How to Protect Assets From a Divorce

Anyone who makes the commitment to get married is most likely not thinking about the relationship's demise. Similarly, many parents and grandparents don't factor the possibility of an heir's divorce into their estate planning. But the reality is that a lot of marriages end that way—and putting safeguards in place to ensure assets go where they should in the future may even help ease tension in the present.

Here's how to help ensure that your assets will go where you intend, if the marriage should happen to go off course.

Any couple on the verge of marriage should talk through how they'll combine accounts, share assets, use each person's income, and split expenses. These conversations should also include how each person wants their individual and shared assets to pass—whether to each other, their children, or even other inheritors or charities.

If one or both of you are bringing significant wealth to the union, these conversations should include discussion of a prenuptial agreement. When you get past the jokes and stigma that many associate with prenups, such an agreement can be beneficial to everyone involved. If both individuals are open and honest about their intentions and concerns, the creation of the agreement should go smoothly, and the process may help clarify your individual and shared wishes.

For example, consider a later-in-life union in which children from a previous marriage worry that their mother's new spouse could have a claim on the family's significant assets. (This is a common concern, especially if there's a large difference in wealth between the two people who plan to wed.) To help ease her children's concerns, she might propose a prenuptial contract in which each spouse gives up all rights to the other's assets if they were acquired prior to the union—but which offers her new spouse financial support, if they remain married for a minimum number of years or other conditions are met.

You should also consider how the prenup factors into your overall estate plan. If you want the terms of the prenup to apply after death, for instance, you could include a clause in which each spouse gives up rights to their "elective share," which is the surviving spouse's legal claim to a share of the estate regardless of what's in a will or trust. Whatever terms you decide, revisit the agreement every few years to ensure it still reflects your circumstances and wishes.

Beyond prenups, other ways to protect assets in the event of divorce or death include:

• Beneficiary designations: 401(k) retirement accounts are subject to special rules that protect a surviving spouse's right to the assets. If you want the assets to pass to someone other than your spouse upon your death, your spouse will need to sign a waiver consenting to a beneficiary other than themself. Having a prenup or changing your beneficiary isn't enough—you'll need a notarized consent form to make the change.
• Postnuptial agreements: If allowed in your state, you may be able to create a binding agreement after you get married that outlines how you and your spouse will divvy up separate and shared assets, if you later decide to dissolve the union. 
• Trusts: If structured properly, a trust can help protect assets in the event of divorce, provided all assets in the trust are treated as separate property and none of the distributions are commingled with marital assets. Trust laws are complex and vary by state, so be sure to consult a trust attorney well in advance to ensure timely protection of your assets.

The last thing you want is for your estate to end up in the hands of an heir's ex-spouse, but that's a real risk if protections are not established ahead of time.  

The most important thing to know—and to communicate to heirs—is that inheritances need to be kept entirely separate from marital property in order to protect them from potential divorce. If assets are ever commingled—such as for the down payment on a home they'll both own—they become part of the marital estate and subject to division in the event of divorce.

Protecting an heir's inheritance will require their close cooperation. Here are some steps each of you can take to safeguard the assets.

What they can do:

• Maintain separate accounts: A bank or brokerage account solely in the name of the heir—with "separate property account" as part of the account title, if possible—can help establish the division between separate and marital property. What's more, funds used for shared expenses, such as a mortgage or other family bills, will be viewed as marital assets even if kept in separate accounts. 
• Keep documentation: It's critical to preserve any documents—such as an affidavit of inheritance or a copy of the will—that establish the heir as the sole recipient. These can be important to prove the intent of the person who provided the gift or bequest.
• Ensure assets are titled properly: For property that has been gifted or inherited, such as real estate or a vehicle, the asset should be titled in the individual heir's name. If the heir titles the asset jointly with their spouse, the court is likely to consider the asset marital property.

What you can do:

• Consider a specialized trust: In particular, two types of trusts may prove useful:
  • Discretionary trust: With this type of irrevocable trust, the grantor would designate the heir as an individual beneficiary while giving a trustee—not the heir—full discretion over disbursements. Additionally, the trust cannot have a history of supporting the family of the beneficiary, and trust documents cannot mandate distributions.
  • Domestic asset protection trust: Typically used for protection from creditors, this type of trust may be useful in protecting assets from divorce claims, including alimony. Several states have favorable laws for this type of trust, but the trust and trustee must be sitused and located in those states to take advantage, respectively.