Navigating Premarital Assets During Divorce

Premarital property is generally anything that’s acquired by either you or your spouse prior to the date of your marriage. It can also include inheritances or gifts that are given to one party during the marriage. These assets are typically set aside in divorce when you are considering how to divide things up.

Premarital property can get complicated in divorce cases where there is a co-mingling of premarital assets with marital assets, potentially altering their classification and making the division process more complex. If you’re considering divorce or want a clearer understanding of your marital estate, knowing how assets are categorized and divided is essential. Some things to think about include:

• Protecting Premarital Assets
• Role of Prenuptial and Postnuptial Agreements
• Bank Accounts
• Retirement Accounts
• Real Estate
• Business Interests
• Gifts or Inheritances
• Children’s Accounts

Protecting Premarital Assets

To maintain the integrity of premarital assets, you will have to document that you’ve kept your assets completely separate. Many clients are surprised to learn how easily premarital assets can be transformed into marital property through commingling. For example, if you add your spouse’s name to a bank account that you had prior to marriage or use marital funds to renovate a home that belonged to your spouse before you were together, the asset may be reclassified as marital property, either fully or partially. This is an area where the details—and documentation—matter.
Some things you can do to avoid commingling include:

• Keep accounts solely in your name.
• Avoid using marital funds for improvements or contributions.
• Maintain detailed financial records.

Most married couples end up with commingled assets. In those cases, a forensic accountant may still be able to determine if there is a premarital component.

Role of Prenuptial and Postnuptial Agreements

Prenuptial agreements are common tools to protect premarital assets. Many clients who experienced contentious first divorces learn from the experience and opt for prenups to avoid litigation in the future.

During your marriage, postnuptial agreements can serve a similar purpose, outlining how assets will be handled if the marriage ends. These agreements can address concerns about commingling, passive appreciation, and asset division, providing peace of mind for both parties.

In my experience, people in second or third marriages are often more meticulous about maintaining separate property. They’ve learned from past divorces that failing to keep clear records can complicate asset division. A common reason for creating a prenup or postnup in these marriages is to avoid repeating previous mistakes and ensure a cleaner resolution if the relationship doesn’t work out.

Whether you’re dealing with bank accounts, retirement funds, real estate, business interests, or inheritances, it’s critical to demonstrate that you’ve kept everything separate to protect those assets in divorce.

Bank Accounts

Bank accounts commonly become commingled once you are married. If you add your spouse’s name to a bank account that was opened prior to marriage, it becomes marital property. It would seem pretty easy to assume that if your spouse had $100,000 in the bank before the marriage, it would be premarital. Under the law, though, if your name has been added to the account, it is now likely a marital asset.

Retirement Accounts

Commingling can also complicate a retirement asset. A retirement account opened before the marriage is a premarital asset. If you continue to contribute to that account during the marriage, those contributions would be marital contributions. This is further complicated by any gains on the account value. An expert may be needed to untangle the marital and premarital components and to determine exactly how much is attributable to each.

Real Estate

If you or your spouse own real estate that was purchased prior to marriage, it is likely considered premarital property at first. People are often surprised to learn during the divorce process that simply adding your spouse’s name to the deed on a house converts it into a marital asset.

Appreciation of real estate that is considered a premarital property can also have a marital component. Appreciation due to the real estate market may still be considered premarital, but appreciation due to renovations may not, especially if those renovations are funded by marital income, Both can exist within the same asset, so a lawyer and accountant may be needed to help split the two components.

Business Interests

Closely held businesses can also be complicated. If your business was started during the marriage, it is likely considered marital property. Regardless of whose name is listed in the operating agreement, there will likely be at least some marital component. This happens because marital funds are often invested through the course of operating a family-owned business, or time is spent by one or both spouses to run it. If that’s the case, you may need a forensic accountant to separate out the premarital and marital value.

Gifts or Inheritances

If a gift or inheritance is given to one spouse, it is typically considered separate property, similar to a premarital asset. If it is given to both, like a check written to you and your spouse, it is considered a marital asset. An exception to this can happen when you cash the check. Depositing these funds into a joint account may transform it into a marital asset.

Children’s Accounts

When there are children’s accounts in a divorce, we typically keep those separate from the marital estate. Like a lot of people, you may have 529 or investment accounts for your child. In that situation, the portion that’s attributed to the child should be put in an account that’s for the benefit of the child and not touched. If it does get co-mingled at any point into a joint account, then it could be considered a marital asset subject to division.

Final Word

Understanding the distinction between premarital (or separate) and marital property is essential when navigating a divorce. The process can be complex, especially when assets become commingled or their value changes during the marriage. Whether you’re dealing with bank accounts, retirement funds, real estate, business interests, or inheritances, it’s critical to demonstrate that you’ve kept everything separate to protect those assets in divorce. Otherwise, they may be considered part of the marital estate and be subject to division. Tools like prenuptial and postnuptial agreements can also offer valuable protection and clarity.