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10 Tips To Protect Your Clients’ Separate Property In The Event Of Divorce

As a matrimonial and family law attorney, I am often retained by people who came into the marriage with significant assets and, or inherited large estates.

Under New York law, these assets will constitute what is known as separate property and will not be shared with the other spouse. But what happens to those people who didn’t have the foresight and knowledge to keep their separate property separate? While they may recoup some of their money, it is doubtful they will be able to recover all of it. And if they cannot trace their separate property, there will be a price to pay under all circumstances.

As a financial planner, if you want to be the true hero to your client, you will and can always ensure that their separate property remains separate and can be easily traced.

Following are the steps to take in advising your client:

  1. Make sure your client has a prenuptial agreement (prenup); and if there was no prenup, there may be an opportunity for a postnuptial agreement (postnup).
  2. The prenup and/or postnup should clearly set forth what assets and liabilities constitute separate property versus marital property.
  3. If you are representing both spouses, you should make sure to carefully read these documents to appropriately chart the marital versus separate property assets so that neither spouse has false expectations. Remember that saying, “what’s mine is yours,” isn’t so in a divorce.
  4. Separate property must be kept separate; that means your client cannot commingle separate and marital property. Keep in mind that there is a presumption under the law that property that is acquired during the marriage is marital. Therefore, if your client inherits money during the marriage, they must show the origin of the inheritance and prove they didn’t commingle it with their earnings during the marriage.
  5. Likewise, premarital accounts must be kept separate from earnings. Clients often come to me when it is too late to salvage their separate property. They simply didn’t know that by keeping their premarital property in the very same account as their marital earnings, or worse yet, spending it down, they forever surrendered their premarital property. As an example, on the day your client says “I do” to their spouse, they should have their prenup in hand, a list of the assets they own, maintain those assets in a separate bank account, open a new account for all their future earnings and be sure those premarital assets never mix with the marital.
  6. Keep your client’s bank, brokerage statements and retirement account statements, as financial institutions rarely keep records more than seven years. Even if they kept their separate property separate, they still need to prove it. If, for example, your client was married for 15 years and did all the right things but has years of missing statements, they may be unable to trace their inheritance and premarital assets without those statements.
  7. Advise your client not to use separate property to pay marital expenses as once the separate property is spent, it’s gone. Stacy Francis is a certified divorce financial analyst and cautions advisors, “You may have liability exposure if you do not educate your clients about the implications of spending down their separate property during the marriage for living expenses. We often see one spouse dip into their separate property accounts to prop up unsustainable, high living expenses.” Francis continues, “If your clients have to use separate funds, spend those dollars on assets that will accumulate in value such as real estate, private equity or business investments. Track the source of funds contributed for the purchase, improvements or capital calls.”
  8. Make sure each of your clients pay the taxes including capital gains taxes for separate property from separate property. Have their accountant provide the backup documentation to both spouses setting forth a clear delineation of the taxes paid for any dividends and capital gains from separate property. Remember you can never be too careful, so keep the backup material.
  9. Many financial planners represent parents who intend to gift their children money during their lifetime. Those parents should take a moment to consider what they intend if their adult child divorces. Did they really intend for the down payment for the home to pass to both spouses in the event of a divorce? If not, they should ensure that the gift is payable to their adult child only as opposed to both spouses, that the monies are traceable and that any gift tax returns are properly filed.
  10. Most importantly, if a parent is loaning their adult children (and their spouses) monies, be sure that any loans are well-documented with legally enforceable promissory notes and/ or mortgages.Keeping these tips in mind will ensure your clients will have the foresight to be protected in the case of divorce.

Lisa Zeiderman is a matrimonial and family law attorney, and certified divorce financial analyst.


Original published in FA Magazine. Read the original publication here.

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