Divorce is one of the most tumultuous experiences a person can go through. Not only is it emotionally draining, but it also puts your wealth at risk, especially if you didn’t set up protection beforehand.
However, a divorce doesn’t have to lead to severe financial consequences. If you place your investments, real estate, business, and income into an asset protection structure, you can secure your wealth against divorce-related challenges.
In this article, we’ll explain some of the strongest divorce asset protection strategies and how they work:
- Divorce: A Top Wealth Buster
- How Assets Are Treated During a Divorce
- State Laws that Impact Asset Distribution During a Divorce
- Asset Protection Tip: Build Your Defenses Early
- Common Divorce Asset Protection Strategies
- What Works Better: A Trust or a Prenuptial Agreement?
- How to Set Up a Divorce Asset Protection Strategy Using a Trust
- Is Using an Offshore Trust Safe?
Divorce: A Top Wealth Buster
Divorce is a top wealth buster for most people. In the worst-case scenario, a divorce could cost you more than half of your wealth. Worse still, divorce is increasingly common; nearly half of first marriages end in a split. For second marriages, it’s up to 67%!
It doesn’t have to be this way, though. If you have strong asset protection tools, you can hold onto your wealth during a divorce.
How Assets are Treated During a Divorce
When a couple divorces, assets are divided according to a prenuptial or postnuptial agreement. In cases where there are no agreements, state laws will apply.
In all cases, state courts will determine what separate property and marital property are.
Separate property includes assets owned only by one party. They are typically brought into the marriage. For example, if one spouse had an inheritance fund before the marriage, it would likely remain their sole property. In some states, assets acquired after getting married are classified as separate property.
Marital property includes any assets acquired during a marriage. They commonly include:
- Automobiles
- Bank accounts
- Business assets
- Retirement accounts
- Pensions
- College savings accounts
- Real estate (primary residence and rental properties)
- Antiques and collectibles
- Investment accounts
Items labeled as marital property are often divided evenly between the couple.
Although the distinction between separate and marital property may seem obvious, state laws can alter how these property types are classified.
Common Divorce Asset Protection Strategies
Two divorce asset protection strategies are more popular than any others: nuptial agreements and asset protection trusts. Nuptial agreements can be arranged before or during marriage and can protect against divorce-related asset loss. Asset protection trusts can be established at any time and can be used to defend against divorce and other financial threats.
Prenuptial and Postnuptial Agreements
You’ve likely heard about prenups and postnups in popular songs or Hollywood films. These agreements detail who owns what in a relationship. The two main forms of nuptial contracts include:
- Prenuptial agreement: A prenuptial agreement, more commonly known as a prenup, is a contract between a soon-to-be-married couple. It outlines the distribution of assets in a divorce.
- Postnuptial agreement: A postnuptial agreement operates like a prenuptial agreement. These contracts are created after a couple gets married and detail how to divvy up assets in a divorce. Postnuptial agreements created shortly before a divorce are also called separation agreements.
- Prenuptial and postnuptial agreements come with significant drawbacks. First, for the agreement to hold up in court, each spouse must retain separate legal counsel—adding complexity and cost. Second, these agreements often create emotional tension, with many couples reporting a negative impact on the relationship. Third, and perhaps most importantly, nuptial agreements frequently fail under legal scrutiny, leaving assets exposed and vulnerable to division.
Asset Protection Trusts
An asset protection trust is most commonly a self-settled trust used to keep assets safe from divorce, creditors, and legal action. As self-settled trusts, these financial tools allow the trust creator (known as a settlor or grantor) to list themselves as a beneficiary. By doing so, the settlor can access funds from the trust without leaving them open to threats.
Asset protection trusts can be established either domestically or overseas. Here’s a quick overview of both options:
- Domestic asset protection trust: These trusts are created and managed in your jurisdiction. They offer more powerful asset protection than nuptial agreements but still have some weaknesses. Notably, these trusts can be breached by “exception creditors,” who can break through standard trust protections. Ex-spouses are considered exception creditors in most states.
- Offshore asset protection trust: This trust type is settled and overseen outside of your jurisdiction. Because these trusts are not located in your home country, your trustee can ignore any rulings made by your home courts. Offshore trusts in most jurisdictions also have no exception creditors. So, even ex-spouses will find these trusts difficult to breach.
In contrast, we strongly recommend asset protection trusts. They are far more effective at protecting assets from divorce. In addition, they offer far greater flexibility and significantly less emotional friction. Unlike nuptial agreements, an asset protection trust can be established independently—without involving a current or future spouse—making it a far more robust and discreet tool for protecting wealth.
State Laws that Impact Asset Distribution During a Divorce
The way the laws will affect your divorce depends on whether the state follows community property or equitable distribution laws:
Equitable distribution laws: States with equitable distribution laws divide assets based on an assumption of fairness. Judges will evaluate each spouse’s circumstances to decide who receives certain assets. For example, if one spouse was the primary earner, they might be required to give up more of their assets to their former spouse.
Community property laws: Community property is a set of laws stating that any property purchased during a marriage belongs to both spouses. Only property purchased prior to the marriage can be considered separately owned.
Asset Protection Tip: Build Your Defenses Early
For the best possible defense, start planning a strategy to protect your assets long before a divorce is imminent. Unfortunately, many people only set up defenses when marital problems arise, or divorce papers are served. Although you can still take protective measures at this stage, the security you gain by planning ahead is well worth the effort.
Ideally, you should establish an asset protection plan before marriage. By transferring your separate property—such as your business, income, and other assets—into a protective structure, you can shield them from potential division during a divorce.
Furthermore, the best divorce asset protection strategies also work against other threats. Crafting your shield long before a divorce is more than just good planning; it’s playing smart defense against lawyers and creditors who could take your money.
What Works Better: A Trust or a Prenuptial Agreement?
As we touched on earlier, trusts work better than prenuptial agreements — period. Prenuptial and postnuptial agreements are highly flawed and easily undone by a capable attorney. Trusts, on the other hand, are far harder to breach, especially when established offshore.
Prenuptial and postnuptial agreements are not watertight. In fact, some states don’t even recognize them. Because of these weaknesses, they are often challenged. There’s no certainty a prenuptial agreement will work even if it was signed, notarized, and drafted by an attorney.
Aside from the above, discussions about prenuptial agreements can bring about contention right when you should be planning a life with your spouse. In a practical sense, these agreements force you to plan your divorce before you’re even married. This is a surefire way to throw water on the fire of a romance.
An asset protection trust, however, requires no unromantic planning. In fact, it can be established without your future spouse’s knowledge. And since trusts are used for reasons other than divorce, creating one shouldn’t ring the same alarm bells a nuptial agreement might.
So, for the most effective divorce asset protection strategy, use an asset protection trust. Better yet, use an offshore trust to hold an offshore LLC. The LLC holds your bank account. This tactic gives you greater control over your trust-held assets when there are no legal threats on the horizon. Then, when a lawsuit or divorce arises, you can cede control of the LLC to your trustee. They’ll maintain LLC ownership until your legal troubles are over and then transfer control back to you.
How to Set Up a Divorce Asset Protection Strategy Using a Trust
For a trust to protect assets during a divorce, it needs to be set up correctly. Ideally, you’ll rely on a professional trust establishment group like Asset Protection Planners. We can help you build and maintain the strongest possible financial fortress.
Once you’ve selected a professional to establish your asset protection strategy, follow these steps to get it off the ground:
- Gather all your financial records from the past three years.
- Make copies of your bank, investment, and retirement account details.
- Have your asset protection professional set up an offshore trust and international LLC (call or fill out a free consultation form for details).
- Ask your planning team to set up an international bank account in the name of the LLC.
- Establish credit in your name.
- Obtain copies of your spouse’s account statements, if possible.
- Get copies of your real estate records.
- Record a home equity line of credit mortgage against property that you control. The mortgage will be payable to the international LLC inside of your asset protection trust.
- Ask your planning team about international institutions that can acquire your mortgages. These institutions will place the cash proceeds into an account in your offshore trust if you need to protect any real estate.
- Avoid placing your inheritance money in accounts that are also in your spouse’s name.
- Make an inventory of personal property assets.
As we’ve mentioned before, do this as early as possible. Although these strategies can work when a divorce is imminent, setup requires time. The longer your trust has been active, the more likely it is to be recognized as legitimate by the court.
Is Using an Offshore Trust Safe?
It’s natural to have concerns about using offshore trusts managed by foreign trustees. However, consider this: You’re looking into an offshore trust because your assets aren’t safe at home.
Compared to domestic asset protection trusts, offshore trusts are vastly more effective. People have used these financial institutions for over 100 years, and their protections have only grown stronger over the past few decades.
Clearly, these trusts can protect your money from creditors, lawyers, and ex-spouses. But what about malicious trustees? Put plainly, bad trustees in the common jurisdictions are virtually nonexistent. Top offshore trust destinations like Nevis and The Cook Islands have strict licensing requirements for trustees. These professionals are regularly background-checked and must remain in good standing to operate as trustees.
Even if you ran into the only malicious trustee in a jurisdiction, you don’t have to worry. Offshore trusts and the trustees operating them are bonded and insured. If a trustee breaks the rules and misuses your funds, you can receive reimbursement via an insurance payout.
Everything about an offshore trust is safer than keeping your money at home. If you’re still concerned, though, consider working with Asset Protection Planners. We have reputable trustees serving within our international law firm. When you let us set up your trust, you can keep a close eye on your trustee without having to live in The Cook Islands.
Protect Your Wealth from Divorce with Help from Asset Protection Planners
Divorce doesn’t have to mean financial ruin. By taking proactive steps to protect your assets, you can safeguard your wealth and ensure a more stable future.
If you’re ready to protect your assets from the financial fallout of divorce, contact us today for a free consultation. Let us help you secure your future with a tailored asset protection plan.
