As discussed in yesterday's blog post, premarital agreements are becoming more and more popular in Texas for persons interested in setting up a plan before their marriage for how property should be divided up if they divorce. If you find yourself in this position, then today's blog post should be of interest to you as well.
We concluded yesterday's blog post where we will pick up the disclosure of financial information in today's blog. Suppose you do not find that trusting others is easy, especially when it comes to sensitive information. In that case, you can take solace in knowing that you can both be protective of your information and fair in disclosing it. After all, you are negotiating with your future spouse- not your future ex-spouse.
Disclosure equals fairness in the eyes of a court.
The simple fact is that if your spouse provides information to a court showing that you withheld information purposefully in the future, it is likely that your premarital agreement will be held to be invalid and unenforceable. This is not necessarily an indication that you purposefully lied or were manipulative. Many people do not want to disclose information because they fear how it will be used and if it could be harmful to them.
Information you provide to your attorney does not need to be in the original form of the documentation and can copy the original documents. Those copies can be returned to you after the case. With this in mind, the areas that you can anticipate finding to be problematic in negotiating a premarital agreement- deciding upon what is community property and what is separate as well as how your marital home will be disposed of in divorce- can be made more accessible by laying your cards out on the table before your marriage begins.
Suppose you own any real estate before you get married. In that case, you will need to have that property classified as separate property so that it is not commingled with community property assets. While you may have owned your marital home from before the marriage, the equity in it or your ability to claim it otherwise as your sole separate property becomes tricky when you consider that your spouse's income may have contributed in large part to its mortgage.
How to consider the growth in value of assets owned before marriage
Having a property that is likely to increase in value that you owned before you got married, you will want to note that in your premarital agreement. Specifically, the question that will need to be decided is whether or not that property will be considered community or separate. If you do not do this now, before you are married, you will be left in a position to have to trace the origins of that property if you should ever be facing a divorce. This is not only difficult to do but often requires the assistance of a CPA or other accounting professional and will cost you a great deal of money.
One technique that I believe would be successful for you and your fiancé is to create a separate document that will lay out all of your and your fiancé's separate property. You can then attach your premarital agreement to that document. This leaves no question as to what should be considered separate property. Making the definition of separate property known within that document will erase any doubt about how you and your spouse applied that term.
Special considerations related to real estate
If you own any separate property real estate, you will need to note how much equity is currently held in that property. Should you die before a divorce, your spouse will likely need to waive any right they have to inherit the property upon your death should you decide to name the property as separate rather than community.
Many spouses agree that the spouse who owns less property at the time of the marriage should be entitled to a higher percentage share of the community estate the longer the marriage goes on. Usual provisions for spouses to live together for the agreements in the premarital document to be triggered are advisable as well.
Suppose you live in a home previously owned by your spouse before your marriage. In that case, you should consider negotiating for a provision that allows you to remain in the home subject to your making the mortgage payments and taxes. Should you need to sell the home after your spouse's passing, that should also be taken into consideration. As these provisions affect estate planning, you should update your will or trusts accordingly.
Make sure you understand community vs. separate property before signing a premarital agreement.
The distinctions between community and separate property are essential and need to be discussed with your attorney before beginning negotiations on your premarital agreement. Suppose community income was utilized to purchase real estate or pay the debt off on a piece of real estate. In that case, the lines between community and separate property could become blurred if you attempt to argue that a piece of property is yours separate from your spouse. In this situation, your separate property can quickly become more like a community property interest that will need to be split upon your divorce.
Tracing separate property
It isn't easy to trace separate property to its origins if you have not taken the property into account within your premarital agreement. Not only this, but you will need to keep a diligent record of every transaction that you have completed and cannot throw away or dispose of any documents related to real estate transactions. Please do not take any marital income and contribute it to premarital bank accounts or utilize it to pay off premarital debts or improve upon premarital assets. Doing so requires you to trace the source of funds.
Either way, it is wise to open up a bank account for you and your spouse to have all marital income deposited into it. This allows you and your spouse to see what is being added and deducted and will keep either of you from commingling separate and community property. Keep in mind that your marital home, or rental properties, are the type that can be susceptible to commingling due to the frequency with which people own these types of property before marriage and the ease with which community income is utilized to pay for their upkeep and debt servicing.
How is the increase in value of premarital property handled in the context of a divorce?
I want to conclude today's blog post by discussing the subject of income and increased property value that comes from property owned before marriage. Namely, is this income treated as separate or community property?
In Texas, the law states that the increased value in the property you own before the marriage to be separate property owned by you and the income generated from that property to be community property. This is a danger for you if you are a real estate investor or simply a person with retirement on your mind. If you are not careful, you may be entering into a marriage relationship where the income you earn from the property you purchased with separate income is now split between you and your spouse. To avoid this problem in the future, make sure that you consider the benefits of a premarital agreement.
Real property considerations for married persons
We've spent the past few days discussing considerations for people planning to get married. Tomorrow's blog will discuss how married people can prepare for divorce about their property. If you have any questions for our attorneys, please do not hesitate to contact the Law Office of Bryan Fagan, PLLC. We offer free of charge consultations with our licensed family law attorneys and are available to meet with you six days per week.