While a prenuptial agreement may not be included in your wedding plans, business owners and home owners are often advised to execute one as part of the marital process.
What is a Prenuptial Agreement?
A prenuptial agreement (or "prenup") is a contract between prospective spouses that defines the character of assets brought into and acquired during the marriage and sets forth a plan for dividing assets in the case of death or divorce.
Why Would I Need a Prenup?
To begin, California is a community property state. This means that with limited exceptions, all property (assets and/or debts) acquired during the marriage, and all income earned during the marriage, is community property, which is split equally between the spouses upon divorce. Moreover, community property belongs to both spouses equally, regardless of how the property is titled. Even if a bank account is held in one spouse’s name, or a home is titled under the name of only one spouse, the asset would be part of the community if acquired or funded during marriage. In the event of divorce, the community is split equally between the spouses.
On the other hand, property acquired before marriage, after the date of separation, or by gift or inheritance remains the separate property of the acquiring spouse. Additionally, any passive income earned from separate property remains the spouse’s separate property.
However, there are many instances where the community can have an interest in a separate property asset. Family Law attorneys often see these situations arise in divorces where one spouse owned a home or business prior to the marriage.
In California, "all property (assets and/or debts) acquired during the marriage, and all income earned during the marriage, is community property, which is split equally between the spouses upon divorce." – Lauren E. MacKay, Family Law Attorney and Founder of MacKay & Martin, LLP
Example of a Separate Property Asset with Community Interest
If you owned a home prior to marriage, it would generally be characterized as your separate property. But what if, however, you owned the home for 10 years prior to the marriage, and you purchased the home with a 30-year mortgage? It is likely that after getting married, you would begin paying your remaining mortgage payments with community funds (i.e., your income earned after marriage). In most such cases, the community would then have an interest in the separate property residence, since community funds were used to pay down the mortgage.
Depending on the length of the marriage, the community share could be more than your separate property interest in the home. For example, what if you were married for the next 20 years of your 30-year mortgage? If you were paying those post-marital mortgage payments with your income, your spouse's income, or a combination of both, the community would be entitled to roughly 2/3 (or 67%) of the equity in the home. Therefore, even though the home is characterized as your separate property, your 1/3 (or 33%) separate property interest would be less than the community interest in the home. In such a scenario, you would be entitled to your 33% separate property share, plus half of the 67% community share.
A similar analysis could be used in the event you owned a business before marriage that increased in value during marriage due to community funds or efforts. Keep in mind that “community effort” does not have to be work or effort put into the business by the couple together, but any work done by either individual spouse during the marriage is a community effort. Therefore, any hard work you contribute to your separate property business after you get married could give your spouse a community interest in the post-marital appreciation of your business. This is where a prenup comes in.
How a Prenuptial Agreement Can Preserve Your Separate Property Interests
A prenuptial agreement allows you to preserve your separate property interest in your business and real estate, as well as the the income earned on those assets. In the example above, a premarital agreement would allow the spouses to agree that your home and your business would remain your separate property after marriage, and that the community would not have an interest in those assets, income from the assets, or appreciation on the assets, regardless of the community efforts or funds contributed by either spouse. This is often important for business owners to protect their businesses from disruptive events such as fractional sales and buyouts to satisfy divorce judgments, and it can help retain management decisions within the business.
It is Crucial to Retain an Attorney Experienced in Preparing and Negotiating Prenuptial Agreements
The validity of prenuptial agreements is often challenged in later divorce actions between the once happy couple. It is essential to have an attorney prepare the agreement, and both parties need to retain independent counsel to ensure they understand the legal rights they are agreeing to waive.
A Strong Prenuptial Agreement Will Preserve Your Interest in Your Assets and Can Protect the Operation of Your Business
While preparing a prenuptial agreement is hardly a romantic task for most couples, it is crucial to acknowledge that the decision will affect not only your interest in your assets, but in many cases, can affect the operation of your business. A prenuptial agreement can help the long-term success of your business by preventing disruptive events and keeping management decisions within the business in the event of a future divorce.
If you are considering obtaining a prenuptial agreement prior to marriage, you must retain independent legal counsel to represent you in that endeavor. We invite you to request a free telephone consultation with a qualified Family Law attorney of MacKay and Martin, LLP.