If you are entering into a marriage and you already own significant assets, such as a home, rental property or business, it is always a good idea to work with an attorney to develop a prenuptial agreement. Clearly defining what each of you brings into the marriage upfront will not only serve to preserve your assets, should your marriage end, it may also head off serious financial misunderstandings along the way.
California is a community property state, which means that all assets acquired during marriage, by either spouse, are community in nature. In the event of divorce, all community property must be divided equally. That rule doesn’t apply, however, if an asset can be traced to a separate property source, is acquired as a gift or inheritance, or earned while spouses are separated.
Tracing an asset source, however, is often difficult, expensive and can easily stray into legal gray area. Having a prenuptial agreement in place can help avoid unnecessary misunderstandings about your finances.
What is a prenuptial agreement?
A prenuptial agreement helps protect the assets each spouse has prior to marriage. It is a contract between the couple, which describes the assets and debts each person has, as well as the distribution of those assets and debts in the event of divorce. Additionally, a prenup can cover expectations around future spousal support, community contributions to separate property, and other financial matters. A couple can also use a premarital agreement to contract out of community property law, and make certain assets that would otherwise be a community asset the separate property of one spouse.
Here is what can happen to your assets without a prenuptial agreement when:
You own a home
Let’s imagine that you own a $1,000,000 home previous to your marriage, and you decide to take out a $300,000 mortgage, after you are married. If the lender mortgage company relies on the income of one or both parties, the proceeds of the loan will be deemed community property because earnings are community property. As a result, the proceeds of the loan will become community property, and your spouse will now have community interest in your home. Let’s say that you divorce after 15 years, and the house has significantly increased in value to $2,000,000. Your spouse has community interest not only in the proceeds of the original loan amount, but also the increased value of the house. This may not be what you had intended.
You own rental property
When you own rental property, things just tend to break down physically. Let’s say that you need to purchase a new refrigerator or repair a toilet. Since the expenditure of time, skill or labor is community property; the community just gained an interest in the rental property, regardless of whether you repaired the toilet yourself, or called a plumber. If you should get divorced, how much of that rental property is clearly yours?
You have a business
If you own a business going into a marriage, having a premarital agreement in place is especially important. We have all heard stories of businesses that had to dissolve after a couple spit up because one spouse didn’t have the funds to buy the other spouse out. This situation harms not only the couple, but also the employees, suppliers and even the community the business serves.
Sometimes businesses do move forward successfully with co-owners who are no longer married, but in my experience, this situation is rare.
If you are about to get married and want to discuss how a prenuptial agreement might be helpful in your situation, please contact our office for a consultation.
Attorney Christina Sherman is a Marin County CA family law attorney and Certified Family Law Specialist, specializing in divorce, child custody and support, marital contracts and other family law issues.
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