Remember 1987? If you lived here in Alaska, you might remember that it was the absolute nadir of the recession. Oil prices had dropped, jobs had gone away, houses had been abandoned. Generally speaking, it was not a good time and place to start a career.
But there I was, fresh out of law school and returning to my hometown. Growing up and going to college here in Anchorage, this had been an exciting boomtown. In the three years I was gone, it had become more like a ghost town.
If you’re an attorney, there are three areas of practice which are going to thrive during a recession: bankruptcy, criminal defense and divorce. I didn’t particularly know how to do any of those things, but learning divorce law was a lot easier than the other two, so I did a lot of that messy stuff in the early years of my practice.
In the process of doing what I had to do to make a living, I learned some important lessons that stayed with me, now that I am pretty much exclusively an estate planning attorney. Most critically: it really matters, as an estate planner, what you do with separate assets of a married couple.
In divorce law, you see, it is really important whether an asset is labeled as “marital” or “separate”. An asset is separate, usually, if it was owned by one of the parties before they got married, or was a gift or inheritance to one of the parties during the marriage. It is marital, usually, if it was earned or purchased during the marriage.
But here’s the big exception to that usual rule: an asset can start out separate, but it can be “transmuted” (the word the Alaska Supreme Court uses) into marital property if the parties do anything to treat it as marital property. And the most common way that happens, is for the parties to retitle an asset to the both of them, or to put it into any kind of joint ownership arrangement.
How important is it that an asset is separate or marital? It is huge. In the property division, the judge is going to divide up only the marital assets. Each party gets to keep their own separate assets, and those don’t count against them. But if that once-separate asset became marital, the other spouse is going to get a piece of that, or at least get other assets to make up for it.
Adding to the screwiness, whether something became marital, is decided for each individual asset. I have seen divorces in which both parties came into the marriage with separate property, but one of them had all of his or her separate property transmuted into marital property and counted in the divorce, and the other one managed to keep his or her separate property separate, so it didn’t count.
So here is the scenario. Fred and Ethel go to see an estate planning attorney. They own their home, and some financial accounts, but Fred also has a condo which he bought when he was a bachelor. After they got married, he rented out the condo, and it is still just in his name.
But now the estate planner, thinking only about taxes and probate avoidance and whatnot, but not about the possibility of divorce, tells them to put all of the assets, including the condo, into a joint revocable trust. Having no idea how divorce law works, Fred and Ethel title all of the properties into the trust.
And now a year later, Ethel has fallen in love with their neighbor Ricky, and has moved out and filed for divorce. Fred is going to get a nasty surprise, when he finds out that Ethel is going to get extra money in the divorce settlement, because the condo has become marital property.
This does not mean you cannot put separate property into a joint trust, and still have it retain its character as separate property. Putting that separate property into a joint trust only creates a “rebuttable presumption” that you wanted it to become marital. All you have to do to avoid that, is include some language in the trust saying that is not the intent, and that if there is a divorce, each party gets their separate property.
You can still do what you want. You just have to know how to do it.
Kenneth Kirk is an Anchorage estate planning lawyer. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult an estate planner who can take all the facts into account. But you knew that, right?
