Prenuptial agreements, or prenups, are legal contracts that protect each spouse’s assets and financial interests if their marriage ends in divorce. Despite the legal benefits of a prenup, you may not want to get a prenup for a variety of reasons:
- You have moral obligations or negative attitudes to a prenup
- You want your divorce to follow the laws of the state
- You don’t want to disclose all your assets to your spouse
There can be many more reasons why, but regardless of what they are, you may still want the security of knowing that your assets are protected in your divorce settlement. While a prenuptial agreement is an easy way of ensuring your property remains yours, there are still ways to separate your assets and keep them in your possession following the dissolution of your marriage.
Separate Your Finances
Keep your premarital accounts separate. It’s vital to safeguard your finances without a prenuptial agreement.
Legally separate your finances by having individual bank accounts or a dedicated joint account for your marriage. Courts generally consider premarital funds jointly owned when you mix them with joint assets.
For example, you might pay a home maintenance bill with money from your separate account. Regardless of how much the bill was, the account will become a marital asset.
Creditors can go after your account to pay your spouse’s financial obligations. So imagine they buy an expensive car with a loan. Your name may not be on the title, but if you contributed to the payment with your own money, you’d still be obligated to repay the debt.
Separate Your Assets
To protect assets before marriage, a spouse may want to separate them from the marital estate. The different kinds of assets a spouse may want to keep separate include:
Real Estate Property
Keep your real estate separate by ensuring that only your name is on the deed. The court may deem your real estate property as marital property if you don’t keep it completely separate. To prevent this, always use separate funds to maintain the property. Even if you didn’t list your spouse as a joint owner, they could claim an interest in it if you used marital funds to maintain it.
If you get an inheritance during the marriage, it can still be non-marital property if kept entirely separate from the marital estate. If your inheritance is a significant financial sum, separation would be a case of not mixing a part of that money with your marital assets.
A gift made directly to one spouse would be considered a non-marital asset. But suppose you receive a large sum of money as a gift. If jointly owned funds or earnings from your job are deposited into the account holding that gift, it is no longer separate property. In that case, the entirety of the gift will be subject to the property division laws of your state.
The value of your property can appreciate during your marriage. Whether it’s your home, income, business, retirement assets, or investment accounts, the appreciated value of the asset becomes marital property after marriage. Depending on your state, a divorcing spouse can be entitled to half of those appreciated assets, particularly if your spouse’s efforts have served to increase its value. Unless waived in a prenup, the court will consider the appreciated value as marital property when you divorce.
For example, if your separately owned business was worth $10 million on the date of your marriage, and it’s worth $20 million by the time of your divorce, your spouse would be entitled to one-half of the difference, i.e., $5 million.
It’s vital to have records of your finances and assets, so you can provide evidence of ownership when ready.
Consider taking a snapshot of your assets right before your marriage. The more records you keep that identify your premarital property, the better chance you’ll have of keeping your property after your divorce.
The same holds true for assets you receive during the marriage, like inheritances or gifts. These are generally deemed non-marital property with the proper documentation in place.
For real estate, a spouse may keep the property separate from the marital estate. But this is only if you can show evidence of separate ownership. You must confirm that only non-marital funds were used to pay the mortgage, property taxes, upkeep, and maintenance.
The more documentation of payments, bills, and purchases, the better. For example, a separate home that turns into a commingled marital home may be divided equally upon divorce despite the amount of personal equity you had in the original home.
Retirement accounts are another form of personal property where documentation is essential. If you can produce evidence of retirement account statements obtained before you married, the court may let you keep the premarital amount and divide the rest in a divorce. Without such documentation, the spouse you are divorcing may be entitled to half of the money in your retirement account.
Get a Postnuptial Agreement
If you’re looking for prenup alternatives, one option you can consider is a postnuptial agreement. It’s essentially a prenup after marriage. It’s still a contractual arrangement addressing the division of assets and works well for a marriage without a prenup.
For example, if you sell your premarital home to buy one jointly with your spouse, a postnuptial agreement can establish what part of the house is owned by whom. You should be able to arrive at a fair postnuptial agreement that rewards a spouse for the equity they had already built up in the premarital asset.
Get an Irrevocable Trust
Irrevocable trusts are becoming more prevalent as an alternative to protect assets in a divorce without a prenup.
For a prenup to be enforceable, a court will consider if there was a full disclosure of assets and liabilities. The court would not deem the prenup fair and reasonable otherwise. But there can be reasons why a spouse may not feel comfortable disclosing all their assets.
A spouse may have concerns that their fiance is only after their wealth. If so, they can place some or all their assets into a trust for the benefit of their children or other chosen beneficiaries. This method would protect future inheritances for your children from a prior marriage.
When you deposit financial assets into a trust before marriage, they are protected because they would be considered property of the irrevocable trust and not part of your marital estate. Technically, you would not own the assets any longer. This is a critical distinction in a divorce.
If it turns out that you later need or want some or all the assets held by the trust, the named trustee may add you as a beneficiary.
Consult with an attorney to determine the exact details of where and how you can create your trust to provide maximum protection of your assets.