Article written by Chris Coulter
There are very few savings, assets or investments that are not subject to division during a divorce, but they do exist. How proactive you are in addressing some of these items today will determine how much you get to keep in the future, and what you may need to share if your marriage dissolves down the road.
Assets Before The Relationship
Generally speaking, any assets that either party brings into the relationship are not subject to marital division if the family unit breaks down. Both parties are privileged by the same rules. If you have a ledger of all of your assets prior to a marriage, then it would be prudent to keep statements prior to the union. This will make things infinitely easier to sort out if the marriage ends in divorce.
Another asset that can be argued to be excluded from asset splitting are any personal loans from third party individuals that earmark funds only if the marriage remains intact. An example is if one set of parents gifts a large sum of money to the couple to put against the purchase of a home. The parents can stipulate that the money only becomes the property of the couple if the marriage remains intact. If the marriage dissolves, the one spouse can argue that the value of the loan should be taken out of the mix of the marital assets. It’s advisable that a contract be signed by both parties with the understanding that the terms of the loan are subject to the union remaining in place.
Trusts are contracts put in place that prevent individuals from accessing granted money all at once; the money is released over a course of time. Trusts are set up by lawyers to protect the interests of the family setting up the trusts. Assets that may have been acquired by proceeds of the trust, for example a house, vacation properties etc., are marital assets and thus subject to division after a marital breakdown. If an individual receives an annual income from a trust, that amount can likely be argued for spousal and child support purposes. However, if the trust proceeds are distributed at the discretion of a trustee, then it may be more difficult to argue as a marital asset, and may not be subject to division.
Items Listed in A Prenuptial Agreements
Done correctly prenuptial agreements ensure that the assets that are important to you remain with you should your marriage end. Business ownership stakes, inheritances, significant assets and even real property can all be included in a prenup.
Inheritances or Gifts
Inheritances or gifts of cash are not subject to marital asset splitting, regardless of whether it’s received prior to or after the marriage. But, the following caveats need to be considered. The gift or inheritance needs to be kept in a separate account, and not be blended with other marital assets. As an example, if you put an inheritance or gift against a mortgage or loan on your house, it may be argued that that money is a marital asset and would be subject to marital asset splitting. To avoid complications, keep these assets in a completely separate and standalone account.
Split Dollar Critical Illness Insurance
A tax strategy that I promote when I work with business owners is something called a split dollar critical illness policy. This is a critical illness insurance policy with a return of premium rider. The corporation takes out a critical illness policy on the business owner and pays for the critical illness insurance. The business owner personally pays the return of premium portion of the policy. The policy has no cash value usually until 10-15 years after the policy was purchased. The business owner has the ability to cancel the policy and cash in all the premium paid by both the company and the business owner at a tax preferred rate.* Since there is no cash value until year 10+, it doesn’t exist on a company balance sheet (and therefore could not be divided). If the business owner does have a critical illness in the meantime, the policy pays the business for the insured amount, and the policy is considered cancelled. The same vehicle can be used on a personal basis without the tax benefit.
Some Permanent Life Insurance Products
There are some insurance products that have deferred cash value until a few years after the policy exists. When the cash value starts to accumulate, it will accumulate at a much faster rate than policies that have a cash value in their initial years. The availability of these type of products has greatly diminished after the Federal Government’s Exempt Test measures were put into place on January 1, 2017.
Although most assets accumulated during a marriage are subject to division, there are a few exceptions. It you do some financial planning now, you may save money in the future.
*critical illness is paid with using after corporate tax dollars (usually 15%)