Protecting Your Assets In A Divorce
Below is the transcript of the online Q&A presentation by Family Law Attorney Billie Tarascio and Asset Protection Attorney Paul DeLoughery as they discuss ways to protect your assets in a community property state, both before and after marriage.
I am so excited to be talking about asset protection specifically on divorce and community property. community property seems like something that’s pretty straightforward and it is. But, when, when we’re talking about protecting assets and high asset divorces, having this information could prevent you from having to spend a $100,000 on a divorce attorney. So that would be a good thing because essentially when you get divorced and you pay money to a divorce attorney, those are transaction costs. It’s like the cost of selling your house. And it just decreases the amount of money you get after your house is sold, depending how much you have to pay your realtor.
And sometimes you can’t, you can’t really avoid that, but other times you can. And so this is really about protecting yourself and having knowledge when you’re acquiring assets, if you’re married or unmarried, it doesn’t really matter.
So what are the basics of community property? All property acquired during your marriage belongs to the community. That is the general rule. And unless there’s an exception and we’re getting to the exceptions, if you’ve acquired property or debt during your marriage, and there’s no prenuptial agreement, then it belongs to the community and the community is a concept of like its own entity, its own being. It has its own ownership, interests that are separate from the ownership interest of the wife or the husband. What that means is that each person has a hundred percent permission to act on behalf of or bind the community.
So I can take all of the money that is earned by my spouse during the marriage and spend it all. And that’s not a problem at all in a community property, even if he doesn’t like it or she doesn’t like it or whatever, it doesn’t matter. Each of you can do whatever you want, which is a little dangerous, but that’s the way it is exceptions. If your property was owned before the marriage, then it is separate property. If your property is inherited, it is your separate property. It doesn’t belong to the community. and if it’s a gift, it is your separate property. Now the thing about the gift typically title doesn’t matter. Okay. So if I go out and I buy a car during the marriage, and it’s only under my name, then, it is not my car. The car belongs to the community, regardless of the fact that my name is on the car.
It’s it gets a little tricky with houses because when you are married and one person buys a house, the other person usually signs a disclaimer deed. And what that means is their interest in the property is disclaimed. And that is usually looked upon as a gift, a gift from the community to one spouse. And there are different ways that the community can claim a lien on something that doesn’t belong to it. But if it’s gifted out of the community, if it’s inherited, or if it’s owned prior to the marriage, it is not community property.
Now the, the property of the character of the property never changes. What that means is if I buy a or have a house before I’m married, and I get married and we live in it together as a married couple for 20 years, and the community pays all the bills associated with the house, does the house become community?
It does not. It’s a separate asset because the character doesn’t change. The only way the character could change would be if the separate property belonging to the spouse is gifted it to the community, which happens sometimes, if it’s refinanced, or retitled, or put into a trust with both people’s names. Now we’ve got a transaction that can change the property or the character of the property, but generally speaking, the character of the property doesn’t change at all. What happens instead is that the community interest develops an equitable lien. So the concept of community property upon divorce is that the community is divided equally equitably, which usually means equally, unless there is some good reason to be argued that in this particular case, an equal distribution would not be an equitable distribution. Now community lien is where the, in the example, I just said, where I buy the house. we own it for 20 years.
So after we get married and the community pays all the bills, the community is going to have a lien or an interest in the property because the community invested money in that house, the community pay the pay down the mortgage, maybe added a kitchen that increased the value of the property. And while the house is separate property of the spouse that owned it before they were married, the community gets to say, well, we have, we have an interest in it now.
How do you quantify that interest before we get to Rueschenberg? Let’s talk about Rueschenberg (case law dealing with community property between divorcing spouses). How do we quantify the interest? There are several formulas that are allowed in the case law, but the reason there were several formulas is because this comes down to a question of equity. There’s no hard and fast rule that tells you exactly how to quantify your community interest.:
You have to argue using data and the facts that you have then to determine how much of the value of the piece of property should be attributed to the community and how much should remain, separate. So, and it’s not a one for one. So let’s say that you, as the community pay down your mortgage by a hundred thousand dollars, well, you might be able to argue that a hundred thousand dollars is that community lane, but there’s no hard and fast rule. That would say that you’re exactly right. Or you’re exactly going to get that. and then when you add in all the other expenses, there’s no hard and fast rule that says the community is entitled to a hundred percent reimbursement because you can argue the community has received the value of living in the house and you would have had to pay rental income somewhere.
So this is where this is where there, because there is no hard and fast rules. Lawyers get paid more to argue and make, take positions and advocate on behalf of their clients. And hopefully come to a settlement that everybody can live with.
Now, let’s talk about Rueschenberg, probably the premier case on what happens when you’ve got separate property that grows during the marriage. How do you determine how much of the growth should belong to the separate spouse and how much of the growth should be given to the community? Now in Rueschenberg, the husband owned a dental practice prior to getting married. And, he, after he got married, he and his wife both worked in the dental practice. They opened several offices, the dental practice group. And when it came time to get a divorce, there was obviously an argument: Should any of this separate property business be attributed to the community?
The answer was yes, but it wasn’t quick. And it wasn’t easy. The first question was, how much did this business grow? How much was it worth when you got married? Now, most of us don’t go through the process of valuing our business and all of our assets prior to getting married, unless we’re getting a prenup.
And now, if we did a prenup, we don’t even have to talk about Rueschenberg, but you know, usually nobody plans to get divorced, but this is what we have to start our analysis with, or the same thing with the house.
How much was the house worth on the date you got married? How much was the business worth on the date you got married? And the only way to do that is really to get an expert opinion. And many times you’re going to get several different expert opinions.
And then you, you just argue in front of the judge, there’s nothing hard and fast about it, but you have to figure out first, how much was it worth on the date of the marriage? Then you have to figure out how much is it worth on the date? The community ended, so the community ends on the date. The petition is served and the affidavit of service is filed. Now there can be a big difference between that date and the date you’re divorced. It could be 18 months between the time that you filed to divorce, you serve that affidavit, you serve the petition, and you filed the affidavit of service. That is the date at we need to value that separate property asset secondarily, whether its the house or the business.
The next question is how much was the growth and what portion of that growth was due to community efforts? Because the concept of community property is any work done during the marriage that, uh, is for the benefit of the marriage. It’s, it’s back to the original concept of the community as its own entity, with its own interest. And unless you opt out of it, all of the work you do while you’re married is for the benefit of the community. So in the Rueschenberg case, they had to argue how much of this growth is due to increase demand for dental services or population growth that doesn’t have anything to do with community efforts versus husbands or wives work in the business that grew the business. Now, again, how do you quantify this?
The only possible way to quantify it is with expert opinion. So now you, you have to hire an expert and usually you’re going to have expert, but, there can be competing experts who get to take all these facts, like how much did the population grow and what was the general increase in demand for dental services and how much was, how much did real estate go up in value? And then, and then somehow magically, uh, is assumed you can figure out how much is due to community effort, and how much is due to individual effort.
Once you figure out what the community portion is, let’s say, let’s say the dental business grew by a million dollars and, you know, the experts let’s say they agreed that half of that was due to market forces. And half of that was due to community efforts. Then if the community portion is $500,000, each spouse gets half. So wife would get $250,000 for the community lien that is, on the separate property business, practically speaking, this is bad for everyone.
It just means months and months and months of those transaction costs and of battling in court. And it’s very difficult to settle a case where people think it’s fair under this set of circumstances, which is why it’s so important to do planning way before this happens.
As I said, this can be applied to absolutely everything, house trusts, stocks, property of any kind, let’s say, you know, you’ve got a, you know, I had a case that I worked on where, the husband had a ton of money, and he spent all of his time trading day trading. And so we argued that that was community efforts and that was a part of the increase in value. And it was huge. Part of the increase in value should be attributed to the community efforts. You can argue this concept for absolutely everything, which is why it’s very interesting to think about, you know, the various ways that you can move money while you’re married and what that means for the community. There is nothing that prevents me as a lawyer from making this argument under any fact pattern that increased the value of any asset during the marriage. So how can these assets be protected?
Let’s answer the questions first. “How do I protect my assets that I have inherited that are property held in my trust?” And I’m going to assume that it’s in the person’s probably revocable trust actually. I don’t know. I don’t know what kind of trust, but anyway, held into trust and money and a personal bank account. “My husband did not sign a pre-nuptial agreement as we live in the home now together.”
So if you’ve inherited property, it is separate property. If you want to, prevent the community from taking an interest in the property, then you need to be careful about major expenses. So how much is the mortgage? Are you paying the mortgage with community dollars or with separate dollars? Now there’s nothing that says you can’t use community dollars to pay a mortgage. You can. The thing that will be the bottom line on that will be, did paying the mortgage increase the value of your separate property? And even if it did, it doesn’t mean that all of that is split or all of that is community. The community would have need to pay money to live somewhere. was it a good deal or a bad deal? Did you pay the mortgage down super quick? Did you pay it down slowly?
What, what you need to mostly do is make sure that the title doesn’t change do not change the title, do not refinance the property and put both people’s names on it. and do not take a big chunk of community money and invest in the improvement in the home that will increase its value. If you avoid those things, you’re probably going to be just fine because the community is getting a benefit from living there. And that’s another part of the Rueschenberg analysis; when we did that $250,000 payment payment payout. How much did the community already receive? So in the form of money above and beyond wages. So that also impacts that final buyout number, which is not a simple answer, but I hope it answers the question.
Yeah, well, I think that’s really good. I mean, I think the answer is still, unfortunately, it’s kind of unclear and I, I have a couple of ideas that I want to, talk about, before that though. Uh, let me just mention for any of you who have not used zoom before, or as a refresher anyway, uh, if you want to raise your hand what you can do and actually, how do I do this? you go to actually, Billy, maybe you can help me. I think he’d go to, participants and then there should be a way for you to raise your hand
Yes. In the participants. you can see everybody and then you can, okay.
I don’t see it, I think because I’m the host, but you should be, there should be a way for you to raise your hand.
Yeah. So I’m not seeing the raise your hand, but if you go participants, you can chat in the bottom, uh, and you can chat to everyone or you can chat to any individual. So you could just me, or you could chat to Paul or to everyone. And then there’s also, uh, assigned for reactions. And so I can click a button that goes like that and do a thumbs up reaction, anything like that.
Thankfully there’s no thumbs down reaction. So you can only do, you can only do thumbs up.
I found the raise hand it’s it is under participants. If you see my little box right here, you see how the hand is raised.
Okay. I don’t think I see it. Darn it. I see her face.
Okay. So above my face here is the hand raise hand. Oh yeah. And now I can lower the hand and that is under,
Okay. Let me see if I can share my screen, go to zoom to, to do, to share screen. Okay. So I just wanted to go through a couple of, analogies or a couple of little stories to kind of give you an, some ideas of some of the things that I think can be done. So we’ll take, Dr. Jenny Jones here, not a real person, she’s unmarried right now. She owns a medical practice, uh, which is taxed as an S-Corp, which is very common to have a company’s taxes.
And the S-corp accountants and bookkeepers always suggest that it makes it makes great sense because they can save on the 7.6, 5% in FICA. But it’s not great from a asset protection standpoint, but there you have it- a very typical situation. So if she gets married the profits and income from the business would be community property, assuming that they result from the individual toil of Dr. Jones. And, please tell me if I’m wrong on any of this, because this is more your specialty, Billie.
So what if then she creates a management company, probably an LLC and enters into a management agreement? And just to start off, maybe it’s a $10,000 a month. And the provisions say that it can be changed on a annual basis. That management company can be owned by an irrevocable trust. That is in which, uh, Dr. Jones is not the trustee and she’s not a beneficiary.
For example, she might have her father be the trustee and maybe, maybe her kids, or if she doesn’t have children, maybe her nieces and nephews for example, could be the beneficiaries and that irrevocable trust and owns the management company. Then let’s say she has a house and let’s say this actually, would be a solution for the one question that the one person posed about having an inherited house.
Uh, let’s say that she just puts that house into a irrevocable trust. Well, why, why would she do that? Frankly, she could do that. for a couple of reasons. One simple reason would be just for asset protection so that she can protect herself. If she happens to get sued, she can protect herself. So she puts her house into another irrevocable trust. She’s not the trustee, she’s not the beneficiary. In other words, she’s not named on it anywhere. Then she gets married. If they later get divorced, the residents would not be community property because it’s not owned by either spouse. And frankly, if she gets sued it’s not up for grabs because it’s not in her name.
So then to address something that Billie was talking about to avoid the community lien on the house, any improvements should be paid for by something other than community property, probably, it could be paid for by the money out of the irrevocable trust there, or maybe she has another inheritance. So maybe she has some money from an inheritance or something like that. And then to further go along with this, a very typical thing for estate planning attorneys and for people in my field is to have a limited partnership. And the reason for the limited partnership is this. I compare it to, having a car that you drive around where the bank still owns the car because you owe money on it, but you have control of the steering wheel. So if you kind of follow that analogy, what I mean is with the limited partnership, you can have control by being a general partner, but most of the ownership of it is outside of your name.
So most of the ownership of that limited partnership can be owned by an irrevocable trust and be outside of your name. Again, like in the example we’re giving here where the father could be, the trustee, nieces and nephews could be beneficiary. So in that limited partnership, she can put a future inheritance from her parents, or actually she, if she has money that she saved up from prior to the marriage, she could put that in the limited partnership. And again, that would only be 1% owned by her, or 0.1% owned by her or something like that.
So then if she happens to get sued and there’s an injured party there with a cane, let’s say medical malpractice, insurance doesn’t cover it and it doesn’t cover everything. I’ve had situations where clients were doctors or, people in the health care industry were sued for sexual harassment or, or something like that. Well, that’s not going to be covered by, medical malpractice insurance. So in that case, yeah, the things that are outside of her name are not going to be up for grabs. So the management company or any money in that is not going to be available in the house and the inheritance is not available. And now let’s, this is actually an advanced technique. So I’m just kind of throwing an idea out there for, I guess how my mind works and in terms of how to, come up with different ways to protect assets.
So in this, in this case, okay, say Dr. Jones got sued for $500,000, and, uh, the malpractice insurance isn’t going to cover anything. Well, let’s say that maybe the limited partnership could actually settle with the, with the plaintiff for, you know, some, some fraction of what was what was owed, which is kind of the way that lawsuit settlements typically work. But the limited partnership actually buys the full value. So now, the limited partnership has a hold on. Yeah. Now that limited partnership has a $500,000 judgment lien against Dr. Jones against her personal assets. And again, that’s not, that’s not community property. Okay. So let me, let me back up here. Why in the world would you want to have a judgment lien against yourself? That sounds horrible to people, right? But in this case, what we vote, I didn’t mean it in this case, what we’ve done is we’ve, uh, we have a friendly lien.
It’s actually a lien in favor of her limited partnership. And so what that actually does is if she is then sued again in the future, her limited partnership can garnish her wages. And, uh, she actually, and so the way wage garnishment is it’s first come first serve. So her partnership has dibs on the garnishment and that puts her in a much stronger position. So what I like to tell people a lot is that, asset protection planning is not a one and done kind of deal. It has to be done on kind of on an ongoing basis. And, it’s like a fine wine. It gets better with age. And, like as, as you put some things in place like the partnership and these other trusts, and then as life circumstances happen, and you kind of revisit it, you find different opportunities for making improvements.
So, and then just a couple of other things that are, possible here would be, a line of credit from the limited partnership, let’s say she has an inheritance, or she has some other money in there. She can extend a line of credit there to herself and secure that by her personal assets. She could also do a sale of assets to her limited partnership. So what would that be? Well, that might be maybe she has some rental properties or something like that, and she wants to get those out of her personal name. So what she could do is, sell those to the limited partnership, uh, in exchange for a self canceling note and the terms of the note, you know, again, because you’re, you can’t get too crazy with these things.
I mean, they need to be commercially viable, but, it’s not crazy to make one of the terms of your promissory note, your installment note, being that if you’re financially insolvent or file bankruptcy, those are common conditions for a promissory note to, to be due on sale or to be, to be immediately due. And, another thing you could just throw in there, if you’re, if you’re later subject to a divorce, the limited partnership has the right to deem the assets at risk and to secure those assets.
So feel free to chime in Billie if you have any other opinion. but that any way that would be an example of something that, that could protect you. Another thing would be a irrevocable life insurance trust, where it’s not owned the way life, life insurance trusts work.
They’re not owned by you. The original purpose was years ago when the estate tax amount, uh, the estate tax exclusion was a lot lower. And so people would put life insurance in a trust and have it outside of their estate. So what I’m suggesting is to use basically the same type of situation, and, maybe you don’t need it for estate tax reasons, but you can get it outside of your estate. And because it’s not in your name, it’s, it’s then not going to be subject to, uh, to a later divorce or anything. So, anyway, those are just some basic examples.
Some thoughts on this: so the community, either person in the community and bind to the community, which means a gift of your community assets, or a transfer of your community assets to a third party is not per se prohibited, right? There’s nothing that stops me or anybody who’s married. I’m not married, but, you know, if I were married, there would be nothing that would stop me from spending the money of my law practice, the way I wanted to including giving it to some other entity that I didn’t own. I would be allowed to do that the same way. You know, my husband would be allowed to give money to a church. There’s nothing that prohibits that.
Like there’s no rule that you’d be a good business owner or be a good business person.
Exactly. You are not required to be a good steward on behalf of the community. You’re not. But you are, if you commit concealment of community assets or community waste or fraud against the community, then the community could come back and make a claim for that. So what does that mean? It means that these, these there’s no case law on what it is that you are proposing. So neither of us can predict exactly how this would end, but, but, we have enough principals too, to know that, if it looks like I’m trying to hide assets and be shady, then a smart lawyer is going to make a claim against that. However, if this is part of your strategy, you’ve been doing it a long time. and you know, if you’ve put money, if you’ve gifted money outside the community to, you know, your, your children or whoever those beneficiaries are, if you’re not the beneficiary, then I think a judge would have a really hard time, you know, making that decision for community lien, what you would need to do as a lawyer is start joining all of those third parties, but it would be insane.
And it would probably end up settling, or you could litigate it forever. If you just didn’t want to ever settle. Even if you got a judgment against you for money in that limited partnership, you could appeal it. You would be doing that forever. So it’s something to think about.
It makes sense. I mean, for work with a lawyer and I guess that sounds self-serving, but work with someone before you do that. And for sure, setting all this stuff up works much better. Doing this works much better if you’re doing it before you get married, of course. And after you get married, I think that there’s a lot more danger that you’re going to be accused of concealment or waste or fraud.
That’s totally true. But, and the other side of the coin is if you found yourself married with no prenup and you think there’s a possibility of divorce, you have to take some action now, for sure. And there are options. And I think that’s, that’s the biggest thing that I’m learning from Paul is like, there are options married, people can take to protect assets. And you just have to be smart, know the risks.
Right. Well, and this is going to sound really shady and slimy, so please please know that in real life, I’m not that kind of person. I certainly try not to be, but that being said, something that I have seen people do is work together for the purpose of asset protection to transfer community property or marital property outside the marriage. And then, and maybe one of the spouses has an ulterior motive of later wanting to get a divorce. I mean, that’s kind of shady, I guess, but it’s not technically concealment because the other spouse participated and it’s not waste and it’s not fraud.
That’s a great point, intent matters. And if you can show you were doing this for some other reason, except to conceal assets from your, you know, your future spouse, that’s going to be important. That should be part of your planning.
So here, there’s a question.
“If you put real estate assets into a trust, what taxation is used when the asset is sold: capital gains tax or ordinary income.”
Okay. So the kind of trust that I would suggest using is one that’s disregarded from a tax standpoint. So from a tax standpoint, the trust doesn’t even appear on the tax return. There’s no separate tax return. There’s no separate addendum on your tax return or whatever. So for example, that situation that I was showing before with the limited partnership and the two different trusts, in that situation, the only additional thing you have on your taxes as a limited partner is a partnership tax return. And, the CPA charges, maybe about $350 a year for that. but it doesn’t actually increase your taxes. So however the asset would be taxed on to you personally, is just the way it’s taxed. Longterm, if you’re holding real estate for a certain amount of time, it’s probably taxed as capital gains.
I’m not sure that we necessarily answered everything, Billie. How do you feel about prenuptial agreements?
Well, prenuptial agreements make all of this a lot easier. Because you get to decide in advance when you’re on the same team; how do we want to settle our assets, and how do we want to conduct ourselves in the event of our divorce? People think a prenup has to say certain things. It doesn’t, it can literally say anything you want. It could even, simply outline a process for determining what your future, arrangement might look like. And just because you do a prenuptial agreement does not mean that the, that the issue is closed. I don’t know how many of you read the very interesting article about how Melania Trump renegotiated her prenuptial agreement before agreeing to move to Washington DC. When her husband became president, she stayed in New York under the, under the guise of Baron needing to finish school here in order to renegotiate because the situation had changed.
So it’s not necessarily a one and done thing. and you know, the last thing any of us want is adversity with our spouse. But if we’re, if we’re dealing in good faith from the beginning, but also kind of from a more practical standpoint of like, you know, we may be in a position one day where this has to be done and do we want to do it? The hard way that I discussed the beginning with competing experts, trying to figure out are, are our assets value at different dates and time and attributions of weight, and then have a judge maybe not even understand, or do we want to take that into our own hands and figure out what works better for us? I always think that’s the better way to do it.
It actually makes sense. It actually makes sense. Explain what you said about Melania Trump. What did she do?
Well, when she got married, I think she was the fourth wife of, of Donald Trump, I think. And there was a prenup in place. She’s been married the longest, I think, out of the four wives and prior to agreeing to move to Washington, DC, you’ll remember that he went there first without her, and then it later came out that she refused to go. And she was in the middle of renegotiating that prenup, because she had some leverage now that she didn’t have when she first married the Donald’s. so I, I thought that was one of the most interesting things that,
And I’m sorry, what, what was her leverage?
Well, Trump was sleeping with a stripper (while they were married) and he really wanted his wife in the White House. And she’s like, I’m not coming. I’m not coming unless you, agree that we need to redo this deal.
Okay. Well, good. so I feel like we don’t have a real clear cut answer for everyone, but I think the answer and tell me, tell me if this is a good summary. I think the answer is that a prenuptial agreements are a good idea, but if for some reason you feel like you don’t want one, you don’t want to do it. Uh, there are some options it’s just that the options may not, may be a little bit more difficult or may not be as perfect as having a prenuptial agreement.
Well, yeah, and I think the bottom line, what I’m learning from this from you is there are a lot of options and planning beats doing nothing every day of the week. If you’re in a position where you’ve got assets to protect either from a divorce or from anything else, talk to your attorney, because there are things you can do. There are decisions you can make now that will change the position that you’ll find yourself in if you do nothing
Great, okay. There aren’t any other questions, uh, and I don’t see any hands raised. So, I think we’re good.
Oh, there’s one other question.
“What can cannot be controlled by a prenuptial agreement, say child support or alimony.”
Great question. you cannot in your prenuptial agreement decide who gets custody of your kids and you cannot contract around child support. So you could probably agree to pay more child support, but you can’t. It would be to the best interest of the children to agree to no child support. So those are the two things that are off limits and legal decision-making. You know, you can’t really contract to have somebody have the decision making authority over the children, but you absolutely can for alimony.
Okay. Very good. Well, thank you so much. And then if someone wants to contact you, how, how should they do that?
I’m pretty easy to find. My email address is email@example.com. And if you just Google Billie Tarascio or Modern Law, you can absolutely find me. And if you want to chat about this further, or you have other ideas, I mean, you know, Paul and I are brainstorming and spitballing, cause there’s a book on this. So if you’ve got ideas, please chime in, we can all get smarter together.
Yeah. And if anyone wants to reach me, you can do it at (602) 443-4888 or, firstname.lastname@example.org. And there’ll be a little link for both of us in the, when we put this on YouTube. So great. Thank you, Billie. Thanks guys. Bye. All right. Take care, everyone.