There are very few savings, assets or investments that are safe from divorce. Depending on how proactive you are in addressing some of these items will determine how much you get to keep in the future versus what you may need to share if your marriage dissolves down the road. Another potential opportunity is looking at something today with no cash value but may have a deferred value in the future. Another potential opportunity is an asset that is restricted by a third party contract.
Assets Before The Relationship
Any assets that either party brings into the relationship is not subject to marital division if the family unit breaks down in the future. Both parties are privileged by these same rules. If you have a ledger of all your assets before being deemed legally married (married or common law), it would be prudent to keep statements just before the union. This will make things infinitely easier to identify if the marriage ends in divorce.
Another asset that can be argued to be excluded from divorce asset splitting is 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 or property to the couple to put against the purchase of a home. The parents can stipulate that the money only becomes the couple’s property if the marriage remains intact. If the marriage dissolves, the one spouse can argue the value of the loan should be taken out of the mix of the marital assets. Again, both parties should sign a contract to understand that the loan terms are subject to the union remaining in place.
Trusts are contracts put in place that prevent individuals from accessing granted money all at once or deemed to be given over time. Lawyers set up trusts to protect the interests of the family setting up the trusts. Assets that may have been acquired by proceeds of the trust, i.e. house, vacation properties etc., are marital assets and thus subject to its division after a marital breakdown. If an individual receives an annual income from a trust, that income amount can likely be argued for spouse and child support purposes. If the trust proceeds are distributed at the discretion of a trustee, it may be more difficult to argue as a marital asset and subject to division.
Although prenuptial agreements can be argued, they are not always easy to enforce depending upon factors like how long a marriage has existed and the children of the marriage. Common items included in a prenuptial agreement are business ownership stakes, inheritances, significant assets brought into the marriage or a home that one spouse owns before the union.
Inheritances or Gifts
Inheritances or cash gifts are not subject to marital asset splitting regardless of whether it’s received before the marriage or during the marriage. The following caveats need to be considered for this to remain in force. First, the gift or inheritance must 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 it’s now become a marital asset, and it may be difficult to argue that it is not subject to marital asset splitting. If you want to keep this out of the divorce proceedings, keep these assets in a completely separate and standalone account.
Split-Dollar Critical Illness Insurance
A tax strategy that I work with business owners upon 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 the premium portion of the policy. The policy has no cash value usually until 10-15 years after the critical illness policy was purchased. After that, 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. 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 deemed cancelled. The same vehicle can be used on a personal basis without the tax benefit.
Some Permanent Life Insurance Policies
Some insurance products have deferred cash value until a few years after the policy exists. When the cash value starts to accumulate, it will accumulate faster than policies with a cash value in their initial years. The availability of these products has greatly diminished after the Federal Government’s Exempt Test measures were put into place effective January 1, 2017.
Although most assets accumulated during a marriage are subject to division, there are a few exceptions that may save you money down the road if you make part of your financial planning process.
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*critical illness is paid with using after corporate tax dollars (usually 12.5%)
Consult with a Family Law professional to receive counsel on what your rights are while going through a divorce