Premarital Residence Divided Equally Between Spouses in Divorce

Posted on April 15, 2011 by Bryan Howard

In the Liner divorce case, the court awarded 1/2 of the equity in the husband’s premarital residence to the wife. As a general rule, assets owned by one spouse prior to the marriage are treated as separate property and are not divided in the divorce. There are some exceptions, including the division of appreciation of the property if the non-owner contributes to the appreciation. This case did not involve appreciation. Rather, the wife was awarded 1/2 of the house primarily because she made non-financial contributions to the ongoing maintenance and management of the residence.

This case demonstrates the importance of entering into a prenuptial agreement or an asset protection trust prior to marriage. Assets that you transfer into an asset protection trust prior to the marriage will belong to the trust and will not be subject to division in the event of a divorce.


 

Tags: , , , , ,

Wife Receives Joint Assets Upon Divorce Due to Prenuptial Agreement

Posted on August 6, 2010 by Bryan Howard

In recent years, I have seen a tremendous increase in the use of prenuptial agreements. I attribute this to high divorce rates, as well as increased awareness of the potential benefits of prenuptial agreements.

Death and divorce are the two primary circumstances governed by prenuptial agreements. Generally, the agreement details the provisions that will be made for the surviving spouse upon the death of the first spouse. The agreement also details the division of the couples’ assets upon divorce.

A recent case decided by the Tennessee Court of Appeals demonstrates the divorce protection provided by a prenuptial agreement. Mrs. Cummins spent more than $2 million buying two separate homes which were titled jointly in the names of Mr. and Mrs. Cummins. Due to the wording of the prenuptial agreement, Mrs. Cummins was awarded both homes.

Mr. Cummins claimed that he was entitled to 50% of the appreciation of the homes. The Court awarded all of the appreciation to Mrs. Cummins since she had paid all of the property taxes, insurance, and maintenance expenses associated with the homes.

Mrs. Cummins was very fortunate to receive 100% of the homes. Even when there is a prenuptial agreement, both spouses generally share in the value of homes that are titled jointly in the names of the couple. Mrs. Cummins could have saved the aggravation and expense of this lawsuit if she had titled the homes solely in her name.

Tags: , , ,

Pre-Marital Planning Can Protect 401(k) Plan Upon Divorce

Posted on October 15, 2009 by Bryan Howard

A recent decision by the Tennessee Supreme Court (PDF) ruled that the entire increase in value of a 401(k) plan that occurs after marriage is a marital asset that is subject to equal division upon divorce. It does not matter whether the increase in value is attributable to appreciation of the assets that were held in the plan prior to marriage or contributions that were added to the account during the marriage. The pre-marital balance of the plan was separate property that was not subject to division.
 

The case confirmed that IRAs are treated differently. Appreciation of a pre-marital IRA that occurs during the marriage continues to be separate property and is not a marital asset subject to division upon divorce, unless the other spouse substantially contributed to its preservation and appreciation.
 

There are two lessons to be learned from this case. First, keep good records that demonstrate the account balance of the 401(k) plan on the date of your marriage. Second, if your 401(k) plan permits in-service withdrawals, you should establish an IRA, rollover your 401(k) to the IRA prior to your marriage, and exclude your spouse from making any investment decisions for your IRA.

Tags: , , , , , ,

Making Gifts to Your Granddaughter's Future Ex-Husband

Posted on September 9, 2009 by Bryan Howard

Wealthy grandparents often make gifts to their grandchildren. A grandparent can give $13,000 per year to each grandchild without incurring gift tax. If gifts are made over several years, estate taxes upon the death of the grandparents can be substantially reduced.

There is a hidden trap in making gifts. The danger is that your grandchild may get divorced in the future. Some states consider all property owned by either spouse to be marital property which is subject to a 50/50 division upon divorce.

The problem is illustrated by a family that I now represent. The grandmother made gifts of stock of the family business to her granddaughter in the 80s and 90s. The grandmother died in 1997. Two years later, her granddaughter married a man the grandmother never met.

I did not know the grandmother, but have represented the grandmother’s daughter for the last several years. The daughter continued her mother’s pattern of making annual exclusion gifts to her daughter. Rather than direct gifts, the gifts were made to a Cristofani Trust (pdf) that benefits the daughter’s husband and all of her children and grandchildren.

The granddaughter recently obtained a divorce in a state that treats all property owned by either spouse as marital property. In accordance with state law, the judge awarded one-half of the granddaughter's stock in the family business to the granddaughter’s husband.  The net result is that when the grandmother made gifts to her granddaughter, she was also making a gift to her granddaughter’s future ex-husband.

The stock awarded to the ex-husband was subject to a Shareholder’s Agreement, which allowed the company to purchase the stock from the ex-husband. As you might imagine, the family was upset about having to buy back the stock.

The laws of the states where the grandmother and granddaughter lived at the time of the gifts would not have included the gifts in the marital estate if the granddaughter had obtained a divorce in either one of those states. However, division of property is determined by the state in which the couple resides at the time of the divorce.

Fortunately, because the gifts by the daughter were made to a trust, these gifts were protected in the divorce. The moral of this story is to consider making gifts to a properly designed trust in order to reduce the chance that the donee will lose part of the gift if they subsequently obtain a divorce in the wrong state.
 

Tags: , , , , , , ,