Relationships start with romance, but can erupt into anger if a couple doesn’t work on intimacy on the money level. As a trained mediator and financial planner, I have seen the potholes that people blunder into on this subject even when love dodges other obstacles.
If you are planning for a marriage in a community property state like California, it’s important to set expectations and discuss community property, that is, the basics. It is also important to decide how to commingle your net worth to build your life together as a couple. You may decide to keep certain assets separate, and you may negotiate with each other tradeoffs relative to these decisions.
After a marriage, you may decide to formalize agreements concerning separate property such as inheritances. There are agreements you can create with the aid of an attorney, who may be specialized in family law, estate planning, or real estate, as appropriate.
The doctrine of community property is defined by state statutes. In states where it applies, both a husband and wife are responsible for the expenses of the family and for the education of children including stepchildren. The law deals entirely with property, and sources of income, and sets a fiduciary standard of care for each of the spouses when managing community assets.
Ironically, couples may or may not have sources of income that are separate property but if they file married jointly under the federal tax code, they may each be liable for the taxes levied on separate assets or activities. For instance, there could be business income coming from a pass through business entity, such as an S-Corporation. Even if a pre-nuptial agreement defined the business as a separate asset, the business income may be marital property, and the taxes associated with it a shared debt obligation to the US government.
First a definition: Separate property can be anything you owned before marriage or included in a prenuptial agreement that was explicitly defined, and agreed to by your spouse. In California, your spouse should have been counseled by an attorney to grant fully informed consent. Assets that arrive during the marriage can remain separate if they fall into certain categories, like gifts and inheritances, and can retain that status if kept separate. That is, they cannot be commingled with community assets.
The muddle in the middle
During the course of a marriage it is common for spouses to draw upon separate property to finance aspects of their lives together. For instance, a wife’s trust account might be partially collateralized by a bank to help lower the amount of down payment necessary on a house. The wife cannot remove her trust account from the bank without forcing a refinancing of the loan. The asset is still titled in the name of her trust but the account is encumbered for the good of the community. This arrangement may actually violate the terms of her trust, said one estate planning attorney, because the wife has fiduciary responsibility to protect assets for the trust’s named heirs.
Or, in another example, income received from a separate asset such as an inheritance or a personal injury claim is used to finance ongoing living expenses. The dividends may be deposited to a family checking account. This may or may not create a claim for community property later.
Salaries and wages are always considered to be community property. Couples may trade off community assets for other things if they negotiate a prenuptial or post-nuptial contract for this purpose. Couples may agree to economic restitution should they ever split if, for instance, one partner must make a career sacrifice for another, resulting in a salary cut.
State statutes may override some of these agreements and judges may overturn agreements if they are not in the best interest of children, or are a violation of codes. Also, as I stated previously, in California, spouses must each obtain separate legal counsel when signing prenuptial or post-nuptial agreements.
For better and for worse
Commingled assets may present no problem when couples stay together. However, couples who fight about money or who transition into a divorce may discover the unwelcome realities of separating assets that are no longer solely his or hers, but that are now shared.
This new reality is not necessarily bad. Life as a couple for the parties involved is usually more satisfying than life as single individuals. Marriage is an economic relationship as well as a romantic one. The challenge to partners is to find the right balance, and to be able to talk comfortably about the resources necessary to sustain a couple’s economic life, together.
Financial planning can help achieve this level of détente. Having a third party mediate the discussion can clear the air for a difficult but necessary conversation.
To learn more about protecting assets for children of a previous marriage, or if you are contemplating divorce, consult with an attorney. Getting advice is even more important if one of the spouses :
–owns a business prior to marriage that may become subject to control issues or necessitate sale after his or her passing;
–has substantial separate property, either before marriage or that is inherited or otherwise acquired during the marriage;
–has had issues getting his or her spouse to properly manage community debt, including credit cards and small business administration loans;
–wants to refinance a house previously owned before marriage, and /or wishes to keep its ownership separate during marriage.
Family law attorney Sarah Davis of San Francisco suggested that spouses discuss use of separate money to benefit their life as a couple. “This is especially true if either one of the spouses expects to eventually be reimbursed for the loan or use of the money, ” she said. She advises couples, “Discuss how accounts will be kept.
“Spouses have fiduciary duties to one another. If one spouse has a business, he or she will need to balance accounting for the business with accounting to his or her spouse for the business funds and payouts.”
The big takeaway here is that it’s always a good idea to seek professional legal advice before acting before acting upon any assumptions of what constitutes separate vs. marital property.