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Most people have heard of a prenuptial agreement, but have you ever heard of a postnuptial agreement? It’s just like a prenup except that it’s created after marriage. Either document can be used as an estate planning tool, and they can also save marriages before or after financial distress occurs (if it’s done in time to save it). I practiced family law and divorce for 10 years and I’m saddened by the number of cases that could have benefitted from this type of planning but people just didn’t have the foresight to prepare when they had the chance, probably because they simply weren’t aware.
One of the common mistakes I see people make is assuming that a business (or other asset) owned before marriage remains their separate property. But that’s only true to a degree. If the value of the business/asset appreciates during the marriage as a result of the person’s labor or knowledge, that labor or knowledge can create a community property interest in the asset, which means the spouse acquires an increasingly greater interest in the appreciated value of the business/asset as time goes on and it continues to appreciate. In other words, only the value as of the date of marriage can remain separate property, but the appreciation that has occurred during the marriage becomes community property, which means the spouse has a 50% interest. And, the original separate property portion can potentially transmute into community property under certain circumstances, as well.
It can even get more extreme than that. If you can’t prove what the value was on the date of marriage (because you didn’t get an appraisal at the time, for instance) then you’re going to have a hard time demonstrating what your separate property portion is, which means you might lose the right to it.
Or, if you co-mingle community money with separate money, then you may lose the separate property character of the asset. For instance, if you had money in a retirement account before marriage and then you contribute money from your wages (which is community property) into the account after marriage, you might lose the separate property character of your original money and your spouse acquires a 50% interest in the entire balance.
This occurs with real estate all the time. You own a house on the date of marriage and it has some equity, or you use separate property money to put a down payment on a house for the two of you and you title it in just your name. You think it’s your house, right? Well, if you have a mortgage and it’s paid with either/both of your wages, and/or your spouse does something to improve the property, the character of the property is being transmuted from separate to community to various degrees depending on the circumstances. After litigating these types of cases, I can tell you it can be a giant mess to figure out who owns what portion of it.
These are just a few examples, but there are many of these types of tricky little nuances at play.
Having a prenup or postnup would have avoided these (and all) issues. But this stuff only matters if a divorce occurs, right? Wrong!! It matters in a variety of circumstances, such as upon your death, particularly regarding your children’s inheritance rights. Or bankruptcy. Or for purposes of qualifying for various financial programs, such as social security disability, or even qualifying for mortgages. It can also help save marriages when spouses have conflict over financial matters.
-By Jacqueline Rambo, Esq.