Protect Your Assets In Divorce
Hi, this is Billie Tarascio with Modern Law and the Modern Divorce podcast. I am here today with Paul Deloughery, a fellow attorney here in Arizona. So excited to talk to you. How are you doing today, Paul?
I’m doing fine. Thank you, Billie.
So excited because we are going to talk about protecting money. And Paul is an estate planning attorney and an attorney who protects wealth. And you know, as a divorce attorney, there’s nothing that is a quicker way to reduce your wealth, then getting divorced and losing half of it. So Paul is going to talk to us about how we might be able to not lose half of it even in the event that there might not be a prenuptial agreements.
Right. So, yeah, thanks for having beyond. And one of the, one of the things that I’ve just run into a lot is people are not super excited about signing prenuptial agreements. And I don’t know, I think I saw a statistic recently that 17% of people would sign a prenup if asked. Wow. So anyway, so yeah, so there are actual ways of setting things up ahead of time, and it’s better to do it ahead of time, like before you’re married. And so what, why, why do we even do this? I mean well for one in a community property state, and you can go in to a lot more detail about this, but there’s community leans and all this stuff and, and the community property is pretty sticking. It starts sticking to all kinds of things. Inheritance prior, prior property businesses where the, I don’t know where the wife goes in once a week and, you know, helps clean or, you know, as a part-time secretary or, or whatever.
And all of a sudden, you know, she has a claim that she was helping out build the, build the business. So how, how do you, how do you change that? Well, just as a general rule, what you don’t own, can’t be taken from you. So that’s the, that’s the first thing. So there are some ways that you can take a business or asset and put it in, for example, a trust where it’s not in your name, you’re not the trustee, you’re not the beneficiary, but then you want to have some special ways to still be able to control it or get access to it later or make changes. So that’s, that’s the trick. I mean, one of the rules of that, another rule of with asset protection is you don’t want to just protect it, but then never have access to it again.
Right, right. We don’t just want to protect it. So let’s take a minute, let’s take a minute and go over like basic community property concept because it intense. And the idea is that when two people get married, they become one unit that is the community and the community has its own interest apart from each individual. So that sounds like it’s all fine and dandy. But it can get really tricky because it means that any action that you take while you’re married is on behalf of the community. So even if you don’t intend to be building something for the community, because let’s say you started a business, you know, way before you got married and you don’t want to split that. And the general rule is if, if you, if, if you come into the marriage with an asset, then it is your sole and separate property.
So, all right, anything that is, everything is community, except if you came into it before you were married or it was inherited, or it was gifted to you as, as a, as a human, not as the community, but when those assets grow during the marriage and when community efforts helped any of the assets grow, that’s when the community has an interest. And, and of course for high asset earners or business owners, businesses can grow enormously over the course of a marriage. So and when that happens, I, as a divorce attorney who am representing the, the non owning spouse, I go in and I make a claim for a community lien for a portion of that growth. Now, how could you prevent me the divorce attorney from getting my community lien?
So it’s a, let’s say it’s a business from before the marriage. Right. Okay. And not to be sec or whatever, just hypothetically husband is going there. All the time working in the business, the business grows. You’re saying that that’s yeah. He was doing that on behalf of the community. Yeah. Yeah. Well yeah, that’s tricky. I mean, one way to not have it be part of the community would be to not have it be part of the community, meaning that if it’s, if it’s possible and we start getting into all the details here, but just high level, if it’s possible to have it in a trust where the the, the owner is not the owner anymore, then that’s, that’s not a community property. I mean, it would be the same then as you know, going to a job. And just because you know, maybe a husband or wife works at a law firm, let’s say and, and keeps working there. Well you don’t acquire an interest in assuming you’re not an owner of it. You don’t get an interest in it just because you’re working for a job. So that, that would be kind of the same thing. Now there are other details, for instance okay, he’s working at a business that he doesn’t own. How does he get what he would take a salary, I guess, or take, you know, get wages out that way. So that’s perfectly fine. That’s, you know, that obviously is part of the community.
So let’s, let’s make our hypothetical, like, let me, let me set up the fact pattern a little differently. So I’m a husband and wife get married and husband owned a string of movie theaters. Let’s say that that’s a really good fact pattern, cause I’m pretty sure all the movie theaters are owned by huge conglomerates, but let’s pretend he owns movie theaters. And they get married. There’s no prenup, but this is both of their second marriage and they keep everything separate. They get, they stay married for 20 years. During that time, he really builds up the movie theater business. He opens two, three more movie theaters. They’re always in his name, they’re always an LLC is owned completely by him. They get divorced and she says, I want a portion of the growth. What can he do and what could he have done differently?
Well, what he could, you can probably speak to what he can do now. Like, cause he, he already kind of botched, botched it all up. But but what he could have done, for example, have a trust where he’s not the trustee, he’s not the beneficiary he’s out of the picture. Maybe, maybe his kids or their kids are the beneficiaries or whatever. And that truck now the issue with that, he, he doesn’t control it. So if you have the movie theater is owned by that trust you know, he has no management ability. He has to go to the trustee to write checks and all that. Well, that’s not good. So how about this? So you have the trust that owns an LLC or owns then owns the business. He can, even though he’s not an owner, he can still be the manager of it.
And so, so the trust actually has no ability, you know, let let’s say let’s think worst case scenario. So he gets he gets his buddy to be the trustee of the trust. And then, you know, the buddy gets a gambling habit and wants to take over the movie theaters and sell them or something like that. Well, you can’t because he, he, he owns the mean, you know, he owns it as trustee, the theater, but the manager is still husband. So the husband has all the authority to do anything or sign anything. And so I made that, that would be a quick and dirty way of doing it.
Okay. So let’s talk about that for a minute. When you’re, when you’re setting up an LLC, you have to check whether or not it’s member managed or manager managed and your saying you could make an LLC owned entirely by a trust. That is, that is manager managed and the manager is the husband right now. Husband is not the owner of the trust that owns the LLC, but he is a beneficiary. Or tell me about that.
Okay. So this is, and this is like the area of practice for like the super nerds. I don’t know.
Right. We are super nerding out right now.
I’m going to, I’m going to super nerd out for about two minutes. So there’s a whole issue. You can go on the internet, read about this. There’s an issue about single member LLCs, are they protected and blah, blah, blah. Maybe make him make husband a 1% ma 1% member. Who’s also a manager. Those aren’t necessarily the same people, same managing member. You can say, if you want, just to, because it’s easy, it rolls off the tongue, say he’s a 1% managing member of the LLC and the 99% non managing interest is owned by this trust. So, so then, yeah. Okay. So maybe wife then has an interest in the 1% of the LLC and they would have to deal with that, but that’s, that’s not as bad as a hundred percent. Okay.
Okay. So he only owns 1% of this LLC. Couple things that would be really hard. I think as a business owner, if I had to jump through those hoops, I can’t really sign checks. I can’t go open bank accounts. Like how do I do that? How do I he’s the manager? Of course he can. Okay. Okay. And
I mean, let’s imagine this, the movie theaters are owned by an LLC or a corporation or whatever it is right now. And you know, so right now he’s a 1%, I’m saying 100% member, but now, but we just change that to be a 1% member, but he has full authority to manage and make any decisions. See, it’s the same.
Okay. So, and how does he get, how does he retain the benefits from the trust?
So a couple of different ways you can take a salary and he can he can borrow, this is actually a little trick. So instead of just getting distributions of profits from the, from the trust he can borrow from it. And the benefit of doing that is because, because it’s a loan and we’d probably set it up as a line of credit because we were setting it up that way from the trusts standpoint th the trust is going to want collateral to make sure that it gets repaid. So what could he set up? What could he use as collateral? He can actually use his car and personal bank account and other assets and maybe interest in the home or other things like that. So I’ll all of a sudden than this. That’s actually taking this removing community property. So now there’s even less at stake in a future divorce.
Very interesting. So as a divorce attorney, I would have to add this trust to the lawsuit of the divorce. And I think the bottom line is the more layers you put between your money and whoever wants it, the easier it might be to protect it.
Oh, absolutely. Absolutely. And, and the trust do work. I mean, I’ve seen it, I’ve seen them work in divorces a perfectly valid, perfectly legitimate. Yep. Yeah. I’m sorry. And one of the leading causes of divorce is financial problems. So this is even protected in a bankruptcy. Oh, really? Yes.
Nice. Yeah. What I have seen is when, when there are very complicated divorces and lots of layers of money and lots of layers of LLCs first of all, the divorce attorneys make a lot of money because they got to pour through them and figure out where all of the money is and whether or not money has been hidden and wasted, because if money has been hidden or wasted, then we as a divorce attorney can get at it. But the more layers and the more entities involved, the more people that we have to add to the divorce, like if so-and-so transferred all of their money to their grandma, like that’s, that’s an issue in grandma might have to become part of the divorce. And usually it doesn’t happen. And usually it settles. So while a prenup is probably preferable because it’s crystal clear, even, even when people find themselves in a place where they’re not protected by a prenup, there are actions that they can take.
Right. Let me mention another thing too. And I, so before I even say this, let me just mention, I was a boy scout. I went to Catholic high school. I consider myself honest in a deep, down a good person, but I’m going to say something sleazy.
I like the disclaimer.
So there, there’s nothing illegal about husband and wife, both doing doing something like this together. Like let’s say, let’s say they’ve been married. They have an asset is community property. And they they agreed to do, to put something outside of the community. There there’s nothing there’s. I mean, and how, how do I even say this? I, I probably shouldn’t say this because this is going to go on the internet and all that kind of stuff. But, but if, if one of them is careless, let’s say, and doesn’t protect his or her interest. And it ends up outside of the community. And the other spouse happens to have the ability to make changes and have, you know, change who the trustee is and ultimately has control. You know, that, that’s just something that happens, I guess. Well, I mean, you’re right.
So when people are married, there is people spend money all the time. Either the wife or the husband spends money and it’s gone after it’s spent, it’s gone. And so when they get to the divorce or DJ, it’s not like you can get back money that your spouse has moved or spent or used in a way that you didn’t approve. Right. So it’s, it’s, it’s really the exact same concept.
Right. I guess so. Yeah. Yeah. And I’m not advocating to try to trick your spouse into signing something or something like that. But, but you’re right. I mean, there, there are ways there, there are ways to do this, it’s it really? Okay. Bottom line way better to do this before you get married.
Absolutely. Yeah. And then, and the other thing to consider is you’re always allowed to do a post-nuptial agreement, even if you haven’t done a pre-nuptial agreement, right? So you find yourself in a position where things are not going well financially, or your business takes off, right. The business that you started before you were married, that was your side gig is now taking off. And, you know, it’s separate property because, you know, you owned it before, but now you know, that it’s huge and it’s your family’s relying on it better to figure out right now, how do we want to protect this asset? Moving forward from everyone, from every potential event, from creditors, from a potential divorce, from a potential death in the family, like how do we consider protecting our assets in a very broad sense? With divorce being just one risk factor.
Sure. Yeah. And I’ve done that actually as part of a asset protection plan, like just separating. Yeah. Like I, I mapped things out. Like, I, I, you know, I I mapped things out for clients all the time, you know, where things are going to be owned and in order to make this actually happen, we need to have an agreement that this is sole and separate property.
Oh, interesting. Okay. So this is major. So if a couple comes to you and they have high assets as part of your estate planning, are you considering, you know, what happens in the event of a divorce?
Well, you know, I mean, I have to think holistically.
Okay. Okay. And so how do you protect a couple’s assets in that case? Who do you look out for the husband or the wife, or how do you protect the assets? Right.
Because I’m representing both. Usually, usually I’m representing both of them. So I, and I’m taking your examples. So something is sold and separate, but, but there’s the possibility of it getting kind of muddied down the road. I mean, it’s possible to, to clarify that just right now and make it, so it’s not an issue in the future.
Okay. And when you’re doing an estate plan with a married couple, are you usually valuing the assets that exist at the time?
Sometimes a lot of times I don’t have to, but I mean the, the reason, usually for me to value things is if there’s a tax reason for it, like if we’re making a gift to gifting it outside of their estate, I don’t frankly do that a lot because the estate tax amounts, the exclusion is so high right now it’s around 10 million for a single person, 20 million for a married couple. And just there aren’t that many people that are over that well, and frankly, it’s, it’s easy enough to, to, you know transfer things and, and not have to worry about it. So but yeah, that’s, that’s the main reason for actually doing evaluation, I guess.
Okay. And, and does transferring assets to trust and other vehicles does that implicate, or how does that implicate, what taxes might be owed?
Well, I’m pretty careful to have it be tax neutral if at all possible. So yeah, it, it, I mean it, at the worst case, it’s tax neutral and there might maybe there’s a limited partnership and then you have to do a limited partnership tax return each year, but, but there’s no additional tax.
Very, very interesting stuff. It, it, it really does tell me that, like the more money you make, the more complicated things get in, the more planning you have to do.
Oh yeah, absolutely. Well, and another thing too, I just want to do kind of address if, if I can get on my soapbox just for a quick little bit, I know this is your podcast.
The term asset protection is really popular now. And there are asset protection attorneys and financial advisors who say they do asset protection and insurance people say they do asset protection. And like, when I say I’m an asset protection attorney, I I’m actually going to stop saying that because no one knows, you know, I’m in competition with life insurance agents. We’re also doing asset protection and say they do exactly the same thing as I do, which isn’t true. So there, there are basic, I mean, I call themselves seven pillars of asset protection and I don’t have to go into all of them right now, but, but one, for example, pillar number one is that your assets are protected in, in any state. And under any circumstance, if it’s divorce or bankruptcy you know government action, IRS audit, any, anything like that. Okay. And so, so that’s what I’m saying. So, sorry, when I’m talking about asset protection, that’s really what I’m talking about. So I’m talking like holistically making sure that things are protected. Okay. I just wanted to throw out because
I am so glad that you did that sounds pretty, pretty remarkable that you could protect assets from all of those threats.
Well, yeah. And you have to do it a certain way. There, there are very popular things right now for it, for instance my pet peeve is asset protection trust, and they’re incredibly popular because they promise that you can be the, you can be the beneficiary of this trust, but at the same time, your creditors can’t get to it. So you actually put your, everything you own into this trust. You’re still the beneficiary but your creditors can’t get to it. And it sounds, that sounds amazing. And Arizona’s actually on the verge of adopting a statute like that. And the prob well, there’s multiple problems. They’re, they’re not recognized in the majority of States. So if you get sued in Texas or Illinois, it’s, for example, or California, it’s not going to help you. And then well, it, it, it’s not protected in bankruptcy.
That’s kind of a huge deal. I mean, if you, if you want your things to be protected, then you, you know, let’s, let’s say, I don’t know some bozos Susie for a million dollars for something that, you know, it’s just made up. And the judge, I don’t know, the judge, didn’t like how you dressed, you know, on the day of trial and rules against you. Now you have this million dollar judgment. Well, you think, well, I’m protected because I have this whatever Alaska asset protection trust, or Delaware asset protection trust. You’re not because your, your choices. Well if you want to file for bankruptcy, it’s going to be unwelcomed and all of that, the assets are going to be made available. And if you don’t pay the AP, don’t pay the creditor, the creditor can actually force you into an involuntary bankruptcy. Yeah.
I don’t like that idea at all. So
Anyway, enough of my soapbox.
And now I’m curious though, we don’t have a ton of time, but what are the other six pillars?
Okay. creditors can’t limit how you use your assets. In other words, you, you, you need to, you want to be able to have control. So that’s, that’s part of it. So just putting things into a trust where you don’t control it, it might be protected in a way, but you know, like a business, I mean, you want to be able to control your business. So that’s you have to be able to change your mind. So there has to be some flexibility. The creditors can’t dictate how your kids enjoy the assets or, and also it has to be protected from their poor choices. So, you know, disease, you set everything up, it’s protected from your creditors, you die, everything goes to your kids and the, they become drug addicts and, and gamblers. That’s not really good. And let’s see what else?
Oh, frankly, another one of the other ones is to have to take care of all of the administrative details. And so, so actually I apologize ahead of time, but I’m going to do a quick little add because I’m starting a new venture where I’m going to be offering services to families to help them take care of all the administrative junk that they, you know, they don’t want to take care of like dealing with the, you know, the insurance and just lawyers and the state planning and all the little details that can go wrong. So just making sure that everything’s all buttoned up, that’s one of the other important things,
Does that include actually making sure that the assets that you own are titled in the trust? Yeah, yeah. Yeah. Because I see that a lot where people have trusts, but then nothing is in it.
Right, right. All the little details like that.
Got it. Very cool. Well, I know that my big takeaway from this is that you really gotta do some planning. You really gotta think about how you’re structuring your life and your money to protect against all the risks. Not only in divorce, but, but all of the other risks, including, you know, frivolous or, you know, non, non legit lawsuits. And when people look at at you and they see that you’ve got nice cars and a nice house and a teenage driver, you know, you kind of become a target for those lawsuits.
Th that’s true. There are people like that. Yeah.
Yeah. So, but it’s good to know that people can contact you. How can people find you?
Magellan law firm.com. Yeah. M M a G E L L a N law firm. And or let’s see, phone number, I guess six Oh two, four four three four eight, eight, eight.
Great. And I’ll make sure to have all of that information in our show notes. Thank you so much. All it was great talking to you today. Good talking to you. Take care. Bye.