by Richard J. Coffee, II, Litigation Manager – Illinois Offices, Cordell & Cordell, P.C.
Within the confines of the specifics of state laws, the following general information may be helpful in considering pre-marital property issues as to states or territories that do not have community property laws. Community property law states and territories presently are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Puerto Rico. Issues as to community property laws are not addressed in this article.
As with all marital property issues, the laws of the state of marriage and/or divorce, or perhaps the law of the state in which the property is located, will control the determination as to which property is non-marital and which property is wholly or partially marital. A pre-marital agreement and/or asset protection planning are important steps if you wish to keep any property or debts separate from your marital finances. The issues and options for segregating assets and liabilities can be complex and impact estate and tax issues as well. A thorough review of your financial situation by a qualified attorney or accountant (or both) is advised.
Pre-Marital (Pre-Nuptial) Agreements
A well-drafted pre-marital agreement may be able to keep pre-marital property separate. The issues and considerations of pre-marital agreements are varied and would require a separate discussion. Key elements of an enforceable pre-marital agreement are mutual full disclosure of finances and adequate time prior to the marriage to review and consider the agreement. The formalities and limitations on pre-marital agreements will be dictated by the law of the state of marriage or in which the agreement is entered. The more difficult aspect of the pre-marital agreement is maintaining the agreement. It is easy for marriage partners to deviate from the agreement out of convenience or necessity, and thereby possibly voiding the agreement. Relocating to another state after the marriage may result in the agreement being applied differently than intended or not enforced.
If a pre-marital agreement isolates pre-marital property from marital claims, it is important to maintain those segregations. Writing checks out of the wrong account, allowing the spouse to not pay their share of the bills set out in the pre-marital agreement, failure to follow-through on setting up accounts (both bills and bank accounts) in the proper names, etc may later be used as a basis to claim the parties changed their minds on keeping the pre-marital property separate. Full implementation of a pre-marital agreement over the long term may be the more difficult part of the process.
Many states provide special rules for real property and the family “homestead” such that there may be property issues created by getting married without you having to take any formal action. If the marital home is real estate you owned prior to the marriage, but during the marriage you use your income or other “marital assets” to pay the mortgage, make repairs, or even pay the tax bills, you may be creating a marital interest in the real estate for your spouse.
If you execute a deed to put your spouse on the title to the home, that act may be considered as having made a gift to your spouse of the interest conveyed, usually a half interest. As the property is the home for the family, the assumption would be that the intention was to make the home a gift to the spouse and the burden will normally be on you to prove that it was clear that the deed was not intended to create a gift. The execution of a deed to the spouse may be done to obtain refinancing or as a form of estate planning. Lenders usually can not foreclose on a person’s home without an agreement in the loan documents allowing foreclosure. As spouses may have a marital interest in the home, the lender may require either a joint deed and a joint mortgage allowing foreclosure, or that the non-owner spouse sign a release of homestead rights which allows the lender to foreclose on the home. If the intent is to provide a home for your spouse in the case of your death, that usually can be accomplished by other than a current deed to the spouse. A transfer upon death deed or a trust may be available to keep the home your individual property until your death to avoid your spouse obtaining a present interest in the non-marital property.
If you wish to keep the pre-marital home non-marital, you may need to take extra steps as allowed under the laws of the states involved to create a wall between your home and the marital finances. This may require a complex financial arrangement such as a land trust or holding entity to rent the home to you and/or a premarital agreement. If you have substantial equity in the pre-marital home, a comprehensive review of your options is necessary to keep the home non-marital in whole or part.
Other real estate may be easier to maintain as non-marital. Rental property or business property that is maintained as a separate entity and is self-sustaining such that no marital assets are invested in the property may be sufficiently segregated to keep that property out of the marital estate. The impact upon the non-marital status of the property by your personal labor and the use of any profits for marital activities should be reviewed as well. Allowing the spouse an active role in the management of the property may create a claim of a joint venture that could defeat the non-marital status of the property.
Bank Accounts and Investments
Keeping any pre-marital bank accounts or investments segregated is the first step in safeguarding the non-marital status of those funds. Deposits or withdrawals on the account during the marriage may create a commingled account with partial or entire marital value. Reinvestment or changes in the specific investments during the marriage may also create a marital interest. Regardless of the physical segregation, the laws of your state may dictate the any interest income or other increase in value of the pre-marital account during the marriage is still marital property.
Retirement accounts which increase in cash value during the marriage or on which the benefit formula includes periods of employment during the marriage usually will have a martial portion. Depending upon the nature and value of an account, the type of investment and the terms of the investment may be important to maintaining the non-marital character. A certificate of deposit with automatic reinvestment of interest may be determined to retain its non-marital status under some laws, where a mutual fund in which you make investment changes or add to principal during the marriage may become partially marital. The statutes and court decisions of your state(s) of residence during the marriage will control.
As with real property, maintaining non-marital bank accounts requires that you not put your spouse on the account, even what a bank may call a “convenience account” or “authorized signator”, as giving your spouse access to the account will allow for conduct – intentional or unintentional – that changes the non-marital status of the funds in the account. To fully segregate non-marital and marital accounts, the accounts should be maintained in separate financial institutions to avoid commingling of accounts or transfers of funds. While a bank error accessing the incorrect account, if immediately corrected, should not affect the non-marital status of an account, the burden is upon you to monitor the transactions to catch any such error and promptly correct the mistake. In addition, your deposit agreement may provide that any overdraft of a joint marital account may be covered by the bank transferring funds from any of your individual non-marital accounts without prior notice, also commingling the funds.
Other Pre-marital Property
Cars, boats, airplanes, and other property that has a legally recognized title are subject to the same types of concerns as real estate and bank accounts, with the complications that these types of property often require ongoing maintenance expenditures and may be traded-in for other similar property, making the keeping the property non-marital a more complicated paper trail.
The non-marital status of pre-marital personal property that does not have a title, but may have other documentation, can be preserved as long as you maintain the documentation to show that it was owned prior to the marriage and that it has not been converted to marital property through improvement with marital funds. Gun collections, antiques, and other collectibles should be appraised and inventoried prior to the marriage by a neutral third party, such as a licensed appraiser, insurance agent, or other reputable professional, to provide evidence of both the pre-marital ownership as well as the pre-marital condition and value.
While the usual pre-marital household furnishings generally remain non-marital unless repaired or replaced during the marriage, the value of such items and the day-to-day wear on the items during the marriage may make the value at the time of any dissolution of the marriage not worth the effort to take the steps necessary to preserve the non-marital status. However, a video inventory witnessed by a neutral observer prior to the marriage may be helpful in the event there is an issue later as to what was pre-marital.
The pre-marital property issues in your situation may be more, or less, complex than the examples set forth above. Regardless of the value of the pre-marital property, the decision to enter in to marriage should include a conscious decision to commingle or keep separate your pre-marital property.
Richard Coffee is a Litigation Manager in the Belleville Illinois office of Cordell & Cordell.
Mr. Coffee is an experienced divorce attorney whose practice is devoted to domestic litigation. He is licensed in the State of Illinois and is admitted to practice law in the U.S. District Courts for Northern, Central and Southern Illinois.
Mr. Coffee has extensive domestic litigation trial experience representing clients in courts throughout Illinois on all aspects of domestic litigation, including the representation of clients who are current or retired military personnel with issues under the Soldiers and Sailors Civil Relief Act and the Uniformed Services Former Spouses’ Protection Act, clients involved in state court jurisdictional disputes due to the relocation of one or both parties from or to Illinois, and clients with government or private pension benefit valuation and division issues. Read more…