How to Protect Your Assets During a Divorce

Divorce can be a complex and emotionally charged process, but it’s also a significant financial event. Ensuring that your assets are protected during this period is critical for maintaining financial stability post-divorce. Proper asset protection involves understanding legal rights, preemptive financial strategies, and the role of professional advice. This comprehensive guide will outline key steps and considerations for protecting your assets during a divorce, particularly within the context of Ontario’s family law system.

Understanding How Assets Are Divided in Divorce

The Equalization of Net Family Property in Ontario

In Ontario, the division of assets is governed by the Family Law Act, which operates on the principle of equalization of net family property. This principle ensures that the value accumulated during the marriage is shared fairly between both spouses, regardless of whose name is on the title.

How It Works:

• Net Family Property (NFP): Each spouse calculates their NFP, which is the value of their assets minus their debts at the date of separation, less the value of property owned at the date of marriage.
• Equalization Payment: The spouse with the higher NFP may owe an equalization payment to the other to balance the division of marital property.

Marital vs. Non-Marital Assets

Assets that are considered marital property and thus subject to division include:

• Jointly Owned Property: Homes, vehicles, and shared investments.
• Pensions and Retirement Accounts: Contributions made during the marriage.
• Business Interests: The portion of a business acquired or grown during the marriage.

Non-marital assets, which are typically excluded from the division, include:

• Pre-Marriage Assets: Assets acquired before the marriage, except for their increase in value during the marriage.
• Inheritances and Gifts: If kept separate and not mingled with marital funds.

Understanding which assets are considered marital or non-marital can guide your protection strategy.

Preemptive Steps to Safeguard Your Assets

Create a Prenuptial or Postnuptial Agreement

One of the most effective ways to protect your assets during a divorce is to have a prenuptial or postnuptial agreement in place. These legal documents outline how assets will be divided in the event of a divorce, providing clarity and minimizing disputes.

Key Features of a Prenuptial Agreement:

• Asset and Debt Disclosure: Full disclosure of each party’s financial status before the marriage.
• Asset Protection Clauses: Clear delineation of which assets remain separate property.
• Spousal Support Terms: Provisions for spousal support, if applicable.

For couples who are already married, a postnuptial agreement can serve a similar purpose. These agreements must be negotiated and drafted carefully to ensure enforceability under Ontario law.

Keep Detailed Financial Records

Maintaining comprehensive records of your assets can be critical for proving their value and ownership. This includes:

• Property Deeds and Titles: Proof of ownership for real estate, vehicles, and other high-value items.
• Bank and Investment Statements: Documentation of balances and transactions over time.
• Appraisals and Valuations: Up-to-date appraisals of real estate, jewelry, and other valuable assets.

Having clear documentation can help demonstrate whether an asset is marital or non-marital and establish its value at the time of separation.

Maintain Separate Accounts for Non-Marital Assets

To protect inheritances or assets acquired before the marriage, keep these funds in a separate account and avoid commingling them with joint marital accounts. Once an asset becomes mixed with marital property, it may be subject to division.

Financial Strategies During Divorce

Open Individual Bank Accounts

As soon as divorce becomes imminent, consider opening an individual bank account in your name. This account should be used for your income and necessary expenses, ensuring that your financial independence is maintained during the divorce process.

Monitor Joint Accounts

If you have joint accounts with your spouse, keep an eye on all transactions. Work with your lawyer to prevent unauthorized withdrawals or significant expenditures that could impact the division of assets. Courts may view draining accounts as an act of bad faith, which could influence the outcome of the property division.

Freeze Joint Credit Lines

To avoid incurring additional joint debt during the divorce, contact your bank or financial institutions to freeze joint credit cards and lines of credit. This step ensures that neither party can take on new debt that both would be liable for post-divorce.

Legal Strategies for Asset Protection

Understand Your Rights to the Marital Home

The marital home, or matrimonial home, holds special significance under Ontario law. Both spouses have an equal right to stay in the marital home, regardless of ownership. Selling, mortgaging, or refinancing the home requires consent from both parties or a court order.

Strategies for Protecting Your Interest:

• Negotiate a Buyout: If one spouse wants to remain in the home, they can negotiate to buy out the other spouse’s share.
• Court-Ordered Sale: If neither party can agree on who stays in the home, a court may order its sale and the division of proceeds.

Seek Temporary Court Orders

If financial disputes arise during the divorce, temporary court orders can help protect your assets and provide financial stability until the divorce is finalized. Examples include:

• Exclusive Possession Orders: Granting one spouse the right to remain in the matrimonial home while the divorce is ongoing.
• Temporary Support Orders: Ensuring that spousal or child support payments are made during the divorce process.

Work with a Divorce Lawyer

A qualified family lawyer can provide tailored advice for protecting your assets. They can help identify potential vulnerabilities in your financial situation and suggest legal avenues to safeguard your interests. A lawyer’s guidance is essential for navigating complex cases, especially those involving business interests or international assets.

Special Considerations for Business Owners

Valuing a Business During Divorce

If you or your spouse owns a business, it must be accurately valued to determine its share in the division of assets. Courts may require:

• Business Appraisals: A certified valuation by an expert to assess the business’s worth.
• Income Statements and Balance Sheets: Financial documentation that provides a comprehensive view of the business’s financial health.

Protecting Business Interests

To protect your business during a divorce:

• Separate Personal and Business Finances: Avoid commingling business and personal funds to establish clear ownership.
• Shareholder Agreements: If applicable, a shareholder agreement can include provisions for handling divorce-related asset divisions.
• Consider a Buy-Sell Agreement: This agreement outlines terms for buying out a spouse’s share of the business, preventing unwanted involvement in business operations.

Future Planning

If you are considering a divorce and own a business, consult with both legal and financial advisors to plan for the future. Options like restructuring business ownership or changing the business’s legal structure may provide additional protection.

Protecting Investments and Retirement Accounts

Division of Pensions and Retirement Savings

Retirement accounts, such as pensions and RRSPs, are considered marital property if contributions were made during the marriage. Dividing these assets requires:

• Valuation by Experts: Ensuring that pensions are accurately valued, considering current and future benefits.
• Tax Implications: Transferring retirement funds as part of a divorce settlement can have tax implications. Working with a financial planner can help mitigate these consequences.

Designating Beneficiaries

If your spouse is currently named as the beneficiary of your retirement accounts or life insurance policies, update these designations once the divorce process begins or is finalized. This step ensures that your assets go to the intended recipients post-divorce.

Common Pitfalls to Avoid During Asset Protection

Hiding Assets

Some individuals are tempted to hide assets to shield them from division during a divorce. This tactic is not only unethical but also illegal. Courts take asset disclosure very seriously, and attempting to hide assets can result in severe legal penalties, including loss of credibility in court and an unfavorable settlement.

Overlooking Shared Debts

While focusing on assets, do not overlook joint debts. Both spouses are typically liable for debts incurred during the marriage, regardless of who incurred them. Ensuring that debts are properly accounted for in the division of property helps prevent future financial surprises.

Emotional Decision-Making

Divorce can evoke strong emotions that lead to impulsive decisions, such as selling assets quickly or agreeing to unfavorable terms just to end the process. To protect your assets effectively, strive to separate emotion from financial decision-making and seek objective advice from legal and financial professionals.

Post-Divorce Asset Protection

Rebuilding Financial Independence

After the divorce is finalized, focus on rebuilding your financial independence:

• Create a New Budget: Adapt your budget to reflect new income and expenses.
• Establish an Emergency Fund: Set aside funds to cover unexpected expenses and prevent future financial stress.
• Review Credit Reports: Check your credit report to ensure that no joint debts are affecting your credit score.

Review and Update Legal Documents

Ensure that all legal documents reflect your post-divorce status:

• Wills and Trusts: Update your will to reflect new beneficiaries and trustees.
• Powers of Attorney: Change any financial or health care powers of attorney that named your former spouse.
• Estate Planning: Consult with an estate planner to secure your financial future and protect your assets.

Conclusion

Protecting your assets during a divorce requires proactive measures, clear documentation, and the guidance of experienced professionals. By understanding how assets are classified and divided under Ontario’s family law, you can take steps to secure your financial future. Creating prenuptial or postnuptial agreements, maintaining separate accounts, and seeking professional legal and financial advice are all crucial for navigating the divorce process with your assets intact.

Whether you own significant investments, a business, or a modest portfolio of assets, careful planning and strategic action can help ensure that your financial well-being is preserved through and after the divorce.