Divorce is never easy, and when significant wealth is involved, the stakes are even higher. If you’re a high-income earner in your 30s or 40s, it’s crucial to understand how to protect your assets and financial future before, during, and after the divorce process. In this post, we’ll cover key strategies to help you safeguard your wealth when facing a potential divorce.
1. Prenuptial and Postnuptial Agreements
One of the most effective ways to protect your wealth is through a prenuptial or postnuptial agreement. If you’re already married and didn’t sign a prenup, don’t worry—it’s not too late to create a postnuptial agreement. These contracts clearly define which assets are separate property (yours) and which are marital or community property (shared between you and your spouse).
For high-net-worth individuals, these agreements can address everything from investment accounts and real estate to business ownership and future income. Without one, you risk having all marital assets divided, which could include earnings and assets acquired during the marriage.
2. Separate vs. Community Property
In Texas, assets acquired during the marriage are considered community property, but there are exceptions. For example, assets like inheritances or gifts to you alone are typically classified as separate property, provided you keep them in your name and don’t co-mingle them with community property.
One strategy is to avoid mixing separate property with community property. For example, if you inherit a large sum of money, keep it in a separate account and don’t use it for joint expenses or purchases with your spouse. Once separate assets are commingled, they can become community property and subject to division.
Keep your account statements
Even if you keep your separate property funds and investments in separate accounts, without a prenup or a postnup, the income (not appreciation) on those funds is community property. In a prenup or a postnup, the parties get to make their own rules–in effect write their own law. The document retention period for financial institutions is seven years. If your marriage lasts more than seven years, but ends in divorce, it will not be possible to get statements from before the marriage and for each reporting period during the marriage. Therefore, if you have a separate property account that generates even modest income, it will become a mixed asset account without a prenup or a postnup.
Trusts
A trust is a wonderful vehicle for protecting separate property. For one thing, property is characterized as separate, marital, or community according to the laws of the state where the divorce is taking place. With only nine community property states in the United States, a divorce in 82% of the U.S. will involve marital property laws without community/separate property protections. A trust that was properly set up by an estates and trust specialist can provide bullet-proof protection to your separate property.
Risk comes from not knowing what you’re doing. –Warren Buffer
3. Protecting Business Interests
For high-income earners who own businesses, protecting your company is critical. The best way to do this is to ensure the business remains classified as separate property. This can be handled with a prenuptial or postnuptial agreement, but if you didn’t create one, there are still steps you can take.
Keep detailed financial records, avoid paying for personal expenses through the business, and ensure that your spouse doesn’t contribute financially or operationally to the business. The goal is to show that the business’s growth and value are separate from your marriage.
4. Be Mindful of Lifestyle Choices
Your lifestyle during the marriage can have a huge impact on your divorce settlement. Courts may consider the standard of living established during the marriage when determining post-divorce spousal maintenance.
If you’re in the process of divorce, adjusting your spending and documenting your financial habits can help. Cutting down on extravagant expenses before and during the divorce can demonstrate that the lifestyle is unsustainable without two incomes, potentially reducing long-term alimony obligations.
5. Tax Implications of Divorce
High-income earners often face significant tax implications when assets are divided in a divorce. Transferring stocks, retirement accounts, or real estate can trigger substantial tax consequences if not handled correctly.
Working with a tax advisor or financial planner early in the divorce process can help minimize the tax impact. For instance, Qualified Domestic Relations Orders (QDROs) are often used to divide retirement accounts without triggering early withdrawal penalties or taxes. Understanding these tax strategies can save you a lot of money in the long run.
Generally, in-kind transfers of assets in divorce do not trigger tax implications. Dividing by sale will almost trigger long-term or short-term capital gains.
6. Build a Team of Experts
Divorcing as a high-income earner means you’ll need more than just a lawyer. You’ll want a team of experts—including financial planners, accountants, business valuation experts, and tax advisors—to guide you through the process. They can help ensure that all financial aspects of your divorce are addressed and that your wealth is protected.
Final Thoughts
Divorce for high-income earners can be complicated, but there are steps you can take to protect your assets. From drafting prenuptial or postnuptial agreements to understanding the tax implications of asset division, it’s essential to be proactive. Working with the right legal and financial professionals will give you the best chance of walking away from your divorce with your wealth intact. You will be the CEO of your team and your lead counsel will be the Chief Strategy Office and Chief Operating Officer.
If you’re concerned about protecting your assets in a divorce, don’t wait. Contact an experienced family law attorney today to discuss your options and take the steps needed to safeguard your financial future.