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Episode 81 Transcript: Acquiring Assets During Divorce

In this episode, I wanted to talk about something that comes up for a number of clients who are going through the divorce process, in particular, where their divorce process is taking time. As your divorce process is taking time to resolve, life goes on. Things happen, and there are changes in your financial life. Specifically, I want to talk in this episode about what happens or what should you think about, how should you think about when you are acquiring assets during the divorce negotiation?

What might that look like? Well, it could look like you decide to start a new business. It could look like you are in the market because you’re separating your households. You’re in the market to purchase a new home, and you purchase a new home. You could have a relative want to gift you money, or you could have a relative pass away and leave you money through their will or through their estate planning. You can simply be continuing at your very same job that you’ve always been at, and part of your compensation continues to be deferred compensation as stock options or restricted stock units, and you’re continuing to acquire those and earn those throughout the divorce process, or through your cash salary or cash bonus compensation, which exceeds your expenses, you are continuing to accumulate savings throughout the divorce process.

How do you think about that? What do you do about assets that are acquired during the divorce process? How do you think about whether it’s advisable to opt to acquire an asset during your divorce process? The first distinction I want to make is that there are assets that you have a choice in acquiring, and there are assets that you do not have a choice in acquiring. For instance, if you are working at the same job you’ve always been at and your compensation is the same as it’s always been and there’s a deferred compensation component to it, you’re not going to quit your job. You are going to keep earning money and earning assets through your job as you always have been. Similarly, God forbid, if a relative were to pass away, that’s something that’s completely out of your control. If you receive an inheritance as a result of that, that’s also something that’s completely out of your control, whereas the decision to purchase a home or the decision to start a new business is something that’s much more within your control and something you can make a decision about as to whether or not you do proactively want to do during your divorce process.

With regard to that first type of asset accumulation, it’s going to happen one way or another. Your salary is being partially invested in your 401(k). You’re not going to change that during the divorce process. You are earning deferred compensation throughout the year. You’re not going to change that during the divorce process. You receive an inheritance that you didn’t expect. That’s not something you have control over preventing from happening during your divorce process. With regard to that type of asset acquisition, the only real ways to deal with it prospectively and then at the time are, number one, at the outset of your divorce process or at any point in the process, to either come to an understanding and have a written agreement with your spouse about drawing a line in the sand and saying, “As of this date, future assets that either one of us acquires will be considered separate property, off the table for division in a divorce.”

The other way that you can accomplish that without having mutual agreement with your spouse is, generally speaking, to file for divorce in court. Now, this gets into an area of legal complexity and legal strategy, so you absolutely must consult with your own attorney on these issues. Generally speaking, the way that people deal with the idea that, “Through my income, I’m going to be building the value in my 401(k) throughout the divorce, and I don’t really want all of that increase to be on the table as marital property or community property,” or, “The RSUs that I’m earning every month during the divorce, well, it feels like those should not be on the table to be divided in the same way that the ones that I earned throughout the course of our marriage should be.” You may know that a grandparent wants to make an estate planning-related gift to you, to transfer title to real property to you, or to make a transfer of money to you. Although that is likely to be separate property anyway, you just really don’t want to leave anything to chance, and you want to make sure that that is not something that’s on the table for division in your divorce negotiation.

Well, essentially, as we’ve talked about in prior episodes, you can agree on a stop the clock date or a cutoff date with your spouse, and you can memorialize that in a formal interim agreement, in a written interim agreement. You can unilaterally file for divorce in court. We have a whole episode on that subject. It is a complex subject, and it’s something you want to consider very carefully in consultation with your own attorney. For the type of asset acquisition that is outside your control, setting a stop the clock or a cutoff date or filing in court in advance of that happening is really the primary way to deal with ensuring that those assets that you’re accumulating or acquiring during the divorce process are not then also on the table for division with your spouse.

Let’s talk about the second type of asset acquisition, which is something that really is within your control. You may have always had the idea that you wanted to start a bakery. Whether or not you actually start that, whether you formed the LLC or the partnership or whatever the business entity is that you ultimately form, whether you take on a lease, begin construction for that bakery during the course of your divorce process is something that is within your control and something that you can affirmatively choose to do or not to do. Similarly, deciding to purchase a property that you own during the course of your divorce is up to you. You may decide ultimately you want to purchase a property, but you’re going to rent a separate property for a year during the course of the divorce process.

Let me speak a little bit to that more optional type of acquisition of assets. Similar to the first type of assets that are just automatically going to be acquired during divorce, with optional assets, like buying a home or starting a business, you absolutely want to consult with your own individual attorney first and foremost before making any decisions about how to proceed. I want to give you some questions to be asking yourself with regard to acquiring these types of assets during the divorce to deepen your own thinking about it a bit and to help you arrive at the right conclusion for yourself in terms of whether or not you do choose to acquire a substantial asset during the divorce process.

First of all, can you take the asset you’re contemplating acquiring off the table for negotiation in the divorce by way of an interim agreement? If your spouse is totally open to say, “Yes, I know you want to start that business. No, I have no interest in treating that as a marital asset. I’m happy to sign an interim agreement that says that that business that you’re just starting today post the initiation of our divorce process is totally your separate property, and any debts related to that are your separate debts,” well, if your spouse is willing to do that with regard to the particular asset you’re questioning whether you want to acquire or create, you can likely feel more comfortable, again in consultation with your attorney, but you can likely feel more comfortable going ahead and doing that.

Similarly, you want to ask yourself, apart from this legal process, does this creation of the asset or acquisition of the asset, does it need to happen now? Is there any detriment to you in waiting a year or two years, whatever it takes to resolve your divorce process? Depending on where you are in the process when you’re asking yourself this question, is there any detriment to you in waiting? Do you have to do this now?

Related to that, does this asset need to be created or acquired in your own name? For instance, if your parents are anticipating buying an apartment or a home for you when you conclude the divorce process, does that home need to be purchased in your name? Well, that’s probably a tax and estate planning consideration for them. That’s not just a divorce law consideration. It is also a divorce law consideration. If something is acquired in the name of your parents, purchased by your parents, it is not on the table for division in a divorce process. Again, with all of this, you have to consult with your own attorney about the laws as they apply to your specific situation. Generally speaking, if your parents purchase a property that’s held in their name and purchased with their own money, it’s not actually a property to be divided in your divorce, and so you might have less concern that things could get messy in your divorce negotiation around what is supposed to happen to that asset. Also, as I mentioned before, you might consult with your spouse and say, “Listen. My parents are considering buying this property with their own money, in their own name. Is that something you’re willing to say could be purchased in my name but would be treated completely as separate property, not to be divided in our divorce? Could we sign an interim agreement around that?”

Related to all of this, where is the money coming from? Is it coming from your own separate property assets that both you and your spouse agree are your separate property? For instance, are you using assets that are held in trust for your benefit to purchase the property, or are you using savings of yours that clearly predated the marriage to purchase the property, or is the money coming directly from relatives of yours who are going to make the purchase themselves directly so the money is not even coming from you? For instance, relevant to starting a business, is the asset being acquired in exchange for your work, and is it in exchange for work that you did during the marriage prior to the divorce process, or is it being acquired in exchange for work that you will do in the future during and after the divorce process? Is the acquisition of this asset going to require any investment of marital property? That’s a very significant issue if you’re in the course of a divorce negotiation.

Similarly, would it require you to incur in your name any debt? That’s also something that is significant as part of a divorce negotiation, and in fact, maybe something that your spouse is motivated to say, “Yes, that property that you’re about to acquire mostly with your parents’ money is your separate property, but also, the debt that you’re about to acquire in the form of a mortgage in your sole name is also totally separate debt and not on the table for distribution between us in our divorce negotiation.” Some less objective questions but still things for you to consider are: Will the acquisition or creation of this asset make your financial situation better or more complicated? Hopefully, it will make your situation better, but it really is something for you to consider.

Related to that, will it make the resolution of other financial issues and topics of negotiation in your divorce simpler, easier, or more complicated and more contentious? There’s no way in your individual situation for me to answer whether or not it makes sense for you to acquire, to purchase, to create a new asset in the course of your divorce process, but some of the guiding principles for you to have in mind are something that generally improves your financial situation is a good thing. However, you want to get individualized advice in a consultation with your own attorney as to whether or not there may be consequences to the improvement in your financial situation that are actually negative or neutral in your divorce negotiation. Sometimes those can be not obvious to you, but they are absolutely something that you should have in mind when you’re weighing whether or not to acquire the asset in question. Above all else, you want to be careful to not create more complexity or more issues for you to resolve in your divorce if you can avoid it.

Finally, certainly anything that requires the use of what is already marital property or that could potentially be a debt that both you and your spouse are held responsible for, you want to proceed with the assumption that that requires mutual agreement between you and your spouse before you take any actions with regard to acquiring that asset. If it is going to require the investment of marital property, or it’s going to create a debt that may implicate both you and your spouse, you really want to have not just a verbal mutual agreement, but ideally a written mutual agreement about what is being used from your marital property to acquire that asset and how that will be treated in the ultimate resolution and division of your finances.

Overall, it’s not unheard of that you may opt to acquire an asset during your divorce process, but it also comes with complications. You really want to think through whether the creation or the acquisition of a new asset during the divorce process, whether the benefits of that outweigh the complications that it brings. If so, what is the most careful and thoughtful way to move forward with the acquisition or creation of that new asset in the context of being in a yet unresolved divorce negotiation?

That was our mini-episode on how to think about acquiring assets during your divorce process. I hope it was helpful for you.

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