As discussed in yesterday’s blog post, premarital agreements are becoming more and more popular in Texas for persons who are interested in setting up a plan before their marriage for how property should be divided up in the event that 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 in today’s blog: the disclosure of financial information. If you are a person who does not find that trusting others is easy, especially when it comes to sensitive information, then you can take solace in knowing that you can both be protective of your information and fair in the disclosure of 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 in the future your spouse provides information to a court showing that you withheld information purposefully it is likely that your premarital agreement will be held to be invalid and unenforceable. This is not necessarily an indication that your 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 that you provide to your attorney does not need to be in the original form of the documentation and can copies of original documents. Those copies can be returned to you at the conclusion of the case. With this in mind the areas that you can anticipate finding to be difficult 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 easier by laying your cards out on the table before your marriage begins.
If you own any real estate before you get married you will need to have that property classified as separate property so that it is not commingled with community property assets. While your marital home may have been owned by you 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 prior to marriage
Being in possession of property that is likely to increase in value that you owned before the time that you got married then you will want to make note of 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 property. 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 times 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 all of 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 as to 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 prior to 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 in order for the agreements in the premarital document to be triggered are advisable as well.
If you live in a home previously owned by your spouse prior to your marriage then 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 the passing of your spouse 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 important and need to be discussed with your attorney before beginning negotiations on your premarital agreement. If community income was utilized to purchase real estate or to pay debt off on a piece of real estate the lines between community and separate property can become blurred if you are attempting 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 is difficult 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 diligent record of every transaction that you have completed and cannot throw away or dispose of any documents related to real estate transactions. Do not take any marital income and contribute it to premarital bank accounts or utilize it to pay off premarital debts or make improvements upon premarital assets. Doing so requires you to trace the source of funds.
Either way, it is smart to open up a bank account for you and your spouse to have all marital income deposited into. 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 type of property before marriage and the ease with which community income is utilized in order 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 would like to conclude today’s blog post by discussing the subject of income and increased property value that comes from property owned prior to marriage. Namely, is this income treated as separate or community property?
In Texas, the law states that the increased value in property owned by you prior to the marriage to be separate property owned by you and the income generated off of 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 their mind. If you are not careful, you may be entering into a marriage relationship where the income you earn from property that you purchased with separate income is now to be 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 who are planning to get married. In tomorrow’s blog we will discuss how married people can prepare for divorce in relation to the property that they own. 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.