Asset Protection Strategies in Los Angeles Divorces

Couples who divorce in Los Angeles often face considerable challenges, not least of which is dividing marital assets.

Matrimonial asset and debt division is the source of many disputes in divorces, especially in high-net-worth divorce cases. Whether an asset should be considered “community” or “separate” property, the value of assets, and who should pay debts must all be worked out by couples (or a judge) before a divorce can be granted.

To protect assets, consider taking steps long before filing for divorce. Here’s what you need to know.

Los Angeles divorces are subject to California’s community property laws. In its most basic sense, this means that assets acquired during a marriage are divided equally in a divorce.

That sounds simple enough but the range of assets that couples bring into a marriage and acquire during it—often commingling these assets—can make the matter much less clear-cut, especially if assets have not been clearly documented.

What is Community Property in California

Community property generally includes:

• Property, investments, and business assets acquired during the marriage.
• Income earned during the marriage.
• Vehicles, household items, and valuables bought with marital funds.
• Retirement accounts contributed to during the marriage.
• Debts incurred while married, regardless of who signed for them.

What is separate (Protected) Property in California?

Separate property is not subject to division and usually includes:

• Any assets that predate the marriage.
• Inheritances or gifts intended for the benefit of one spouse.

Assets clearly documented as separate property.

Legal Strategies to Protect Assets Before an LA Divorce

Spouses looking to protect assets before divorce should tread carefully, as they can be accused of trying to conceal marital assets.

The best asset protection strategies are taken long before a divorce is filed. The three most important steps are:

1.    Accurately Document All Separate Assets & Debts

Any property, investments, and other assets brought into the marriage should be clearly documented, as well as anything accumulated after the marriage started that should be considered separate from the marital estate.

If possible, record the following:

• Statements showing balances before the marriage started.
• Inheritance/gift documentation.
• Photographs of valuable items owned before the marriage started.
• Ownership certificates.

2.    Maintain Separate Accounts For Premarital/Inherited Assets

Keep separate accounts for non-community property, like premarital assets, inherited money, the proceeds of personal injury settlements, etc.

Salary and other community property should be deposited into distinct and separate accounts rather than joint accounts, so that they are demonstrably “separate”.

3.    Address Property Titling

Asset titling is important in California. Property acquired during marriage carries a strong presumption of being community property under Family Code § 760, regardless of how it is titled.

So, if you want real estate, vehicles, and investment accounts to be treated as separate property, using language like “sole and separate property” can help.  Proper titling helps establish intent to keep property separate, but it should be noted that courts prioritize the community presumption over title alone in divorce disputes.

Another strategy that can protect assets in divorces is establishing trusts. However, the right type of trust must be set up well in advance of a divorce and appear to be part of a wider financial plan to have the desired effect.

Trusts are legal arrangements where a “settlor” transfers property to a “trustee” to manage and distribute for the benefit of designated beneficiaries, such as one’s children.

Trusts can be revocable or irrevocable:

• Revocable trusts allow the settlor to make changes or cancel at any time, essentially maintaining full control over the assets. This does not generally protect marital assets from the property division process in a divorce.
• Irrevocable trusts remove the transferred assets permanently from the settlor’s personal ownership and amendments cannot be made without the trustee’s approval. This type of trust is more likely to be kept separate from the marital estate during property division disputes, provided it is not deemed a measure to hide marital property.

How Can Irrevocable Trusts Help Protect Assets?

The two main types of irrevocable trusts that can protect assets from legal claims in a divorce are:

1. Asset protection trusts: Domestic asset protection trusts are not permitted in California but some spouses set them up in other states where stronger protections apply.
2. Lifetime asset protection trusts: These are often created by families to pass on wealth and because they shield inheritances from commingling with marital assets, they can offer strong asset protection in divorce cases.

For many divorcees in California, a business is the largest asset they own.

The main legal strategies to protect businesses in divorces come from the company structure/formation, which is often decided well before the possibility of divorce arises.

The following outlines the main risks and protections offered by the three main business entity types in California:

1.    Limited Liability Companies (LLCs)

LLCs are business structures that separate personal assets from the business.

This arrangement usually protects business owners from lawsuits or debts, but it can also help during a divorce if it’s set up correctly—especially if the LLC was formed before the marriage and no community property was used to fund company operations.

However, California judges can still order a share of the business to a spouse in some circumstances.

2.    Businesses With Partners or Investors

A business owned with partners or investors, with a shareholder agreement in place, can also protect the company during a divorce.

For instance, a buy-sell clause can set rules on how the business will be valued in a divorce and give the company or other business partners the right to buy back shares to prevent them from being awarded to a spouse.

3.    Family Limited Partnerships (FLPs)

FLPs allow ownership and control of family assets while limiting access to them during a divorce.

Assets such as real estate, investments, or a family business are placed into the FLP with a senior partner named and other family members acting as general partners with varying levels of control.

During divorces, spouses cannot usually access assets in the FLP because they are owned by the partnership rather than individuals and they cannot force a sale of FLP assets. Transfer restrictions also apply to most assets.

One of the best protections against asset loss during a divorce is pre- or post-marriage agreements, sometimes called prenuptials or postnuptial agreements.

• Prenuptial agreements allow couples to set their own financial terms for marriage (determining separate and community property) and override California’s default community property laws. The risk with a prenuptial is that a judge may overrule its terms if there is reason to question its fairness or transparency.
• Postnuptial agreements are the same as prenuptials (and carry the same enforceability risks) but are created after the marriage starts.

Anyone facing a Los Angeles divorce should not overlook retirement accounts, IRAs, and pensions when seeking to protect assets.

These valuable assets are generally subject to division during a divorce if contributions were made during the marriage, and there are also often tax implications with withdrawals.

You may need professional advice before implementing strategies to help you protect retirement assets, but consider the following:

• Seek a Qualified Domestic Relations Order (QDRO), which determines how a 401(k) or pension is divided and reduces the risk of tax penalties.
• Keep pre-marital contributions separate: Maintain clear records showing the value of any pre-marital contributions.
• Negotiate asset trade-offs: Offer other assets of equal value to your spouse, such as real estate or investments.

For high-net-worth individuals, in particular, discussions with a qualified Los Angeles divorce lawyer or property division attorney may yield other ideas for protecting assets before, during, and after a divorce.

Some more advanced asset protection strategies include specialized irrevocable trusts located offshore and Medicaid Asset Protection Trusts (MAPTs).

In summary, asset protection strategies in Los Angeles divorces should be planned and executed long before marital issues arise and divorce papers are filed.

The family attorneys at The Sands Law Group, APLC in Los Angeles can help with asset protection strategies during a California divorce. Contact us online or call 213-788-4412 today for a free case evaluation.