In part III I started to speak about the explicit costs of divorce for the first time. I laid out the three types of divorce: meditation, collaborative and litigation. I discussed child support, for those who have kids, and spousal support. I also talked about the wild card: the settlement figure. This can be the one that stings the most because many times it is the biggest up front number besides the lawyer fees that you will be looking at. For example, when Jeff Bezos recently split with his ex wife, that figure in the billions of dollars was the settlement. When people talk about giving half of all that they have to their ex-spouse, that half is usually divided in the settlement. In this post, I want to go into further detail on things you can do that do not involve a prenup before getting married as well as one while married, if you have significant assets.

The Prenup

Many people approached me during my divorce and asked why I did not have a prenuptial agreement. My answer was that at the time much of my assets were invested in a business I had with a friend at the time I was married, my net worth depended more on how that business worked out rather than if my wife wanted to divorce me.

This evolved as I started to exit my partnership in that business and I started to focus on building back up my savings which had been depleted. The key thing to remember about a prenup is that it only covers the assets you have before you were married. Once you are married, you both are one person under the law, even if one spouse makes $5 million a year and the other is a homemaker, the law will look back at it like each spouse earned $2.5 million that year. Any savings from that should be split evenly.

The same goes for financial assets as well as earnings. If you have $100,000 invested in a brokerage account which consists of shares of an ETF tracking the S&P 500 before marriage that grows to $300,000, that $200,000 difference can be divided evenly in a divorce. This goes for other assets like houses as well.

What this means in practical terms is that prenups are for situations where one or both spouses already have significant assets and saves an ugly divorce in the financial sense if the marriage is short. If it’s a long marriage, and assets have grown considerably during that time, a prenup isn’t going to help that much.

This is why divorces that happen later in life, when the kids are teens or even later when people are retiring, can be so debilitating financially. One spouse may have made all the money and feel entitled to most of it, likewise for the other spouse that feels they made sacrifices for the other spouse to be able to make that money.

I have heard of cases where a doctor was married in med school and then divorced his homemaker spouse, he had to give half of everything he saved and accumulated during his whole career as doctor to her. It’s not just men paying women either. In the financial world, I have known high earning women who pay their ex husbands alimony, the courts have to be gender neutral nowadays.

Taking Precautions

However, even without a prenup I found it interesting to learn from my attorney that spouses can protect some assets even without a prenup. Some of these will involve the consent of your spouse, some will involve walling off assets and never touching them, and if you are really dastardly, will involve personal contracts apart from a prenup that you enter into before marriage.

Form a Trust – One solution that would involve the consent of your spouse is to create a trust for both of you. This could be just as contentious as asking a spouse to sign a prenup but is a way to keep from fighting over large financial assets should a divorce come along. This idea would involve creating a trust to benefit both you and your spouse even if you were to divorce. You could also make it a family trust and have distributions also allocated to children upon the parents deaths or choose to share distributions with children while parents are still alive. The point is that a trust is a customized way to split assets before emotions get involved. A trust for this purpose would likely consist of mainly financial assets and could provide a sustainable distribution of say, 4% to 5% of assets to be split evenly amongst both spouses. This could keep the funds from being used up at once while providing a stable income for both parties. Trust agreements can have all types of rules but the important thing is that it be an irrevocable trust so the court cannot say one or both spouses exercise de facto control over the funds.

The other important aspect of an irrevocable trust to keep in mind is that once the assets are there, you can’t just get them out later. The management of the funds and any distributions have to follow the trust agreement no matter what the grantor(s) may want. This is important to keep in mind because it’s essentially an irreversible decision.

Wall Off Assets – Another aspect of financial assets I was not aware of prior to divorce is that any cash, shares, property etc. that was established prior to marriage, has maintained itself and has not been touched during marriage, is essentially untouchable by a spouse in divorce proceedings. In legal terms these assets are not considered “marital” assets. It’s best to show this with an example.

Let’s say again you have that brokerage account with $100,000 which is invested in an ETF tracking the S&P 500. After 10 years of marriage the account is now valued at $300,000. But let’s say that during this time, it remained in your name, was kept as a separate account under your name only and you never tapped the funds at all. Boom, all the sudden, those assets cannot be included in the division of assets. The catch here is that a spouse who knows you have those funds may ask for a settlement where you have to tap those funds to pay your ex spouse a settlement so it still may come into play.

Another example is say you had a rental property prior to marriage that generates income which covers the mortgage. As long as you have not paid for any upkeep or maintenance of the rental property with marital funds (kind of a hard thing to do but it’s possible) then the value of that home is not part of the marital assets that the lawyers can look at to divide.

How will they know what assets there are? Well the lawyers take care of that too by exchanging what’s called a statement of net worth. This is a document where you each have to list all your assets and liabilities and swear these are all of them in front of a court on penalty of perjury. This is why you don’t want to start being sneaky with money which is what I explained in previous posts, it will eventually come back to haunt you if you have to fill out this form.

Finally there is one legendary case I wanted to mention which if you are bold enough and have a friend you trust enough, could be an option. I had a friend who was divorcing and towards the end of his divorce, asked his attorney, who was a really great divorce attorney, what was the best protection/prenup she had ever seen in her career.

Her answer was that one client she had, before he was married had signed a loan agreement with his close friend. The friend loaned him some sum of money which he was to repay annually over many years. If at any time however, he was to marry and then divorce he would be in default of his loan agreement and a penalty in the millions of dollars would be triggered. This essentially turned her client from a net worth of millions to being in debt for millions as well and having a sole net worth of essentially zero. With no net assets to divide, and no legal means of challenging this legal loan agreement, the wife would be forced to either stay or leave with nothing. Whether this agreement really exists I can’t know for sure but it seems like something from what I know up to this point in life that could be plausible as well as legal. This is a pretty extreme and potentially somewhat cruel way to go about preventing losing to or even taking money from a spouse but shows you that for those that are willing to be creative, there are ways around prenups and big payouts for divorces.

I wondered in that situation what they trusted friend would do with the money to give it back to his friend post divorce if it were to happen. It’s not like the friend can just wire it back to the man who was divorced, that would count as income or a gift and likely be heavily taxed. However the friend could act as grantor to a trust for the benefit of his friend with all the customized bells and whistles of a trust to make sure the money is used the way he wants. This avoid a tax liability and only involves a few more lawyer hours to set up a trust.

Conclusion

There’s also the option to just not get married. As I alluded to before, many in rich world countries are living together and having children while forgoing marriage. What was once on the fringes of what was considered normal behavior is now becoming more commonplace. In such a scenario a breakup will focus on the children mostly as opposed to assets as most assets will be in one or the other spouses name. Although this defies the cultural narrative of love and domestic relationships in Western culture the ugly practicalities of divorce and the financial fallout are making it ever more common. Choose wisely but know that even if you are married, there are options to financially survive.

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