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Protecting Your Premarital Real Estate Assets in a Divorce

If you are a real estate investor, your portfolio may be one of the most important parts of your overall financial picture. In some cases, you may have begun your career as a real estate investor before you married, while in other cases, you may have launched your business after the wedding. Divorce can be a challenging time, especially for major financial investments, and there are some key points to keep in mind to help secure your financial future.

Planning in Advance for Potential Divorce

Of course, no one begins a marriage with the idea that it will end in a divorce. However, business owners, including real estate investors, may have unique concerns that may lead them to plan ahead. Prenuptial agreements are becoming more common, especially as people marry later in their lives and careers. In many cases, both spouses already have investments, retirement plans or businesses that they want to protect in the future. For people with companies of their own, angel investors or venture capitalists may want to see a prenup on record before they decide to invest, in order to avoid a company being broken apart during a divorce.

This means that it can be helpful to consult a family law attorney even before you decide to get married. A prenuptial agreement that fairly represents both parties and protects your real estate investments can help you to go into your marriage prepared for any changes that  happen in the future. New Jersey state law tends to favor prenuptial agreements, so long as both parties were properly represented by family lawyers through the process so that their interests were recorded in the agreement.

While it is important to hope for the best when starting a new marriage, preparing for the “worst” may give both parties extra security. In general, a prenuptial agreement is the most secure way to protect your business, especially since New Jersey law strongly favors prenuptial agreements over contracts made between two spouses after they are already married.

House Real Estate in a Divorce

If a Prenup Is No Longer Possible

Of course, if you are already married, a prenuptial agreement is no longer possible. And if you already were married before launching your real estate business, the calculus may be completely different. In either case, you are likely to benefit from planning with an attorney about how to handle your real estate assets before divorce is on the table.

As your business grows, you may think about how to structure your assets to protect them from divorce. For example, you may create an LLC, a type of company that protects you from being held personally liable for the debts or liabilities of your business. This creates a legal distinction between you and your real estate investments. However, this does not necessarily mean that your LLC income or assets are entirely protected during a divorce.

If the LLC was formed before your marriage, in most cases, the LLC and its assets will be treated as separate property. However, this does not mean that your income from the LLC will be treated as separate income for the purposes of property division and spousal support. In addition, if you do not pay yourself an appropriate salary from the LLC during the marriage, a family court may consider that you reduced the cash flow for your family as a result and that the marital estate suffered. This may give the family court access to the assets of the LLC for property division.

In these cases, it is also best if your spouse did not take a management role or other active part in the company. The more involved your spouse is in the LLC, the more likely it will be seen as a marital asset rather than legitimate separate property.

Your divorce attorney can provide you with more explicit guidance. However, this tactic is less likely to be successful if you are already married when you decide to set up an LLC. Creating an LLC may still be a smart strategy for protecting yourself from corporate debt, but it may not always provide a solution to divorce financial concerns.

What About a Trust?

You may also discuss options like a revocable trust with your divorce lawyer. Unlike an irrevocable trust, a revocable or living trust can be changed or terminated by the grantor at any time. The grantor can control the income of the trust’s assets, change the trustee and make other changes. After death, the property would go to a named beneficiary.

An asset protection trust grants legal ownership to the trust, while you receive income from the property and its investment. While the trust is the legal owner of the property, this does not mean that it may not be accessed during the divorce. While a trust will be very effective if the property was obtained before marriage, it may not provide protection for real estate purchased after the marriage. In addition, if funds from the trust were entered into marital assets, this can also become more complicated.

An irrevocable trust, where the grantor may not make changes to the trust or cancel it, may provide greater protection than a revocable trust.  Only the trustee may make decisions about how the trust assets and income are handled. Caution is urged, however, before placing marital assets into any kind of trust, especially an irrevocable trust, because they are included as part of the marital estate on divorce.  Even if the specific asset cannot be recovered from the trust, the value of the asset will be included in determining the value of all marital assets.  in a divorce, courts may view trusts as a means of hiding assets, so before establishing a trust and transferring any assets into it, you should consult with you attorney about whether this is advisable.

Planning for Real Estate Protection

There are other strategies that can help you and your divorce lawyer protect your real estate assets during the end of a marriage, no matter how contentious the process becomes. If you maximize your use of the equity in your real estate and leverage it to fund further investments, each property may be considered to have a lower real value to be split between the parties. Rather than losing your real estate, you may pay only a portion of the market value of the property to your former spouse if your real estate is appropriately leveraged. In some cases, you may even have negative equity on your real estate. While this can be risky in some businesses, it can be an important growth strategy to expand your portfolio as well as provide greater protection during asset valuation and division.

In general, property you acquire during the marriage is considered part of the marital estate in New Jersey and, therefore, is eligible for division.  If you have both premarital and marital properties properties, keeping separate records will help protect the premarital ones.

A land trust may also provide protection in a divorce, just as it does from creditors or other litigation. Your divorce attorney may provide greater information and advice about how trusts may affect your divorce settlement.

Keep a Clear Head

Divorce can be an emotionally challenging time as well as a financial challenge. Anger and spite can take over the process, leading to a more costly and damaging outcome. Your family lawyer can provide advice and guidance on presenting an accurate valuation of your assets, determining which assets may be considered separate property and developing a strategy to protect your assets.

If you are a real estate investor considering divorce, a divorce lawyer may help you to prepare your next steps. Get in touch with the experienced New Jersey family law attorneys at Lawrence Law by calling 908-645-1000 or using our online contact form to schedule a consultation about your situation.

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