Love & Money

Protecting your client’s assets before they tie the knot goes beyond traditional prenups. By Janet Haney | INSIGHT Archives

Romance isn’t all wine and roses. The nation’s divorce rate is proof of that. In fact, marriage is just as much about protecting assets as it is about love these days.

“You don’t know what the future will bring, so arm yourself with the best defense,” advises Mark Gilbert, CPA/PFS, of Reason Financial Advisors. “Look at your future spouse as a future creditor down the road.” That might not seem the most romantic sentiment, but it is, perhaps, the most practical.

A recent University of Pennsylvania Wharton School of Business study reveals that divorce rates in the United States fluctuate depending on age, education and length of marriage. "The ubiquitous 50-percent divorce rate is unlikely to ever be true for those who married in the past few decades," says Betsey Stevenson, assistant professor of business and public policy at Wharton. "For many of these folks, their divorce rates so far have fallen substantially compared with previous generations."

So why worry? “My view is that it is less expensive if you have a premarital agreement that delineates what is marital property and what the rights are to maintenance,” says Barbara Grayson, partner at Mayer Brown LLP in Chicago. “Without a premarital agreement, there is room for more vigorous litigation. Since a premarital agreement is negotiated when the future spouses are feeling more fondly about each other, they will be more generous,” she says. “What clients are worried about is facing a long, drawn-out court battle.”

Commonly, spouses-to-be will establish either a revocable or an irrevocable trust to protect individual or business-related assets.

The grantor of a revocable trust determines who will serve as the trustee and who the beneficiaries will be upon death. The trust is considered part of the grantor’s estate, and assets are therefore subject to individual taxation. The trust can be changed or cancelled during the grantor’s lifetime, and contributions can be withdrawn while the grantor is still living.

The grantor of an irrevocable trust, on the other hand, cannot take contributions out of the trust, but can give away assets held while he or she is still living (in cases of succession, for example). The downside is that the grantor effectively eliminates all of his or her rights of asset ownership. On the upside, he or she is relieved of tax implications on the income generated by the assets.

“The separation of assets is the most important thing. If you have assets keep them titled in your name,” says Kevin Metke, private client advisor in the tax practice at Deloitte & Touche in Chicago.

This means keeping bank accounts and titles to homes and businesses independent. Each person also should be represented by his or her own attorney.

Gloria Birnkrant, CPA, partner at NSBN LLP, suggests that both parties attach a signed balance sheet to the prenuptial agreement, acknowledging which assets will remain separate. Non-marital property such as a house purchased before marriage, an investment portfolio or an inheritance generally goes back to the individual who holds the title.

There are exceptions, however. “How property is held can differ from state to state, and the rules covering property rights differ from state to state,” Birnkrant warns. If the assets increase in value during the marriage, or if a spouse buys additional property with income from the original assets, it might all be tagged as marital property upon divorce.

“Meticulously maintain the separate property and the income from it so that the separate property doesn’t get co-mingled with the community property,” Birnkrant advises. “This is the usual problem for couples and creates issues concerning which property is really separate and which property, by co-mingling, has become community. Keep detailed records of the source of the assets and the income from those assets.”