you don’t live there.
What assets should be in this trust?
* After-tax investments such as mutual funds, brokerage accounts, and other stocks.
* Real estate, including both personal and rental properties, although it is worth considering putting rental property into an LLC or other corporate structure (check with an accountant) and have the trust own the corporate entity.
* Life insurance that is potentially available as an after-tax retirement vehicle or for long term care purposes.
* Savings and other bank accounts, CDs, or Treasury bonds.
This trust can also be a big part of your estate planning by incorporating your beneficiary allocation and distribution terms (which should have provisions for you to change the eventual beneficiaries over time). The best way to think about the protective power of these types of trusts is that while you are the beneficiary during your life (and possibly the one managing investments), you are not the trustee and therefore can’t mandate distributions to yourself. Because there is another trustee in place with the authority to give or not give you money, it sets up a structural trust shield against divorce and other lawsuits against you around these assets. This is why most of your non-marital assets should be in the trust to keep it protected.
Retirement Accounts. IRAs and 401ks need to remain in your individual name in order to maintain its tax-deferred status, so they can’t be placed into your protective trust. While the pre-marital agreement should explain that your retirement accounts should remain your own in the event of a divorce, there is no sense in overfunding IRAs and 401ks. Obviously, if you are working for an employer who is matching contributions to a certain percentage, then maximize that match. Take the free money, but don’t put any more than that in. If somehow the spouse gets half of your 401k despite the pre-marital agreement, you can think of it as only losing what your employer put in and not your half.
Primary Residence. Most spouses going through a divorce will want to keep the family home. The best way to ensure that you are the one who gets the house is to own it through your Irrevocable Asset Protection Trust. (This very likely means that there is not a conventional mortgage on the house in order for the trust to own it.) In fact, one way to get even more ahead in case there is a divorce is to have the trust lease the house to you and your spouse, so now your and your spouse’s equal contributions to “rent” are going solely into your trust. If this is not possible because this term is not agreed to in the pre-marital agreement, the trust can allow the free use of the house during the marriage in exchange for the spouse paying more for expenses not related to the house such as vacations, etc. However, the terms of the pre-marital agreement and a lease agreement should line up and give the trust the right to kick either or both of you out with the minimum amount of days required under the state law in which the house is located.
Estate Documents: While the Irrevocable Asset Protection Trust can constitute a large part of your estate planning, this does not mean that you are excused from the usual estate documents. These include:
* Last Will and Testament
* Durable General Power of Attorney
* Health Care Power of Attorney
* Living Will
* Nomination of Conservator
How much or little your spouse is involved in these documents should be up to you, but their involvement in anything related to finances and taking financial control in the event of a death or incapacity should be limited to those assets outside of the Irrevocable Asset Protection Trust. It may also be advisable to limit the spouse’s ability to control what may be your largest asset outside of the trust: retirement accounts. It is also possible to provide a limited power of attorney to the same person acting as your trustee to also have control of your retirement accounts in the event of incapacity.
What Risks Can’t Be Minimized
Despite all of the protective steps a person can take to guard against divorce, there are some things that just can’t be done.
* Most states allow for emergency support payments if a spouse is destitute to prevent them from being homeless and/or getting full support from the state.
* There is nothing you can do to avoid paying child support. Different states have different guidelines, but if you are the main earner in the family and you have equal custody, you are probably going to have to pay child support. Remember that even though the money is going to the ex-spouse, it is (supposedly) for the care and raising of the children and not for the spouse’s expenses.
These are just some steps and items that may come in handy if you are thinking about getting married but want to take steps to protect yourself and your assets. There is still an extremely high divorce rate, so hoping for the best but planning for the worst is prudent.
(Check out the free webinar on how to protect your children from losing your assets in a divorce at http://www.inlawplanningwebinar.com)