Safeguarding Your Legacy From Property Division In A Divorce

You have worked hard your entire life to pass your legacy on to your children, grandchildren, and generations beyond. Like many people, you may wish to keep your hard-earned assets within the family, which is jeopardized by the unfortunate but ever-present possibility of a divorce. Without certain structures and provisions in your estate plan, there is a good chance that the bequests to your descendants may end up in the hands of an ex-spouse. Learn how to protect your loved ones’ inheritance from Property Division in a Divorce, and how Jurado & Farshchian, P.L. can help.

Property Division in a Divorce: How it Works

Absent an effective marital agreement, upon a dissolution of marriage, the following typically occurs:

• Each spouse keeps his or her nonmarital assets. Also known as separate property, these are assets that were owned by an individual spouse prior to the marriage and were unchanged by the marriage. An example would be the funds in a bank account that is solely in the individual’s name. However, any funds transferred to a joint account between the two spouses would constitute marital assets.
• The couple’s marital assets are subject to equitable distribution. These include assets acquired during the marriage jointly and individually, gifts exchanged between the spouses during the marriage, and all vested and nonvested benefits, rights, and funds accrued during the marriage in retirement, pension, profit-sharing, and insurance plans, among other examples.

Moreover, the wealthier spouse may be ordered to pay alimony to the less wealthy spouse, based on a calculation of the wealthier spouse’s income. The way marital assets are distributed, as well as how alimony is determined, may be affected by your inheritance structure.

Avoiding the Risks of an Outright Gift

Many people prefer to leave their inheritance to descendants via an “outright gift,” which is any transfer wherein all title and rights in the transferred property are vested in the recipient. This can be done either at death or by providing for mandatory distributions at set intervals.

However, an outright inheritance can prove detrimental to your descendants during a Property Division in a Divorce. Despite the general rule that assets by gift or bequest are nonmarital assets—and thus cannot be subject to equitable distribution—the “doctrine of transmutation” provides that, in certain circumstances, a nonmarital asset may change its character and become a marital asset. Whether the inherited assets are intentionally or inadvertently converted to marital assets, they can still be subject to equitable distribution upon divorce.

Examples include if the inherited assets get transferred to a joint financial account or are used in renovating a home to which the spouses have joint title. A nonmarital asset can also be converted to a marital asset by interspousal gift, which requires showing donative intent, delivery, or possession of the gift, and surrender of dominion and control of the gift. Title to the property alone is not a factor in determining whether an interspousal gift has occurred. In 2017, the Florida Supreme Court ruled that a husband made interspousal gifts of two real properties—which therefore became marital assets subject to equitable distribution—even though title remained solely in his name and there was a valid premarital agreement providing that each party would retain his or her premarital assets upon divorce.

A transmutation risk is just one of several possibilities to be concerned about. Even if a nonmarital asset escapes characterization as a marital asset, it might still be taken into account to reduce a descendant’s share of the marital assets upon divorce. This so called “offset risk” comes at the judge’s discretion, based on the “economic circumstances of the parties” and “any other factors necessary to do equity and justice” between them. Thus, a court can award more than half the marital assets to the less wealthy spouse by considering the value of each spouse’s nonmarital assets. That means a descendant who received an outright inheritance might get a lesser total value upon divorce due to the inheritance “offsetting” and thus reducing the marital asset share. A similar calculation of nonmarital assets my lead to otherwise larger payments of alimony.

In short, there is no telling if your bequests to loved ones will eventually end up in the hands of an ex-spouse at some point down the line. Not only must you hope that your descendants strenuously manage their marital and financial affairs, but even if they do their best, there is always a chance that a court may rule otherwise.

Protecting Your Legacy from Property Division in a Divorce

Fortunately, there are several ways to avoid or minimize the risks set forth above. A common approach is to have your heirs execute a marital agreement explicitly protects inherited assets from a property division upon a divorce. However, even if you can convince your descendants to enter into an agreement, they can always be changed or terminated, and you will have little capacity to oversee how your descendants manage their bequests. Moreover, as mentioned before, courts have and may still find such “protected” assets subject to equitable distribution.

A comparatively stronger solution is an irrevocable discretionary trust with spendthrift provisions. As long as the assets are kept in the trust, they will generally not be considered marital assets subject to equitable distribution. Nevertheless, your heir’s beneficial interest in a trust could potentially be factored into whether to impose an unequal division of marital assets, while distributions from the trust used to support the marital lifestyle will likely be considered in determining alimony. So, while an irrevocable trust may protect against transmutation risks, it may still be vulnerable to the offset and alimony risks, respectively.

Fortunately, with the right language, a trust can provide further insulation of your bequeathed assets. For example, it should avoid any provision that could be interpreted by a court as enforceable rights, such as to withdraw assets, demand distributions, or appoint assets to creditors. The trust could also empower the trustee to limit or stop distributions to the beneficiary if the marriage appears troubled, reducing the risk that the trust distributions will be taken into account for alimony purposes.

Contact Jurado & Farshchian Estate Planning Attorneys Today

These are just a few of the ways that you can ensure your legacy remains within your family as intended. No two estates are the same, and our attorneys have ample experience drafting estate plans that consider the particularities of each client, including whether and how they wish to protect their assets down the line. To learn how we can protect your assets, call us today at (305) 921-0440 or send us an email to [email protected] and we will assist you.