The Ideal Divorce Firewall Strategy

For all of my clients and content consumers, thank you for your patience. In the last few months, a lot of time has been divided among the usual law firm work, creating content, the Advanced Institute estate planning conference next week, AND finishing the upcoming book The Divorce Firewall Strategy. That book is now being reviewed, and we hope to have an official launch in a few weeks. For now, here is part of one chapter of the book, and I hope to have more varied content once the Advanced Institute has concluded.

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The Ideal Plan 

In this book, we’re going to explore different legal documents, techniques, and strategies to get you to an overall plan that can protect you from a marriage or other relationship gone bad so that your situation looks more like Rob Paulson’s and not at all like Bill Peterson’s. It’s important to note that there are no miracle cures or cherry picking an item and thinking this one thing is a miracle cure to all relationship vulnerabilities. Let me give an example of one of these “miracle cures” happening around the time I am starting the writing on this book.

Soccer sensation Achraf Hakimi and his actress wife Hiba Abouk are embroiled in a divorce. When they arrived in court, though, Hakimi ended up shocking his wife by revealing that he owned nothing. Apparently, he had been consistently directing his salary and fortune to his mother so she could title the assets in her name rather than Hakimi accumulating it himself. All of the houses, apartments, and wealth were all owned by his mother, and if he wanted something, his mother would just buy it for him.

And suddenly everyone in YouTubeLand, social media, and other digital spheres were shouting about how everyone should now just put their assets into their mother’s name as the ultimate, best, and sole way to protect against divorce with no need for any comprehensive strategy.

Unfortunately, this “duct tape” advice is as dangerous as it is simplistic, and it could lead to huge problems in some common circumstances.

• What if mom dies? Is she leaving everything back to you, or does her estate plan leave everything to all of her children? What kind of protection do you have at that point with the assets back in your individual name?
• What if mom is sued? Those assets are now on the chopping block for a big legal judgment.
• What if mom gets upset with you about something and decides to give your assets to other people?
• What if your mom says “no” about something important you need and are requesting money for?

All of these circumstances can and do happen in this world with great frequency, and if you have turned over your life’s savings to someone else there is little you can do to get your assets back. What benefit is protecting 50% of your assets against a divorce if you simultaneously risk losing 100% just because the technique is simple? No, it will take a little more work and strategizing to get you to a high level of protection with a much lower risk of losing, but if you are the type of person who is driven to accumulating wealth through intelligence and hard work, you already understand that.

In this chapter, we’ll review the legal documents and arrangements we’ll flesh out in the remainder of the book, as well as a summary of some techniques and strategies. Think of these legal documents and arrangements as tools, and the techniques and strategies as ways to use the tools in a coordinated strategy like Rob Paulson did. Having a legal document is not enough just like having a wrench to fix a car is not enough if you don’t use it properly.

Legal Documents and Arrangements

The Domestic Asset Protection Trust

A self-settled irrevocable trust can be the most powerful legal protection vehicle available against not only divorce, but also lawsuits, creditors, bankruptcy, and loss of disability and other public benefits should the need arise. Commonly called a Domestic Asset Protection Trust, it is created by the person who wants protection, they place the assets they want to protect into the trust, and they are the first-level beneficiary. This trust is not available in all states, but there are techniques available to have your trust and assets come under the jurisdiction of one of those states even if you live elsewhere. Other than a lot of formalities to make the trust work, the biggest drawback is that you can’t be the trustee of the trust, nor can you distribute assets or money to yourself, so choosing the right trustee becomes a critical decision.

This is where Rob Paulson put most of his assets before and during the course of his marriage, and it is partly what protected his wealth from the divorce court. By not having any ownership or control over distributions from these assets and accounts, they weren’t even eligible to be on the table for a divorce. This trust will be covered extensively in this book since a lot of the other techniques should be incorporating and referencing the trust as part of a coordinated strategy.

Cohabitation Agreement

Before living with someone you are in a romantic relationship with, it is vital to have a cohabitation agreement in case things do not work out, or even if the relationship does work out that the agreement is a defense against claims that the cohabitation was actually a common law marriage. The terms are very similar to a premarital agreement in that the document covers basic life and financial topics such as how expenses are shared, which assets are separate property, and which assets are clearly defined as jointly owned while everything else remain separate. Without a solid cohabitation agreement in place before moving in together, you are putting your assets at risk. This agreement in combination with other techniques can make your life and financial future far more secure, and we’ll explore this document and the overall strategy in more detail.

Premarital Agreement

If after reading this book you still decide to get legal married, then at the very least put a solid premarital agreement in place to ensure that if the marriage dissolves you don’t lose everything like Bill Peterson did. Unfortunately, most people often only find out just how much they can lose in a divorce after it happens to them, and then they shake their heads at their naivety and what they wish they knew before getting married. If they had a solid, well-crafted, and comprehensive premarital agreement (a prenup) which contained the right provisions and was periodically updated, then a lot of the different ways they lost out in a divorce could have been avoided or at least mitigated. But the premarital agreement is only one component of the overall protective marriage strategy we’ll explore later.

Limited Liability Companies and Corporations

Having a corporation or limited liability company own real estate, cash, and other valuable investments can ensure that some high-value assets gain additional legal protection. More importantly, it solidifies the argument that the Domestic Asset Protection Trust comes under the chosen state laws if the entities are owned by the trust and are also incorporated/formed under the same state laws. Of course, the business entities actually have to actually act like a business in order to have corporate protection from lawsuits. For example, just titling a house in the name of a limited liability company but not having the trust rent it to you under a proper lease agreement where you are paying rent is just begging a court to let someone get through the protective shields you are trying to build.

Contracts, Waivers, and Other Agreements

What a wonderful world it would be if people kept their word and remembered things perfectly. But we know that is not reality. That’s why there are contracts, leases, waivers, and other written agreements to avoid the pitfalls of faulty memory and outright lies if someone turns vindictive. However, depending on the phase of the relationship, the agreements don’t necessarily have to be complex. If you are going to get into a romantic relationship to the point of spending the night at one another’s places, it is also time to make absolutely sure there is documentation that clearly defines the relationship and living arrangements, even if it is as simple as stating you are not living together. While not quite as comprehensive as a cohabitation or premarital agreement, they can nonetheless be invaluable if there is a dispute.

Trusts and Other Estate Planning Documents

Many times, people look at trusts only as a way of planning for where your assets go after you die, but these and the usual complementary documents can be critical in the event of a health crisis as well as protecting your assets from being confiscated by a court in a domestic or legal proceeding and given to someone else. In particular, the Domestic Asset Protection Trust can be the keystone to an entire protective strategy that will also work in tandem with more traditional estate planning documents and techniques, even to the point of providing generational protection for your own children during their lifetimes so what you leave them will likewise not be lost to divorces or failed relationships. Having the right estate planning documents can make sure your wealth continues on to the people you want… and exclude people you don’t, such as a spouse.

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Look for the upcoming book!