Prenuptial & Postnuptial Marital Agreements

If you’re recently engaged, “Congratulations!” There will be lots of changes in your life, including how you will own your property. Our estate planning attorneys guide engaged and newly married couples about the rules so that there are no surprises when it comes to property ownership. If you’re currently married, there may be reasons to explore a postnuptial marital property agreement. Perhaps you have received an inheritance you would like to pass directly to your children. Or you might want the income generated by property you brought to the marriage to stay your separate property.

Remember, Texas law only defines property ownership. You have the right to change the rules by agreement and you also have the right to give your property during your lifetime or at death to whomever you wish, including your spouse, even if the property is your separate property.

Here’s a summary of the general rules governing separate and community property. Call The Galligan Law Firm at (713) 522-9220 to schedule a complimentary consultation to learn more about how the rules can be changed through a prenuptial or a postnuptial marital property agreement.

What is separate property?

A spouse’s separate property includes:

• All assets a spouse owned before the marriage
• Any inheritance a spouse receives during the marriage
• Any gifts a spouse receives during the marriage

Here’s a summary of the general rules governing separate and community property and how they can be changed through a prenuptial or a postnuptial marital property agreement.

What is community property?

All other property acquired by a spouse during the marriage is community property. Examples of community property are:

• Compensation from a spouse’s employment, including salary, bonuses, retirement and other benefits
• Income from separate property, such as rent from separate rental property, interest on separate property financial accounts, and dividends from separate property investment accounts

What happens if I combine separate and community property?

There is a presumption that property owned by a married person is community property. This presumption can be reversed by a marital property agreement if the property can be traced back to the time before the commingling occurred to show that the property was separate. But sometimes this can be difficult to prove, such as in the case of an investment account that is part of a dividend reinvestment program. The dividends would be considered community property and, when reinvested in the separate property account, can result in the presumption that a separate property asset is community property.

What happens if an asset is purchased partly with separate property and partly with community property?

There are situations when the initial payment for property can be made before the marriage, with later payments made after the marriage with community property. For example, it is common for engaged couples to purchase a home before the marriage. Or one spouse owns a home that will be the couple’s residence after marriage. Then, after the marriage, mortgage payments are made from their salaries, which would be community property.

So who owns the home?

According to Texas law, the person who made the down payment will be considered the owner of the property. If, before the marriage, one spouse makes the down payment, that spouse will be considered the owner of the home. If both spouses contributed to the down payment before the marriage, then they would own the home as their separate property in proportion to the amount of the down payment each made.

If community property is used to pay down the mortgage, each spouse would have a right to be reimbursed half of the amount applied toward the principal portion of the mortgage. This would not include a share in the appreciation of the property when it is sold; but only half of the amount of the principal portion of the mortgage actually paid during the marriage.

There are situations when the initial payment for property can be made before the marriage, with later payments made after the marriage with community property. For example, it is common for engaged couples to purchase a home before the marriage. Or one spouse owns a home that will be the couple’s residence after marriage. Then, after the marriage, mortgage payments are made from their salaries, which would be community property.

If income from separate property is community property, what happens if separate property appreciates in value?

If a separate property asset appreciates in value during the marriage, the amount of the appreciation is also separate property. So, if a separate property asset is sold, all the sales proceeds, including the amount attributed to the asset’s appreciation is separate property.

There may be an exception for an asset that has appreciated due to a spouse’s time, toil and effort. This could happen if one spouse owns a business that grows in value during the marriage. The time, toil, and effort a spouse invests in a separate property business may be considered community property which would result in the business being part separate property and part community property.

Are the spouses responsible for each other’s debts and liabilities?

There are two sets of rules, depending on whether the debt is based on a contract or the liability is for injury to a person or property (such as a car accident).

If the debt is based on a contract (credit card, mortgage, college loan, etc.), the separate property of the spouse who owes the debt and the community property held in the names of both spouses (such as a joint account) will be liable for the debt. A community property account held solely in the name of the other spouse will not be liable for the debt.

If the liability is based on injury to a person or property caused by a spouse, the separate property of the spouse who caused the injury and all of the community property of the spouses, including any accounts solely in the name of the other spouse, will be liable for the debt. The other spouse’s separate property will not be liable for the debt.

Are there any special rights that a spouse has under Texas law?

Yes. Special rights that a spouse has include:

• The right to live in the homestead after the death of the first spouse, even if the deceased spouse owned the home as his or her separate property
• The right to be named beneficiary of a retirement plan governed by ERISA (such as a 401(k), 403(b), etc.)
• Possible eligibility for a “family allowance” to be paid out of the deceased spouse’s assets at the death of the first spouse
• The right to be the administrator of the other spouse’s estate, unless the deceased spouse’s Will or other similar document appoints another person

Why does it matter if property is separate or community?

Besides the issue concerning which assets of a married couple are liable for a spouse’s debts and liabilities (discussed earlier), the determination of whether property is separate or community is important when the spouses’ assets are distributed at the termination of the marriage.

Unless changed by a Will or other document that takes effect at death, a deceased spouse’s community property passes to a surviving spouse only if there are no children, or the surviving spouse is the parent of the deceased spouse’s children. Only a portion of a deceased spouse’s separate property passes to a surviving spouse.

Can a marital property agreement change the way separate and community property are treated?

The spouses (and prospective spouses) can agree to almost any arrangement involving their property. Some examples include:

• A marital property agreement can eliminate community property all together, so that the marriage does not affect the ownership of a spouse’s property. Each spouse can own the property brought to the marriage, the income from the property brought to the marriage, any assets acquired during the marriage by the spouse, income from the property brought to, and acquired during, the marriage, and the spouse’s compensation during the marriage, including salary and retirement benefits.
• A marital property agreement be limited in scope so that its only effect is to keep the income generated by a spouse’s separate property also separate.
• A spouse (and prospective spouse) can waive the homestead right to live in the separate property residence of a deceased spouse for life or until the surviving spouse ceases to use the property as a homestead.
• A spouse (and a prospective spouse) can waive the right to be reimbursed if community property or the spouse’s separate property is used to increase the value of the other spouse’s separate property.
• Spouses can decide how community property will be divided on divorce (divorce does not affect a spouse’s separate property).
• A spouse can waive the right to be beneficiary of the other spouse’s ERISA governed retirement plan.
• Spouses can agree on what the surviving spouse should receive on the death of a spouse.

What are some common situations in which a marital property agreement would be useful?

• Because, at the death of a spouse, both halves of community property receive a step-up in basis for capital gains purposes, some spouses elect to enter into a marital property agreement stating that separate property appreciating in value (such as real estate or securities) should be considered community property.
• A spouse (or a prospective spouse) may have inherited family property he or she wishes to leave to children or other family members. But the surviving spouse owns half of the income generated by the separate property inheritance. A marital property agreement can simply state that the income from the separate property inheritance will be the separate property of the spouse who inherited it which makes it easier to pass on to the inheriting spouse’s family.
• Older couples who are remarrying for companionship may wish to preserve their assets for their children when they die. They may also wish to avoid their children fighting over who owned what at a spouse’s death. A marital property agreement can help to eliminate conflict after a spouse’s death.
• A marital property agreement may help avoid a situation that commonly occurs if a person with children remarries after the death of a spouse. It is possible that, without a marital property agreement, the children of the first marriage could lose their inheritance from both of their parents.
• A prospective spouse may give up a career and the chance for retirement benefits because of the marriage. To be fair, the prospective spouses may wish to set up a way to compensate the spouse who has not been in the work force in the event of divorce.
• Spouses or prospective spouses may wish to purchase real estate together, or one or both spouses owned real estate before the marriage. A marital property agreement allows them to determine how the expenses should be paid and the appreciation shared.