Prenuptial Agreements as an Asset Protection Strategy
A prenuptial agreement is an asset protection strategy. According to some polls, nearly 50% of all marriages end in divorce. Having a valid prenuptial agreement in place can help reduce some of the emotional and financial heartache that often accompanies divorce. It may also help expedite the process of finalizing the divorce.
Marital Property Rules in Texas
Texas is a community property state, which means:
- All property acquired during a marriage is presumed to be community property
- Income generated from separate property is considered community property
- Proceeds from the sale or exchange of separate property remain separate property
- Gifts or inheritances received by one spouse are considered separate property
- A party claiming property is separate must prove it by clear and convincing evidence
Case Scenario: Mary and Bill
Mary and Bill were married. One year into the marriage, Bill inherited $1.4 million in stocks and bonds and transferred them into his Charles Schwab account, which already had $600,000, resulting in a combined balance of $2,000,000.
Mary had a separate Wells Fargo Advisors account worth $400,000 at the time of the marriage. The couple lived on their salaries and did not rely on investment income.
Fifteen years later, Bill filed for divorce after being unfaithful. At that time:
- Bill’s account had grown to $3,000,000
- Mary’s account had grown to $1,000,000
- Their combined investment assets totaled $4,000,000, presumed to be community property
The Divorce Dispute
Mary wanted half of the $4,000,000, which meant Bill would be gifting her $1,000,000. Bill disagreed, and both sides hired lawyers to review how Texas marital property laws applied.
Negotiations stalled as neither party wanted to compromise. A mediator suggested hiring a forensic accountant to trace the funds and determine the true amount of separate vs. community property.
Tracing Results
The forensic accountant reviewed the transaction history of both investment accounts from the date of marriage onward.
- Bill’s portfolio: Primarily dividend-paying stocks
- Mary’s portfolio: Primarily growth stocks
Due to the difference in investment strategy, the accountant concluded:
- 25% of Mary’s account remained her separate property
- None of Bill’s account qualified as separate property
Mary and her lawyer were pleased with the result. Bill and his lawyer were not.
Summary of Tracing Results
Allocation of the Two Accounts
| Bill’s Account | Mary’s Account | |
|---|---|---|
| Value at Marriage | $600,000 | $400,000 |
| Bill’s Inheritance | $1,400,000 | — |
| Accounts Now | $3,000,000 | $1,000,000 |
| Community Property | $1,800,000 | $1,800,000 |
| Mary’s Separate Property | — | $400,000 |
| Net Properties Each | $1,800,000 | $2,200,000 |
This example illustrates how a prenuptial agreement or detailed financial tracing can play a critical role in determining property division—and help protect separate assets during a divorce.
