Whether you have been through a divorce, have divorce questions to ask, or are interested in potential property ownership issues for a first marriage, planning as to property ownership or transfer for marriage (or significant relationship in some states) is a worthwhile exercise. The purpose of such planning is not to take the romance out of the relationship, but to take financial steps with as complete an understanding of the ramifications as possible. This article reviews the general topics to be considered, with the caution that you should consult an attorney in the state in which you reside, were the property is located, or both, and consult legal counsel again each time your state of residence, or the location of the property, changes. A second caution is that property transactions may also have tax consequences, which issues are beyond the scope of this article.
The primary method of keeping separate property from becoming joint property after marriage is a premarital, or prenuptial, agreement in those states that provide for such contracts to be legally enforceable. The premarital agreement specifies the separate property of each party, any property agreed to be joint, and dictates how later acquired property will be treated as either separate or joint.
The premarital agreement can also address property division upon the death of a spouse to avoid any state law provisions that allow a spouse to override a Will that does not provide for the spouse. The premarital agreement may also address alimony as allowed by state law. The ability to make binding agreements in a premarital agreement on issues involving children and child support is limited, if possible at all under applicable state law. As a contract, the premarital agreement is subject to the legal requirements of all contracts, including a written document in the form required by any applicable statutes, the full disclosure of all asset information, and each party having an adequate understanding of their rights, usually requiring each party to have separate legal counsel to advise them.
Another legal requirement is that the premarital agreement be entered in to voluntarily. While refusing to marry without a premarital agreement is not coercive, inadequate time to consider and evaluate the premarital agreement prior to the marriage can invalidate the agreement. A premarital agreement should not be left to a form or preparation by someone other than a qualified attorney, as errors or invalidities in the document will usually void the premarital agreement and once the parties are married it is usually too late to enter into a binding premarital agreement to segregate property.
Inventory and Premarital Values
In anticipation of marriage, or prior to the commingling of property prior to marriage, you should create an inventory of your property using both a written list with values and a video inventory. Such an inventory is necessary for a premarital agreement. An inventory is also valuable for insurance purposes, such that the inventory is well advised even if the segregation of property is not a concern. Whether for insurance purposes, premarital planning, legal advice on divorce, or for in the event of divorce, the inventory should be kept in a safe location which is accessible to you, especially in the event of conflict with your spouse, such as a personal safe deposit box or with a legal or financial professional. Property owned prior to marriage which is traded-in, or which changes in form, such as real estate, vehicles, and investments, can remain separate if there are adequate records to establish the chain of ownership. The value of the property prior to marriage or the commingling is also important to show gains or losses in value thereafter. In the event of divorce, the inventory can be a valuable tool for establishing the non-marital property and the premarital values of all property.
The acquisition of real estate in joint names, or the transfer of existing real estate into joint ownership, creates legal rights and liabilities for both parties. Any such transactions should be made after a review of all options to achieve the desired goal. The ownership of real estate is given special treatment under the law and each state will have its own terms and provisions applicable to real estate, such that consulting an attorney who focuses on real estate law in the state in which the real estate is located, not just the advice of real estate brokers and mortgage underwriters, is well worth the minor cost of obtaining such advice. If the intent is to make a permanent, irrevocable joint ownership or gift to another, the review will be a simple consideration of the applicable options. If the goal is to maintain separate, individual property, the review may be more involved.
The usual assumption is that the parties who are going to share ownership in real estate wish to create a joint tenancy with rights of survivorship, such that the property can only be sold with concurrence of both parties and upon the death of one party the other obtains full ownership. Under joint tenancy, the debts of either party can be a lien on the entire property. Another option is to own the property as co-tenants, in which each party owns a fraction of an interest in the property (usually one-half), with the shares being the separate property of each party which can, under certain circumstances, be sold or given to other persons, and a lien on the property for the debts of one party will normally be limited to that person’s share. Some states offer an option for married persons to place the real estate that is their home in a special form, in some states called a tenancy by the entirety, that provides for the transfer upon death and requirement for joint sale the same as the joint tenancy form, but limits the liens on the property to only jointly incurred debts. Real estate acquired by one spouse after marriage is generally going to be treated as marital property subject to the claims of the other party. If the desire is to not create rights of the spouse in real estate, a marital attorney should be consulted prior to the acquisition of the property to determine if segregation of the property is legally possible.
If a premarital agreement is prepared, it should provide for s=the segregation of real estate acquired after marriage. Even with real estate owned or acquired by just one party, certain transactions may result in the real estate being subject to the claims or debts of the other. Using a joint bank account or joint funds to pay bills on the real estate, involving the other in significant aspects of the maintenance or operation of the real estate, and similar behavior that treats the real estate as joint property, may result in creating a claim of the other party. The creation or refinancing of a mortgage on property owned by one spouse may trigger a proposal from the lender to put the property in both names to clear the lender’s ability to pursue foreclosure in the event of default. Unless the intention is to make a gift to the spouse by the transfer, the lender should be asked as to alternative forms, such as the waiver of spousal rights, to secure the lender without making a gift to the spouse by placing the property in both names.
Business Property and Sole Proprietor Businesses
For income producing real estate and self-employment (or sole proprietor) business assets, the creation of a business entity, such as a corporation, limited liability company, or trust, can be used effectively to segregate the property. The entity must be maintained as a formal business by maintaining separate records and bank accounts to segregate the business from the personal finances of the parties. Putting joint or marital funds into the business, using the business bank accounts for personal expenses, acquiescing to a lender’s insistence that the spouse sign loan documents, involving the spouse in the business other than as an actual employee, and similar blurring of the line between the business and personal finances of the parties can be used to turn the property or business into joint property despite creation of a separate business entity. While appropriate efforts may segregate the property itself, the income from the business during the marriage, and possibly increases in value of the business property, may still be marital property.
Bank Accounts and Investments
Money is the asset that is the most difficult to track for the establishment of the joint or separate nature of the funds without complete and accurate records. While most financial records should be subject to recreation from banks or investment firms, it is preferable to preserve the records to avoid problems with obtaining copies years later. The records can be scanned into a computer file in order to keep the volume of paper manageable and kept in safe location the same as the property inventory. Like real estate, accounts and investments can be held individually or jointly. By placing the funds in a joint account, you are making a gift to the other party of the entire account.
A joint account can be accessed by either party, unless specifically set up to require both parties to sign for withdrawals, and subjects the entire account to claims from the other party’s creditors. Many people are unaware that bank can usually garnish any account in which someone is an owner to satisfy amounts due on any other accounts or loans of that person at that bank (or its affiliated banks and branches), such that the bank can remove funds from the joint account to satisfy amounts owed on the individual accounts of the owners, or use individual accounts of the owners to cover amounts owed on the joint account. If you maintain both joint and individual accounts, it is advisable to keep the joint accounts in a bank other than the bank (or its affiliated banks and branches) holding the individual accounts. Deciding to use your individual funds for joint purposes will generally be viewed as a gift to the other party of just the amount used, not the entire account.
However, giving the other party signature authority over the individual account, transferring funds from a joint account to the individual account, or depositing joint or marital funds (paychecks, tax refunds, etc.) into the individual account can destroy the separate nature of the account. Keeping the funds and accounts separate and keeping track of every transaction is the first step in keeping segregated funds separate.
Beneficiary Status and Wills
Absent a premarital agreement or other binding obligation to name a spouse as the beneficiary of a will, life insurance policy, or retirement plan, the ability to select your beneficiaries and the rights of spouses to such benefits is subject to state law and/or the terms of the benefit plan. State law may override a will that excludes the spouse unless the exclusion is provided by a valid premarital agreement. Other binding obligations can include financial agreements or prior divorce article decrees that require providing life insurance for named beneficiaries. Another type of contract is an agreement by each party to make a will providing for the other, called mutual or reciprocal wills, in which in exchange for the other person providing for you in their will, you agree to provide for them in your will. When making a will or engaging in estate planning as to beneficiaries of life insurance and retirement plans which do not include your spouse as a beneficiary, it is advisable to consult a matrimonial lawyer in the state in which you reside in addition to your financial planner and to have your will and estate plan reviewed if you move to another state.
Property Ownership Issues in Child and Spousal Support Cases
If your spouse receives or pays spousal support (alimony) or child support, the commingling of assets and filing joint tax returns may subject your income and individual property to scrutiny by opposing counsel and the court in reviewing your spouse’s support needs or obligation. The extent that your income and property will be brought into an such court proceeding will depend upon the law of the state in which the issue is litigated. However, if you wish to attempt to keep your assets and income out of your spouse’s litigation, you should maintain clearly segregated accounts and records, including separate tax returns, even if you are not concerned about keeping the property segregated as to your spouse’s rights to the property. The filing of joint tax returns opens up information as to your income and assets from the various schedules and attachments to the return to review by opposing counsel. If your spouse owes back support, your joint tax refund can be seized to satisfy that debt, subject to you proving your share of the refund. You can avoid the seizure issue with proper tax planning to minimize any refund.
When contemplating marriage, or the transfer or commingling of assets with a significant other, a review of the issues highlighted in this article may help avoid the making of an unintended gift or creation of an unintended consequence.
Richard J. Coffee is a Senior Attorney in the Fairview Heights, Illinois office of Cordell & Cordell, P.C.