In a complex divorce with many high-value assets, transferring some assets to children can be a solution to a hotly contested property division.
Understanding Transfers to Children During Divorce
Assets acquired during the marriage are, with a few exceptions (such as gifts, inheritance, and personal injury awards), marital assets. Marital assets must be divided in a divorce. Assets the spouses each owned before marriage are usually considered to be separate assets and are not divided in a divorce (each spouse keeps their own separate property). Transfers of separate property to children have no impact on a divorce. Transfers of marital property to children do impact the divorce property division.
Transferring marital assets to children in a unilateral attempt to remove them from the marital estate and conceal them from the court-ordered division is considered dissipation of assets. Transfers made to a child that are not agreed upon or within the couple’s normal patterns of giving may also be considered dissipation. Any assets transferred to a child in an effort to camouflage them from the spouse (and from the court) will be reversed in a divorce case. In short, do not transfer assets on your own to your child during a divorce.
However, transfers of assets to children are only considered dissipation if both spouses disagree. If both spouses agree, then a transfer can be made. The importance of this should not be overlooked since transferring assets to children can be a way to resolve disputes over marital property.
Assets with Meaning
There are some assets that hold sentimental meaning or generational importance, such as family heirlooms, homes, jewelry, or other assets that symbolize things to one or both spouses. A home that has been in the family for many generations, a collectible car that symbolizes success, or a piece of artwork that functions as a status symbol are examples.
Although these assets may come from one side of the family or have deep, personal meaning to just one spouse, it is not uncommon for title to them to be held in both names (such as a family home that has been passed to the couple) or for the spouses to have purchased them together (such as artwork). These assets can be highly disputed in a divorce since one spouse may feel strongly that they belong in their family line or are symbolic of something that is personal to them, while the other spouse feels they took ownership together and therefore they are equally entitled to the assets.
It is also possible that both spouses are strongly attached to the asset because of what it represents about their lives, success, or position. Simply compensating one spouse for the financial value of the asset and giving ownership to the other spouse often is not a good solution in this type of situation.
Agreeing to Transfer Assets to Children
One way to solve a dispute like this is for both spouses to agree to transfer the assets to the children of the marriage. Both spouses benefit from this, knowing the asset will remain in the family and will be used and enjoyed by the children. This provides a mutually agreeable way to stop the conflict over the assets in question and reduces the full value of the marital estate, leaving less to fight over. If the children are adults, the assets can be transferred directly. If the children are minors, the assets can be placed in trust.
Drawbacks to Transfers to Children
While transferring certain assets to children may resolve the dispute over ownership in the divorce, there are tax consequences to take into account. Transferring assets during life transfers your tax basis to the recipient. If, instead, you wait to transfer them after your death, the recipient receives a stepped-up basis. Placing the assets in a revocable trust will allow a step up in basis upon inheritance which may make this a good compromise.
If assets are transferred directly to children, there are other concerns as well. If the child owns the asset and they die before you, they can dispose of it at their death as they wish, which may not be a manner with which you or your spouse agree. They may become disabled and need to sell the asset. If they get into debt, the asset could be seized or sold to repay the debt. Additionally, the child could marry and divorce, placing the asset in jeopardy in their own marital property distribution.
Transferring assets to children as part of a property division can provide a mutually agreeable solution for fiercely contested assets. This decision should be made in conjunction with your divorce attorney, your estate attorney, and your financial planner.