How to Protect Assets From Divorce

You're thinking about getting divorced but concerned about keeping your premarital assets protected. Maybe you've heard rumors that property you brought into the marriage remains yours and that a court won't divide it during the divorce process. While that's the general rule, it's subject to many exceptions.

Luckily, there are ways to protect your premarital assets so you can keep your separate or premarital property in the event of divorce.

Protecting assets requires some action on your part to keep your separate property truly separate.

What is separate property?

When a court reviews the property you and your spouse own, they will divide the community property (aka marital property) and will generally allow you to keep your separate property. Marital property is most of the real estate and personal property you acquire after marriage. Separate property typically consists of the following:

• Property you brought into the marriage
• Gifts to one spouse from any source
• Inheritances
• Awards from lawsuits
• Property listed as separate property in a prenuptial agreement or a postnuptial agreement
• Property listed as separate property in a marital settlement agreement, separation agreement, or stipulation of settlement in a divorce

That said, separate property can become marital property in several ways. For example, if a court finds that you've mixed your separate and marital property, those premarital assets may not be protected.

How to keep assets separate in marriage

There are things you can do to help ensure that your separate property remains separate. But remember: Many of these rules are state specific, so be sure to talk to an attorney if you have questions.  

Get a prenup or a postnup

Before you get married, consider getting a prenuptial agreement. In your prenup, you can specify what property you want to remain yours in the event you get divorced.

If you're already married, consider getting a postnuptial agreement. Be careful, however, because some states view postnups with suspicion, and other states don't enforce them at all. Check with an experienced lawyer before getting a postnup.

Separate your business

If you have a business, you can keep it as separate property in a prenup or postnup. These agreements allow you to dictate how you'll separate your assets through a legally binding document that courts recognize.

If your spouse is an employee of your business, things get a little more complicated; it’s best to speak with an attorney about how a divorce will impact your business.

Don’t commingle property

Make sure you don't commingle (mix) separate property with marital property. For example, if you have your own savings account as a premarital asset, adding your spouse's earnings into this account commingles marital funds (your spouse's earnings) with your separate property. Your savings account might be considered marital property, and a court can divide it upon divorce.

Avoid asset transmutation

Don't let separate property become joint property by transmutation. This legal term simply means that you change your separate property into marital property, leaving your premarital assets unprotected.

For example, if you owned a home before marriage and then added your spouse’s name to the deed after marriage, your home has most likely changed from separate property to marital property, which a court can divide.

Likewise, only deposit marital income into joint marital accounts and avoid depositing marital income into separate accounts. If you're not sure how to keep your property separate, contact an attorney experienced in family law.

Consider setting up a trust

If you wish to shield certain assets from your spouse in the divorce proceedings, consider setting up a trust. A trust is a legal relationship in which you transfer the title of property or assets to another person or entity to hold those assets for a beneficiary, such as your children.

Irrevocable trusts, such as a domestic asset protection trust (DAPT), shield individual assets from creditors or lawsuits, which could include alimony cases. As long as the assets are separate property, transferring possession to a third party through a trust can block the other spouse from claiming entitlement.

However, these trusts are irrevocable. This means you cannot reclaim them later. Only set up this kind of trust if you’re sure you want those assets to go to your beneficiary and not to yourself. It’s wise to consult a lawyer before creating a trust.

Don’t jump the gun

Divorce is an undeniably stressful time that can lead the best of us to make quick decisions to protect assets. However, hiding assets or dissipating marital funds could lead to severe legal consequences.

In other words, transferring funds from joint accounts, selling off assets to pocket the profits, or retitling property in your name could appear questionable and hurt your case should your divorce go to court. Discuss your case with a lawyer before making financial decisions that could impact the outcome of your separation.

Community property vs. equitable distribution

Without a prenuptial agreement, state laws dictate how you and your spouse will divide marital assets. Divorce law differs by state, falling into two camps: community property states and equitable distribution states.

Community property states view marital assets as community property and require spouses to divide them equally in the event of divorce. This includes retirement accounts and debts but excludes gifts and inheritances that one spouse acquired during the marriage. Current community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin​. Alaska is not formally a community property state but offers it as an option.

Equitable distribution states require spouses to divide marital assets based on circumstantial factors such as each spouse's relative income, how divorce will impact their quality of life, childcare responsibilities, and the circumstances of their divorce. The aim of this process is to ensure that no one party is left disproportionately disadvantaged post-separation.

Active assets vs. passive assets: What’s the difference?

Your spouse may actively increase the value of your premarital home by making significant improvements. Likewise, sometimes the value of your property can increase without you doing anything to it.

Let’s look at the difference between active assets and passive assets:

Active assets

These are items that increase in value because you and your spouse took action, such as improving your home. 

Active assets may be subject to distribution and can turn separate property into marital property. In the example where your spouse used their own funds to improve the house, your spouse contributed to the home improvements and thus, depending on your state, some or all of the property could change marital property.

To prevent this from happening, make sure to keep your separate property really separate. Seek legal assistance if you're not sure how to do this.

Passive assets

Assets that increase in value due to circumstances beyond your control are passive assets.

This usually happens when market conditions cause an increase in the value of your house or in your stock portfolio, for example. Passive assets that are separate usually remain your separate property, as does the increase in value.

Consult a divorce lawyer so you know in advance whether the appreciation in value has been active or passive.

FAQs

If you have more questions on how to protect assets from divorce, read our answers to frequently asked questions.

Can I protect my business from divorce?

Yes, there are several ways to protect your business in the event of a divorce. Commingling of business and personal expenses can put your sole business ownership at risk. However, a prenuptial agreement or postnuptial agreement could protect your business from your spouse.

Personal actions—such as paying yourself a salary rather than investing your earnings back into the business and avoiding claiming joint expenses as business expenses—can help keep your business separate.

Can I keep my inheritance safe from divorce?

Yes, as a general rule, courts will consider an inheritance separate property if you are the sole recipient of that inheritance. If you want to protect your sole right to the inheritance in the event of divorce, work with an attorney to draft a prenup or, in some states, a postnup that dictates your sole ownership over the inheritance.

You can also protect it by keeping the inheritance under a separate title and refraining from using it to pay for any shared assets or expenses, as that would commingle it with your shared family wealth.

How do I stop my spouse from getting my assets?

Here are some ways to keep separate assets in your name:

1. Sign a prenup or postnup
2. Avoid putting all of your income in joint accounts
3. Don't commingle separate property (personal inheritances, gifts, or accounts) with marital funds
4. Consult an experienced attorney

How long does it take to recover financially from a divorce?

While this number is different for everyone, it can take several years to recover financially from divorce. Many divorced individuals report regrets over financial decisions they made during the divorce process and wish they'd had more guidance. Although it can be tempting to save costs upfront by personally handling your divorce case, working with a lawyer can help you recover more quickly in the long term.

Ronna L. DeLoe, Esq. contributed to this article.