Divorce not only affects personal lives but also has significant implications for property ownership and asset protection. Forming a Corporation with the Kansas Secretary of State such as an Limited Liability Company (LLC) can be a strategic way to protect your rental property from becoming marital property in the event of a divorce. When determining what type of entity to form, you should always consult with an  experienced business attorney. If you have questions regarding registering what type of corporation might be best for you, contact Grabbe Law Office to schedule a free 15-minute consultation to discuss your business formation needs with our attorney.

Let’s take this common scenario:

Two family members, Joe and Jane, jointly own a rental property. This property is not held in a corporation, meaning they own it directly. Joe gets married, and after some time, he goes through a divorce. The question arises:

Does This Property Become Marital Property in a Divorce, subject to division?

Divorce can be a complex and emotional process, especially when it comes to dividing assets. One key issue is determining what constitutes marital property. 

Defining Marital Property

Marital property includes all assets acquired or earned during the marriage, which can be subject to division upon divorce. However, property acquired before the marriage or received as a gift or inheritance is typically considered separate property, unless it has been commingled or transmuted into marital property.

Key Factors Courts Consider When Determining if Property is Marital Property

1. Timing of Acquisition.  If Joe acquired his interest in the rental property before marriage, it generally remains his separate property.  If any part of the property was acquired during the marriage, that portion might be considered marital property.

2. Contribution to Property. Courts look at whether marital funds were used to maintain, improve, or pay for the property. If Joe and his wife used joint funds to pay the mortgage, taxes, or for renovations, this could convert part or all of the property into marital property.

3. Commingling of Assets. If Joe deposited rental income into a joint bank account or used it for marital expenses, this could be seen as commingling.  Commingling can complicate the classification of property, potentially making it partially marital.

4. Transmutation. Transmutation occurs when separate property is treated in a way that demonstrates an intent to make it marital property. For example, if Joe added his spouse’s name to the property deed, it could be considered an act of transmutation.

5. Use of the Property. How the property was used during the marriage can be a factor. If it served as a primary residence for the couple or if the spouse was significantly involved in managing the property, these might influence the court's decision.

6. Other factors. Courts may also consider other factors to determine whether or not something is marital property. This can include the source of funds used to purchase the property, whether it was an inheritance or gift and from whom, non-financial contributions such as labor, management or input or influence into significant decisions regarding the property, whether there is a prenuptial or postnuptial agreement, and the statements and intentions of the parties.

Each divorce case is unique, and the specific circumstances will significantly impact the court’s decision. It’s essential to consult with a family law attorney to understand your rights and protect your interests in such situations.

Benefits of a corporation in Protecting Property

Let’s revisit our scenario and see how a corporation (in this case, an LLC) could change the outcome.

1. Create a Separate Legal Entity.  An LLC is a separate legal entity from its owners (members). This separation helps in distinguishing personal assets from business assets. By transferring the rental property to an LLC, the property becomes an asset of the LLC, not a personal asset of Joe.

2. Clear Ownership Boundaries. The property owned by the LLC is not considered Joe’s personal property, which helps in keeping it outside the marital estate. Even if Joe manages the property, it remains under the LLC’s ownership, offering a layer of protection against marital claims.

3. Limited Commingling. When property is held in an LLC, rental income and expenses are managed through the LLC’s bank accounts, reducing the risk of commingling with personal marital assets. Keeping finances separate helps in maintaining the property as a distinct asset, not subject to division upon divorce.

4. Asset Protection. LLCs offer liability protection. Personal creditors, including a divorcing spouse, generally cannot reach LLC assets directly. This protection helps in safeguarding the property from being divided as part of a divorce settlement.

5. Estate Planning and Succession. An LLC can facilitate smooth succession planning. Ownership interests in the LLC can be transferred without impacting on the LLC’s operations. This feature ensures that the property remains within the family and is managed according to pre-established terms, even during personal legal changes like divorce.

How Can I Protect My Property with a Corporation?  Is an LLC the right corporate entity for me? What Steps Should I Take?

1. Consult with an experienced business attorney. There are several factors that you should consider when determining what type of corporate entity is right for your business. 

2. Formation. Form a Corporation by filing the necessary paperwork with your state’s Secretary of State office. Have an attorney draft an operating agreement outlining the management structure and ownership percentages. Our experienced attorneys at Grabbe Law can help. Schedule a complementary consultation.

3. Transfer Property. Transfer the ownership of the rental property from personal ownership to the corporation. This involves updating the property deed to list the corporation as the owner.

4. Separate Finances. Open a separate bank account for the corporation and ensure all rental income and expenses go through this account. Avoid using corporate funds for personal expenses to maintain clear financial separation.

5. Maintain Corporate Formalities. Hold regular meetings, keep minutes, and follow the operating agreement’s terms to ensure the corporation is treated as a distinct legal entity. Proper documentation and adherence to formalities are crucial in demonstrating the corporation’s independence from personal assets.

Forming a corporation to hold a rental property can provide significant protection against the property becoming marital property in the event of a divorce. By maintaining clear boundaries between personal and business assets, you can safeguard your investments and ensure they remain protected.

If you’re considering setting up a corporation for your rental property or have questions about asset protection, get a free 15 minute consultation with an experienced attorney at Grabbe Law to guide you through the process.