Protect Marital Assets

March 10, 2006
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GRAND RAPIDS — Though generally an unwelcome conversation, experts agree that the contract of marriage should be approached with the same diligence as any agreement in the corporate world.

“There are different opinions on these arrangements. Some people think that if you want to enter into a prenuptial agreement, it means that you’re planning for the marriage to end,” said Dennis Shimmel, principal of family law firm Shimmel Law Offices in Grand Rapids. “But you should always be planning for the future. Just because you buy life insurance doesn’t mean you’re planning to die in the next five years, right?”

For many individuals, especially business owners, a prenuptial agreement should be a consideration on equal footing with life insurance and estate planning. According to area experts, such premarital planning should not be seen as protection, but an understanding of what happens in the “worst case scenario.”

“Most people don’t discuss what their views are on life support,” Shimmel said. “Do you want to be kept alive in a vegetative state? All these go hand in hand. People should plan for death, if that were to happen. Death and divorce have similar emotional effects on people.

“You need to think about and plan for what is going to happen if someone were to leave you by dying or divorce.”

For many couples, the discussion is relatively short, according to Grand Rapids divorce attorney Kenneth Sanders.

“Most people starting off in their 20s have nothing, so it doesn’t become a real concern,” he said.

But other times, one or both spouses will bring significant assets into the union, such as real estate, a business or stock. Liquid equity is actually quite rare, Sanders said, as most individuals spend or invest all wages and income. Americans today have the worst spending to savings ratio in history (see related story on page B1).

Such a situation helps illustrate the financial threat of divorce, wherein individuals can easily lose a home or business.

Worse yet, this scenario can easily affect those outside of the union.

“What everyone is afraid of is owning a business with someone, or a group of people, then there is a divorce, and all of sudden you’ve got someone new on your board of directors,” said Lynn Perry, a family law attorney at Perry & Stuursma LLP. Perry cited one case in which a divorce split 50 percent of a company’s stock between two spouses — one of whom had no previous experience with the company.

If done correctly and with full disclosure, a prenuptial agreement can mitigate the financial impact of a divorce, ensuring that an individual can leave a marriage with the assets he or she brought into it.

While much less common, the same protection can be provided through a postnuptial agreement. These contracts are identical to prenuptial agreements, but they address concerns not present at the time of the union. They are useful in preventing custody battles over children, and sometimes, companies.

It is not uncommon for business partners to suggest or require postnuptial agreements before a venture is incorporated or an individual is allowed to buy into a company. In other situations, Perry noted, a company can be set up in such a way to prevent potential problems. Such agreements can also be used in other partnerships, she said, such as a family cottage. In this manner, if three married siblings have joint ownership of the property and one gets a divorce, the ex-spouse is barred from access.

While either of these methods can successfully protect ownership of an asset, it cannot protect the equity behind it.

“It doesn’t mean the values won’t be traded off,” Perry said. “But you can prevent an unwanted person from suddenly becoming a partial owner.”

According to Sanders, even under these stipulations, anything accumulated during the marriage is still a marital asset. Any capital investment into a company must have come from the estate, and even if those funds were kept entirely separate, the efforts of the spouse likely contributed to the success of the business — possibly by raising the children or by financially supporting the family while the company was unprofitable.

On the same note, even prenuptial agreements may not protect the full value of covered assets. In Michigan, appreciated value is considered a marital asset. So, if an asset appreciates in value by 30 percent, that additional equity is counted toward the estate, even if the original asset is not.

The entire situation becomes more complicated during tax season.

Lori Baker, tax partner at Grand Rapids public accounting firm Adamy + Co., is often brought in to help manage the tax implications of a divorce settlement.

“The best thing would be to get a big old bunch of cash for your settlement,” she said. “That’s the only way you’re not going to have tax issues.”

A common, but often overlooked problem is tax-deferred retirement funds such as the 401(k) or Roth IRA. Because liquidating these incurs stiff penalties, sometimes the settlement is structured so that this asset is not divided until the shareholder retires, possibly decades later.    

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