Financial stress is one of the leading causes of divorce.
It only makes sense then, that couples should discuss how they’ll handle finances before they get married.
If you wait until after you’re married, you’re in for a surprise — California law has already decided how you’ll handle finances.
Community property
California is one of only nine states that have “community property.” The others are Arizona, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin.
An interesting historical tidbit: “Community property” was a concept that originated in Spain and France. Most of the nation’s common law originated in England. Thus, only states that were formerly French or Spanish territories (or were heavily populated by the Spanish or French) are likely to have held over the community property rule.
Community property versus common law
In community property states, assets acquired during a marriage are treated as belonging to both partners.
The alternative common law property system states that property that one member of a married couple acquires belongs solely to that person unless the property is specifically put in the names of both spouses.
For better or for worse, you’re in it together in California. If one spouse refuses to work, runs up debt, cheats and in general is a nightmare slacker of a spouse, too bad!
California also has no-fault divorce laws that ignore any and all evidence of how good or bad a spouse was. The non-slacker spouse will be responsible for nightmare spouse’s debts and, in the event of a divorce, will share assets and likely wind up paying spousal support for at least some period.
Community property laws were introduced at a time when husband and wife were seen as one person (and that person was the husband). The concept of “community property” also preceded divorce becoming as common as it is, and women’s rights to things like voting and owning property.
The laws evolved to protect, for the most part, women who stayed home to care for children, thus giving up their careers, perhaps their best earning years, and no small amount of independence.
Does community property work for you?
There is a time and place for community property laws. But the laws can also work against a couple.
So, it’s imperative for every couple getting married and living in California to discuss whether community property works for them.
Remember, community property foists the debts incurred during marriage by one spouse onto the other spouse, regardless of the other spouse’s acquiescence or even knowledge of the debt. Pre-nuptial agreements aren’t just for one spouse to protect all their assets and earnings from the other.
Couples with differing earnings, second-marriages, one spouse with a high-risk occupation, and couples who are financially independent and wish to stay that way, should all consider a pre-nuptial agreement.
I often joke that people of means should have a pre-nuptial agreement form ready to go, with only the name to be filled in on the blank line. (Cue Taylor Swift: “I’ll write your name.”)
But it’s not entirely a joke — the worst time to bring up a pre-nuptial agreement is after the engagement when emotions are high. Talk about it before so you know if you should be taking the next step.
What’s in a pre-nuptial agreement?
In my experience, young couples tend to think of a prenup as a document that says, “wealthy spouse gets to keep everything and less wealthy spouse is out of luck.”
While I’m sure those agreements exist, that’s not how it has to be.
A prenuptial agreement can opt out of the community property laws altogether. Or it can set forth customized terms regarding what will be viewed as separate property (a list of specific assets, and/or types of assets) and what will be community property. An agreement can also pre-determine spousal support in the event of a divorce and inheritance in the event of the death of one spouse.
A pre-nuptial agreement cannot, however, determine or waive child support. Nor can an agreement encourage divorce. For example, an agreement that gave the less wealthy spouse 65% of assets upon divorce would be seen as encouraging a divorce since the divorcing spouse is better off after divorce…at least financially.
Death versus divorce
While prenuptial agreements are typically thought of as documents detailing rights in a divorce, they can also specify rights at the death of a spouse.
This might be a provision that the wealthier spouse maintains life insurance for the benefit of the other spouse, or a provision leaving certain assets outright or in trust to the surviving spouse. Such agreements can avoid difficulties later and provide security for spouses.
Absent any agreement to the contrary, both spouses are free to dispose of their share of property (i.e., their half of community property and all of their separate property) at their death as they wish through a will or trust. Again, this means it’s important to have defined what property is community and what is separate.
In a divorce, it’s spouses arguing over what is community property and what’s separate; when there is a death, it’s often children fighting a step-parent.
If there is no agreement, no will, and no trust, California once again has a plan for you: a surviving spouse is entitled to all of the community property and some or all of the separate property (depending on how many children the deceased spouse had).
Estate plans
Make sure your estate planning lawyer knows you have a prenup so your estate plan coordinates. You can be more generous to your spouse at death than you would be in a divorce, and you can be more generous than the prenup provides. But you can’t be less generous. You can’t give away assets you don’t own (i.e., your spouse’s share of community property), and you can’t violate the prenup.
It is common for a married couple to have a joint trust that deals with all their assets and all their beneficiaries. The trust would typically have schedules of assets, delineating each spouse’s separate property and their community property. The trust then states what happens to the separate property and one-half of the community property of each spouse when that spouse dies (or becomes incapacitated).
However, a trust by itself does not change the character of property. Separate property does not become community property merely by putting the property into a joint trust. Likewise, community property does not become the separate property of one spouse merely because it’s listed as such in the trust. There are specific provisions for transmuting the character of property—see your friendly family law attorney.
Where there is significant separate property, and particularly if there are also children from prior marriages, separate trusts may be the better option. But as always, communication between spouses is key.
Love, then law, then marriage.
Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild.” You can reach her at Teresa@trlawgroup.net
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