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Common Sense About Separation

By John Dietz - Email Editor

Date : April 01, 2008

Parting is such sweet sorrow: when parting a relationship is not a bittersweet memory!

- Shakespeare from Romeo and Juliet -

Parting relationships, where there is no tomorrow for the relationship, is often a heated emotional experience for both parties, even when both parties want it all to end. We will examine how the subject pertains to the titling and the exposure of your assets. Though we are concerned about every union, especially second ones and even the business unions you know as partnerships, you might want to put some thoughts into your children’s heads before they enter into one of the most important financial decision of their life: marriage. This article will and should take the glamor out of eloping. It will certainly put the emphasis on planning.

Marriage is simply about “transfer” when it comes to assets. When a legal marital union is formed (by ceremony or common law), state law provides and determines the effect of ownership of the assets involved in the union over most issues, but not necessarily all issues where federal law may supersede. The very confusing and difficult aspect of separation is that ownership and titling may count on record before the moment of the union (sometimes disputed in commingling or determining what was brought into the marriage) effecting the ownership of the assets in the future. This includes marital property, earnings, pensions, business earnings, accounts receivables and inheritance.

Previously, we have lightly discussed the subject of marriage, divorce and prenuptial agreements. This concerns the concept of Wealth Preservation, assuming that you would not want any separation or divorce to inflict any more damage then it has to. We have to ask you, are your assets titled properly and have you made agreements that will produce the result you are looking for? This is not a poster for prenuptials. Prenuptial agreements get a lot of media attention, often misconstrued due to high profile divorces, like Trump vs. Trump (numerous times), Mills vs. McCartney (a British case) and Federline vs. Spears (a calamity of a zillion problems). This is a poster for an Asset Protection Plan that includes all scenarios of life.

Divorce ran rampant in the 90’s. This decade the divorce rate is declining. Maybe it is because the battlefield has left the tracks of blood for all to view and ponder. In a very general view that prevails in most states, marital property may have a claim by both parties no matter how it is titled, unless a separate legal agreement is attached to that specific asset.

Long v. Long, 697 A.2d 1317 (Maine. 1997), where the court held that jointly owned real property is subject to division as marital property even though parts of it were acquired with non-marital funds and,

In re Marriage of Renier, 854 P.2d 1382 (Colorado. Ct. App. 1993), where stock shares purchased during marriage with marital funds through options acquired before marriage were marital property. Additional shares the husband acquired during marriage were also marital, since he failed to trace those shares to stock split of shares acquired before marriage and,

McGinnis v. McGinnis, 920 S.W.2d 68 (Kentucky. Ct. App. 1995) (released 1996), where the husband's accrued ownership rights in nonvested shares of stock in a start-up venture capital company were marital property; it was not an abuse of discretion to structure a distribution to allow the wife an in-kind distribution of the stock shares if the company went public within seven years.

The picture in the above cases points to an important aspect of titling in using the rule of “Source of Funds.” Every asset has a legacy and, in general, is followed by a judge by examining 1) the money trail and 2) titling legacy and indemnification. Where titling does not match or follow the money, often the clauses or agreements in the clauses are held invalid or illegal.

A judge may also use the Source of Funds rule to determine the intention of parties in cases of separation and succession or when inheritance is involved as:

In re Santos, 283 N.J. Super. 26, 660 A.2d 1271 (Ch. Div. 1994) (released 1995), where a New Jersey court held that a divorce alone does not impliedly revoke the designation of a former spouse as a beneficiary of a life insurance policy and,

Zeh v. Zeh, Mass. App. Ct., 618 N.E.2d 1376 (1993). In which a husband's inheritance from his father, who died five years before the divorce hearing, fell within the category of assets subject to division, even though the legacy had not yet been distributed and also, in Michigan a dual property case where in the case of, Dart v. Dart, 459 Mich. 878, 597 N.W.2d 82 (1999), property received as an inheritance and kept separate from marital property is separate property and is not subject to distribution.

Future funds may also be at stake as noted in the case of Staman v. Staman, 622 So. 2d 1147 (Fla. DCA 1993) where the court held that the accounts receivable from the husband's medical practice should have been included in the valuation of marital assets.

Disclosure in divorce matters is a front running factor, so don’t count on keeping secrets a secret. Laws passing trends toward secrecy are being overturned in the name of the First Amendment by news organizations. Thirty states, plus the federal courts, put courthouse records online, potentially making personal information from all cases, not just divorces, available to Web-surfers and data-collection companies. California keeps divorce records off the Web, and Florida is considering a similar ban. Federal courts and several states post court records but delete Social Security and financial account numbers.

Regarding divorce or not, no one wants their financial records to be disclosed. Think about this. If Hillary Clinton had chosen to divorce Bill during the Monica Lewinsky scandal, their financial records would have been public record. Ten years later, Clinton and her presidential campaign still are not making her income tax returns public. (On a side note Obama released only his 2006 returns and McCain has not released his either.) It is fair to say that disclosure exposes not just the person disclosing, but also every company that they have investments with and all debts and assets that they claim. It should be noted, that UK divorces receive a higher standard of privacy and the records are much harder to attain. It takes a spouse like Heather Mills to come out and blab it all to the public seemingly for her satisfaction of revenge.

Where prenuptials are in place, they follow all the same principles as above and consider the possibility that “fault” may be a determining factor as to the standard that a clause is held to. This is why, in some divorces, one spouse will vehemently attack the other. Mrs. Dina McGreevey (X first lady of New Jersey) claimed that she was duped and tricked into a fraudulent marriage to cover the fact from the public that Jim McGreevey was gay. He claimed he fulfilled the marriage by providing a child and companionship.

A third party entered into the picture (only after Mrs. McGreevey tried to sue everyone in the X Governor’s office for the cover-up). The third party claimed to have had three-some sex and that Mrs. McGreevey had to know her husband was gay. This case is still in the determination of “fault” because the determination in the fight over the assets will depend upon a judge’s conclusion as to the fault.

Suppose the McGreevey’s had an Asset Protection Plan in place, with provisions for divorce, death and separation, could their laundry have remained in the dryer instead of the press? What will happen if (but likely when) the Spitzer divorce case hits the news? Mr. Spitzer is an attorney from the tier one Harvard School of Law; do you think she has protected herself?

Here are just a few more cases to exemplify the point.

James v. James, 764 So. 2d 549 (Alabama. Civ. App. 1999). The couple's antenuptial agreement had been rescinded, the husband's businesses were held to be marital property, and the wife had no interest in the husband's individual retirement account.

Compton v. Compton, 902 P.2d 805 (Alaska 1995). The parties' prenuptial agreement did not prohibit transmutation of separate property into marital property.

Preece v. Preece, West Virginia 465 S.E.2d 917 (1995). Even where the parties execute a written separation agreement, they must comply with the statutory requirement of financial disclosure, and the court must make a sufficient inquiry into the fairness of the agreement.

When properly planned, for better or worse can be for the better. If you do not want to deal with the problems involved with prenuptial agreements, use the divide and conquer philosophy to separate the liability of each asset owned between the union. You must divide and conquer, separating liability, using legal techniques and proper titling with the agreement of both spouses.

One final lesson.

You maybe able to outsmart your spouse (maybe not) but consider Haas v. Haas, A.D.2d, 695 N.Y.S.2d 644 (1999) where Mrs. Haas tried to take an inheritance from her father and put a small amount in the couple’s joint account and the remainder in her own account during the term of the marriage.

The judge ruled that the money lost its character as separate property and on the same day of the ruling, Mrs. Haas lost her character also, for trying to fool the courts.

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