Divorce is never a pleasant experience, and no one gets into a marriage with the expectation that it will end up broken. But as much as we wish to remain optimistic, especially with the reducing divorce rate in the US, it is always best to hope for the best but prepare for the worst.
Whether you got a prenuptial agreement or not, begin the process to protect your non-marital assets as early as you can. You should not wait to protect your real estate assets during divorce.
We will show you how to go about it.
How to Protect Your Real Estate Assets During Divorce
Emotions and divorce are never a good combination. You need a logical mind when splitting your property. If not, you could end up losing your hard-earned money and property unfairly.
Here are five things to keep in mind.
1. Get an Accurate Value of Assets
Most people tend to forget the implication of tax on investment, such as deferred tax payment on retirement accounts. An early withdrawal could also come with a penalty. Put such factors into consideration when appraising the value of property and investments.
2. Choose Your Battles
Not everything is worth fighting for, and divorce attorneys are expensive. Before making any petition, compare the cost of the attorney to the value of the item you are trying to reclaim from your soon to be ex-spouse.
3. Get Prepared Before Filing for Divorce
You need to keep in mind that everything is divisible during a divorce settlement. Take measures before filing a divorce to protect what you can, and gather key evidence supporting any claims you intend to make in court.
4. Consider Using a Mediator
Like we mentioned earlier, divorces are expensive. In addition to sharing some of your property with your spouse, you end up paying hefty attorney fees. A mediator will be much cheaper and can facilitate your divorce agreement.
5. Make an Inventory of Your Non-Marital Assets
List down all the property you acquired before the marriage, and have evidence that indicates this is true. This means collecting your real estate records before your spouse hands you the divorce.
Can an LLC Protect Assets in a Divorce?
An LLC is a classification of business where the business owner is not liable for the business’s liabilities. There is a distinction between the owner’s property and the business’s property.
This type of business setting can protect your assets during a divorce by transferring your assets to the company and assuming control over it as the sole manager. It is effective if you assumed control over the assets before the marriage. The court will treat the company and its assets as separate property, which makes it non-marital property.
However, you need to be careful not to commingle it with marital property. Commingling turns the company into a joint marital asset.
Ensure that you are paying yourself a generous salary while in the marriage. If the divorce lawyer proves that you reduced the family’s cash flow to build the company, your ex could become entitled to the business’s assets.
You should also avoid hiring your spouse in the company. If there is proof that your spouse worked for long in your company, they could claim that your spouse helped build your company. Slowly relieve your spouse of their duties in the company as soon as you can.
Alternatively, set up an offshore asset protection trust and combine it with an LLC.
In this case, the offshore trust will have legal ownership over the LLC. You can then open bank accounts and investment accounts under the LLC’s name. In the case of divorce, the trustee will stand in as the manager of the LLC. And since the local courts have no jurisdiction in a foreign land, the domestic court-orders will be inapplicable.
Does a Revocable Trust Protect Assets from Divorce?
A revocable trust is a type of trust where the terms of the agreement can be changed or canceled by the grantor. The income earned from the collective assets under a trust is distributed to the grantor, and property only transfers to the beneficiary upon the death of the grantor.
By establishing an asset protection trust, you transfer ownership of your assets to the trust and only earn income derived from these assets. This means that the trust legally owns the assets and not you, and any divorce company coming after this property or its appreciation would be wasting their time.
However, the trust is not always fail-proof. A trust will be effective in protecting your assets if the property was acquired before marriage, and the income obtained from the trust is not commingled with marital funds. Marital assets placed in a revocable trust can be divided in divorce settlements.
You also need to be careful when drafting the trust. Ensure that the terms and conditions do not portray the trust as marital property.
You can also establish a discretionary trust. This is where the trustee has the ultimate authority to decide who becomes beneficiaries to the trust, and how and when they can receive the assets. The assets will remain under the ownership of the trustee, and they can deny access to the property during the divorce.
3 Ways to Protect Your Real Estate Assets During Divorce
Here are three key ways to protect yourself from losing your real estate in case of divorce.
1. Maximize on the Equity of your Property
You can protect the real estate assets you have control over and have purchased individually by maximizing on its equity.
Equity often determines the real value of a property. By subtracting any loans secured with the property from the property’s market value, divorce attorneys are able to determine the amount that should be split between the divorcing parties. Maintaining negative equity is the best bet at protecting your assets.
2. Prove That it is a Premarital Asset
All assets in a marriage are considered marital estate unless you can prove that they are non-marital. For real estate that you acquired before the marriage, you need to prove that any loans associated with the asset were cleared before you got into the marriage. Failure to which, the courts could declare that the asset only has partial non-marital value.
You can also prove that the asset was
- Excluded in a valid prenuptial agreement
- An inheritance
- A gift to you only, and not to both parties
- Proceeds from a personal injury settlement
3. Set up a Land Trust
If you have real estate acquired before the marriage, you can set it up in a land trust. Just as a land trust offers protection from creditors and litigators, it can protect you from losing your property during divorce.
A land trust offers protection by maintaining your privacy with regards to ownership of real estate. The land trust will be the legal owner of the estate, and your name will not appear in any public records that identify property ownership. Only the trust name will exist.
Divorce is ugly, and if not carried out with a logical mind, it could end up in lost assets and bitter hearts. There is not much you can do to prevent the split of marital property, but ensure that you get accurate values of the property and keep the attorney fees at a low.
Protect yourself from losing your real estate assets during divorce by transferring the assets (including non-marital assets) to an LLC where you are a sole manager. You can also establish a revocable trust. Try to maximize the equity on your real estate or transfer ownership to a land trust.
Try to handle the divorce as calmly as you can, prepare adequately, and ensure that you have all the relevant legal documents showing ownership.
David Freudenberg is a real estate investor that buys single-family, multi-family, fix/flips, and rental properties in the Sunshine State of Florida. He enjoys writing about real estate investing and investing in tax strategies on his “We Buy Houses in Florida” blog. www.davidbuyshousesflorida.com