How Does Divorce Affect Asset Protection Planning?

Tenants by entireties and retirement accounts are popular and effective asset classes that are exempt from creditors under Florida law. In both cases, married individuals have an interest in each other’s assets, either as co-owners or as a beneficiary.

The termination of the marriage can affect the protection that these assets provide. The post-marriage protection of these two types of exempt assets depends on whether a marriage ends by death or divorce.

Tenants by Entireties

Tenants by entireties refers to a married couple’s joint ownership with rights of survivorship. Entireties assets are exempt from creditors of each individual spouse so long as they are married.

Death of a Spouse

If a married debtor dies, their interest automatically passes by operation of law to the surviving non-debtor spouse. The entireties assets do not become part of the deceased debtor’s probate estate, where they could otherwise be exposed to the debtor’s existing creditors.

However, if the non-debtor spouse dies first, the assets are automatically conveyed in full by the right of survivorship to the surviving debtor spouse, where they are exposed to the surviving spouse’s creditors.

Asset protection planning must consider the age and health of a non-debtor spouse when employing tenants by entireties protection. Also, if the debtor is concerned about the non-debtor spouse dying first, then alternate protection tools should be used.

Divorce

Getting divorced terminates tenants by entireties protection. Entireties assets will be exposed to creditors of a debtor spouse upon final dissolution of the marriage.

Even when getting divorced, the married couple typically wants to protect the assets as a means of spousal or child support in the event there is a lurking creditor claim. Asset protection planning during a divorce should use alternate tools to protect the assets post-dissolution. Transfers of entireties assets made prior to finalization of the divorce cannot be considered fraudulent transfers because the assets will be exempt assets at the time of transfer.

Right of Survivorship After Divorce

Do former spouses still inherit property that was once owned as tenants by entireties? No. Florida statutes state that upon final dissolution of marriage, any tenants by entireties assets automatically convert to tenants in common so that each divorced spouse has separate ownership of half of the asset. Each spouse is free to devise as they wish their share of the former entireties assets.

Retirement Plans and Life Insurance

Retirement plans such as IRAs and 401ks are exempt from creditors. Married individuals typically name their spouse as the beneficiary of retirement plans and the payee of life insurance policies. If a non-debtor spouse dies, the retirement asset inherited by the debtor spouse remains exempt from the debtor’s creditors. The exemption of retirement assets does not depend upon marital status. Cash distributions from inherited retirement accounts paid to the surviving debtor spouse are also exempt. 

Life insurance is different. Life insurance proceeds received by a surviving spouse are not exempt from the surviving spouse’s creditors. In cases where either spouse may have a creditor issue, the couple should create an irrevocable trust to own the insurance policy, and the trust should provide that death benefits remain in trust for a surviving spouse. The irrevocable trust can protect life insurance death benefits from the creditors of either spouse during life or even after one spouse dies.

Divorce presents different issues. People usually do not want a former spouse to receive death benefits of a life insurance policy or to be the beneficiary of their retirement plan. Instead, people typically want these assets to pass to their descendants, rather than a former spouse.

What happens if either spouse neglects to change the named beneficiary of their life insurance or retirement plan after divorce? Does the former spouse end up with these assets?

Like the case of entireties assets, Florida law prevents such unintended results. Florida statutes provide that a final dissolution of divorce automatically terminates a former spouse’s interest in a life insurance policy or retirement plan. But, because the automatic termination is effective only after final dissolution, people are cautioned to remove their spouses from these contracts as soon as possible to prevent the unwanted consequence of a spouse’s death during extended divorce negotiations and legal proceedings.