You’ve worked hard and have accumulated assets that will benefit the next generation, namely your kids and grandkids. Throughout this perilous journey, you taught your kids the value of a dollar and your mind is at ease that they will inherit wealth from created with their comfort and prosperity as a central focus.
One day, your daughter, who has inherited the result of your hard work and sweat, meets Mr. Right. They marry, buy a house together, and merge their bank and brokerage accounts. What took you years to build for your daughter and her future may potentially now be half-owned by your son-in-law, if the default laws of your state so dictate.
Understanding Property Classifications
As it relates to married couples, property owned by a couple is either classified as Separate property or Community property.
Generally, anything that a person acquires while they are married is considered, by default, as community property, unless agreed otherwise. For example, money you earn from work that is deposited into a joint bank account or a house purchased during marriage constitute community property.
Unlike Community property, Separate Property describes assets that belong to one spouse specifically to the exclusion of the other spouse. Separate property includes property that was owned prior to the marriage or assets that both spouses agree will belong to just one of the spouses in case of a divorce. An inheritance is also, by default, the Separate Property of the recipient spouse, assuming you don’t fall into a trap set by a divorce attorney.
To illustrate, a condo that you owned before getting married is considered your separate property. Gifts and an inheritance received while married but kept in a separate account are generally considered Separate Property.
Co-mingling – How Things Get Murky
When assets that are your separate property are inadvertently mixed with assets that are community property, a divorce lawyer will argue that you co-mingled funds; therefore, giving a divorcing spouse a right to some of the assets that you thought were only yours. If you co-mingle funds, you may run the risk of turning Separate property into Community property. For instance, if you deposit your inheritance into a joint account shared with your spouse and proceed to pay your mortgage and other marital expenses, you have unwillingly converted your separate property into community property.
A second example may be when you use community funds to make improvements on the separate property. So in the case of the condo you owned prior to marriage, using funds from your joint account can potentially convert the condo into marital property.
In the United States, there are two sets of laws that govern marital property. These are divided in to Community Property States, and Equitable Distribution States.
Community Property States
States such as California and Texas are considered community property states. In these states, if you acquire property while married, your spouse owns and equal amount of the property even if their name is not on the property. As an example, you buy a car and register it under your name only. In California and Texas, that car equally belongs to your spouse.
Equitable Division States
In these states, when a divorce takes place, a property owned by a married couple is not automatically considered to be equal in shares. For example, the rental property that you and your spouse purchased may be divided along the lines of the contributions each of you made to the acquisition and preservation of the property, which considers a multitude of factors.
Divorce and Beyond
The reality is that all partnerships, whether personal in nature or business, will ultimately come to an end. These will either come in the form of voluntary separations or involuntary. Unless you plan ahead and take the necessary steps to protect your interest, you may be exposing yourself to creditors, predators, in-laws and outlaws.
You have no doubt heard about people signing prenuptial agreements as a way to protect themselves in cases of divorce. However, there are two problems with this approach that may not give you the protection you need. First is the legal execution of such agreements, and the second is the personal impact on the relationships.
While prenuptial agreements serve a specific purpose, they are subject to scrutiny when challenged. Everything from the original drafting, negotiation and to the fairness of the agreement may be challenged. In other words, you are still leaving it up to a judge to decide if it was appropriate.
The second issue is on a personal level. Imagine your daughter meets Mr. Right, they are happily in love, you are excited, approve of him and get along with his parents. Everything is going great and leading up to the big day your daughter asks your future son-in-law to sign a document. All he hears at this point is that neither you nor your daughter trusts him, and the entire wedding is now in jeopardy.
While divorce may not be a concern for some, keeping properties separate has other practical benefits, such as keeping them outside the reach of bad actors associated with your son-in-law.
For example, assume your son-in-law is an entrepreneur, a man after your own heart. In one of the deals that go bad, he exposes his assets to creditors. If your daughter’s assets are now part of the marital property, the creditor now potentially has access to the money you left for your daughter.
How To Protect Through Asset Protection Strategies
Asset protection involves the utilization of the law to keep others from gaining access to your assets through civil judgments. Let’s be clear: Asset Protection is NOT hiding money. That would be fraud, plain and simple.
There are things that you can do to protect your assets and there are other things that you can do that will require the help of a qualified attorney and financial professionals.
For example, let’s look at your personal residence. In the state of Texas, you have what is called a Homestead Exemption, which essentially bars your creditors from being able to force you to sell your house to satisfy a judgment. So you may add a layer of protection by purchasing an Umbrella policy. If you want to take it further, with the help of a qualified attorney, you could create a separate property agreement and move the house to the spouse that has “less risk”. If needed, you could further take the steps of moving the property into a trust.
Certain assets that you may own are automatically protected, however, depending on the state, there may be limitations. Keep in mind that state laws are not uniform and limits of protection may be drastically different across state lines.
Typically, tax qualified retirement plans, your homestead, cash values of life insurance and non-qualified annuities enjoy some levels of exemptions. However, as stated above, there may be limits. For this reason, a qualified attorney working alongside a qualified financial professional can help with strategies to enhance the protection.
While you cannot control what happens in the future, you can take steps now to remove certain and unnecessary risk from manifesting themselves or at least mitigating the damage that they can cause. By properly planning ahead of time, you not only protect your and your family’s financial well being, but you can also ensure that the harmony with your future in-laws is not disrupted due to financial concerns.