Divorce Insurance: It’s Mine, It’s Ours, It’s Gone!

Posted on September 28, 2011 by Bill Faiferlick

It’s Mine, It’s Ours, It’s Gone. Unfortunately, this is all too often the case. Protecting yourself and your assets from the long term financial impact of the dissolution of business partnerships, your business partner’s marriage, your marriage or meretricious relationship has potentially irreversible financial consequences.  Risk management takes on a new meaning when considered from the vantage point of relationship dissolutions.

One of the biggest risks to financial security is the internal implosion which occurs when a partner or spouse files for divorce with the ensuing division of assets (including business or professional assets) and for the unfortunate many – the unexpected financial drain to suddenly pay off a partner, years of legal fees, court costs and time committed to dealing with a system designed to transfer wealth from your pocket to your attorneys.

This article will focus on marriage primarily because there are some important legal implications that automatically occur when you say “I do”. Marriage, first and foremost in the eyes of the law, is not a “love” relationship. It is a business contract between two people. You automatically and voluntarily enter into this contract when you say “I do.” By this simple act, you now not only assume fiduciary duties to your spouse but also a lifetime obligation of management of community property and its inherent obligations.

Lifetime management of community property is a comprehensive responsibility that most of us enter into unknowingly in most states. For example, in the purchase of community property or land, mutual participation is required by both spouses and both must participate in its sale, mortgage, lease or other disposition. Neither spouse may bequeath more than half of the community property by will without the consent of the other spouse and neither spouse may sell, pledge or dispose of community property household goods and furniture without the consent of the other spouse. This also extends to gift giving which can be categorized as wasting of assets under some circumstances such a gifts or money spent on paramours.

By saying “I do”, a fiduciary responsibility is created between spouses which requires both spouses to manage the community assets in the economic best interest of the community estate. If, for example, it can be proven that community assets have been dissipated by one partner by giving assets to a third party (friend or paramour) for example, this may constitute dissipation or wasting of community property. The partner doing the gifting may be liable for the total value of the gifts when the division of assets is determined by the courts depending on a number of factors. If one spouse were to invest in real estate without the other’s prior knowledge and agreement, any loss to the community estate could be attributed in whole to the spouse who engaged in the investment transaction.

For business owners, professionals and affluent individuals, tiered risk management strategies can mitigate future potential losses. The divorce of a business partner can mean the failure of your business if steps aren’t taken to protect against the likelihood based on statistics of marriage dissolution. For many professionals or sole business owners, a substantial portion of your net worth is tied to the business and its success is dependent upon those assets and or capital. Affluent individuals are particularly at risk when multiple jurisdictions could be considered for a divorce proceeding as some jurisdictions are more favorable to one spouse over another and the orders awarded are onerous. Multiple jurisdictions and partitioning of assets may provide a better outcome as some jurisdictions or countries tend to favor the less economically endowed party.

Divorce can have huge financial consequences for your business continuity, your business partner, your retirement, even your ability to earn a living and other assets you’ll eventually retain if asset protection strategies are not incorporated as part of your overall risk management planning.