REPOST: Getting Married? Got Assets? Read This First
If you open your bank accounts during your bachelor years and continue to maintain them in your sole name after getting married, they are not automatically your separate property. Forbes.com explains the legal structures of marital and separate property in the article below:
Image Source: telegraph.co.uk
Imagine this: You were married for the first time at age 42, after embarking on a successful career and amassing assets approaching $5 million, the majority of which you kept in bank and brokerage accounts in your sole name. During the marriage, you continued to deposit your earnings into those accounts which you had opened prior to the marriage. Unfortunately your marriage began to deteriorate early on, and you decided to file for divorce just before your fourth wedding anniversary. Your lawyer advises you that the funds in your pre-marital accounts could be deemed “marital property” (or “community property,” if you live in one of the nine community property states, i.e., Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) and subject to distribution upon divorce.
Why, you ask? If I opened the accounts prior to the marriage and continued to maintain them in my sole name, aren’t they my separate property? Not necessarily.
In all jurisdictions, most property that is acquired during the marriage and before the execution of a separation agreement or the commencement of a matrimonial action is deemed marital or community property, regardless of the form in which title is held. This means that in the absence of a pre-nuptial or post-nuptial agreement that defines the property differently, property that is acquired from the date of marriage until a separation agreement is executed or a divorce action is filed will be subject to distribution, regardless of how the property is titled.
In all states, separate property is exempt from distribution, provided that it is not “transmuted,” or converted, into marital or community property. Separate property generally includes:
1. property acquired before the marriage;
2. property that is inherited;
3. gifts received by one spouse from a third party;
4. compensation for personal injuries sustained by a spouse during marriage (except for the portion of the award that compensates the spouse for loss of earning capacity during the marriage); 5. property acquired in exchange for, or the increase in value of, separate property, except to the extent that such appreciation is due in part to the contributions or efforts of the other (non-titled) spouse; and
6. property described as separate property by written agreement of the parties.
Transmutation can occur when separate assets are commingled with marital assets, such as in the example above, or when separate property is placed in the parties’ joint names. It is presumed in those instances that the separate property owner intended to gift a beneficial interest in the property to the recipient spouse and thus to transform the character of the property from separate to marital.
The presumption may be rebutted by a showing that the property was commingled for purposes of convenience only and not due to any intent to convert the funds into a marital asset. But the longer separate and marital funds co-exist in the same account, the more difficult that becomes to prove.
So what can you do to keep your separate property separate?
Sign a pre-nuptial—or maybe, a post-nuptial.
First, consider entering into a pre-nuptial agreement prior to marriage, to clarify how property will be divided upon your death or divorce. If you are already married, you may enter into a post-nuptial agreement (one type of which is known as a “transmutation agreement” in community property states). Both pre-nuptial and post-nuptial agreements are used to keep property separate and outside of the marital or community estate.
Be aware, however, that some states apply a higher level of scrutiny to post-nuptial agreements and others may not recognize them at all. That is because each spouse has a fiduciary duty not to take unfair advantage of the other. Parties who enter into pre-nuptial agreements have not yet acquired any rights as spouses or parents, whereas once a couple is married, both parties have well-defined rights to support and the division of property. In all cases, courts will want to ensure that the agreement was negotiated in good faith, preferably with each party represented by his or her own counsel, and that it is fair and conscionable both at the time it is signed and at the time of divorce.
Keep separate property really separate.
Second, do not commingle separate property with marital or community property if you do not intend that it be divided between you and your spouse upon your death or divorce. Generally, this means that separate funds should not be transferred to marital or community property accounts, and funds earned after marriage should not be transferred to separate property accounts. New accounts should be opened to receive income earned after marriage.
Additionally, separate funds should not be used to purchase assets during the marriage or to pay for household expenses, and income earned after marriage should not be used to pay for separate debts (such as student loans) or to maintain separate property. To the extent possible, the border between marital or community property, on one side, and separate property, on the other, should not be breached.
Image Source: quizzle.com
Pay attention to record keeping.
Third, keep accurate and complete records to establish the separate character of your property and, if available, its value as close as possible to the date of marriage. If you own real estate, for instance, maintain copies of the deed to the property and/or the HUD-1 Settlement Statement (a document that provides an itemized listing of the funds that are payable at closing). Ownership of stock may be shown by formation documents, corporate records, or minutes, in the case of closely-held entities, or brokerage statements or trade confirmations, in the case of publicly-traded companies.
Bank and brokerage account statements should be kept from the date of marriage not only to establish the status and value of separate property as of that date, but also to enable the tracing of separate property funds should they become commingled with marital or community funds during the marriage. Other documents that should be kept (or obtained) include appraisals; tax returns; bills of sale; notes or cards evidencing gifts; and trusts, wills, and other probate
Be aware, however, that the increase in value of your separate property during the marriage may be subject to distribution upon divorce, especially if such appreciation resulted from your active efforts, such as your management of a stock portfolio or business. If the appreciation is “passive” – that is, due to market forces or to the efforts of one or more third parties – it is less likely to be divided.
If you own a business, take additional steps.
If you have an ownership interest in a business, there may be additional measures you can take to protect your interest (not to mention the stability of the business itself), particularly in the absence of a prenuptial or postnuptial agreement. Buy-sell, operating, and other agreements, for instance, may be structured to restrict a former spouse from having an ownership interest in the business.
If you and your spouse (or soon-to-be spouse) are business partners, you can agree that in the event of a divorce, one of you must leave the business and sell his or her stock back to the other. In that instance, the agreement should provide for a method to determine the value of the selling spouse’s ownership interest, a schedule for payment, and the source of funds to be used for the purchase. Additional precautions include transferring your separate property, including your ownership interest in the company, into a domestic or foreign asset protection trust (except in the case of a S Corporation, whose stock only certain types of trusts can own). The property held by the trust should not be subject to distribution upon divorce, but a court could nonetheless take such property into consideration in determining who gets what and how much of the divisible property.
Image Source: prlog.org
Short of avoiding marriage altogether, you cannot guarantee the preservation of separate property. By following the above steps, however, you will make it more likely that your separate property will be protected in the event of your divorce.
Michael Kelly is a family law attorney with decades of experience in handling complex property issues between spouses. Subscribe to this blog for more discussions in family law.