Prenuptial Property Agreements
A prenuptial property agreement can, under Texas law, be drafted to handle virtually any financial issues the parties encounter during their marriage. The primary purposes of a property agreement are to define the financial status of the parties as of the date the agreement is signed and guide the course of the parties’ financial relationship throughout the marriage.
Each prenuptial property agreement is unique because it is tailored to fit the requirements of the particular individuals – their unique economic status, their unique financial objectives and their unique emotional and psychological perspectives. However, there is some general advice that can be offered to assist in determining what issues the parties should discuss.
The purpose of this memo is to provide a quick course in Texas marital property law and thereby give the reader some guidance in defining the boundaries of the property agreement that will be appropriate in that person’s case.
Texas Family Code Provisions
The Texas Family Code favors prenuptial property agreement. Basically, a Texas court is obligated to enforce a property agreement unless there is convincing evidence that: 1) a party did not voluntarily sign the agreement or 2) the agreement is absolutely unfair due to a lack of information concerning the property and debts.
Property agreements may be drafted before a marriage and become effective upon the marriage of the parties. Agreements can also be made at any time after the parties are married. Typically, a pre-nuptial agreement is coupled with a post-marital agreement. That is done to avoid some technical legal problems that might otherwise arise. The agreement or agreements can be modified during the marriage to address any issues that might later come to light.
Community Property Vs. Separate Property
Texas is a community property state. Generally speaking, that means (without a property agreement) both spouses own an interest in all property acquired by either spouse during the marriage. The “name on the title” is generally not significant. A statutory presumption exists that all property accumulated during the marriage is community property unless a party proves otherwise.
With some exceptions, separate property consists of: 1) property owned before the marriage, 2) property acquired by inheritance, 3) property acquired by gift, and 4) certain recoveries related to personal injury claims. All other items are classified as community property.
Income received during the marriage is community property. With some limited exceptions, income from a person’s separate property (i.e., interest, dividends, etc.) is community property. Salaries, commissions, bonuses and other earnings are also community property.
The Reimbursement Claim & Economic Contribution Claim
Texas law provides that a claim for reimbursement might arise in several ways, but the most common of them are:
- The use of community property (usually the spouses’ salaries) to pay down the mortgage debt against separate property (usually a house owned by one spouse prior to marriage), and
- The use of community property (usually the spouses’ salaries) to pay for improvements to one spouse’s separate property (usually the remodeling of a house owned prior to the marriage).
Of course, paying down the mortgage note increases the value of the property by reducing the debt against it. Generally, improvements increase the value of the property. If community funds are used to increase the value of a spouse’s separate property, the community estate is entitled to be reimbursed for the expenditures. Under certain circumstances, the Family Code specifically requires the recognition and payment of such claims and requires the imposition of an equitable interest lien against an asset to secure payment of the claim.
The inverse is also true – there may be a claim by a spouse’s separate estate for payments that benefit the community estate of the parties.
Presumptions In Texas Marital Property Law
There are several presumptions within Texas marital property law that are effective unless the spouses alter them through the language of a prenuptial property agreement. They are:
- In the event of a spouse’s death, the probate court must presume that all property in existence (without regard to what name is on the title for the item) is community property and each spouse owns an undivided 50% interest in it.
- In the event of a divorce, the divorce court must presume that all property in existence (without regard to what name may be on the title) is community property and the court has authority to divide it in a manner that the judge believes if fair.
- A reimbursement claim is to be paid if there has been a reduction in debt or payment for improvements from one estate (separate or community) that benefited another estate (separate or community).
- The income generated by a separate property asset is community property.
- The earnings of the parties during the marriage are community property.
The application of those rules may not always meet the objectives of the parties and, indeed, may not always be fair. Therefore, they are subject to modification through the terms of pre-nuptial or marital property agreements.
When Are The Terms Of A Prenuptial Property Agreement Important?
The terms of a prenuptial property agreement become effective at the moment it is signed. However, the importance of its terms may not be fully realized until a later point in time.
Some agreements include provisions about what property or income is to be utilized for the payment of certain expenses. In those cases, the language of the property agreement has an ongoing impact upon the financial status of both parties. On the other hand, many property agreements only become a significant document to the parties in the event of: 1) a spouse’s death or 2) a divorce.
Why Is A Property Agreement Important?
When a spouse dies, the disposition of his or her estate will be controlled by the Last Will and Testament of the deceased. The Will serves to allocate all of the deceased’s property to the persons he or she has designated to receive it. However, whether a particular item is separate or community property is very important because: 1) if it is separate property, the Will disposes of 100% of the property, or 2) if it is community property, the Will only disposes of the deceased’s 50% interest in the property. Therefore, determining what is separate property vs. what is community property defines the parameters of what each beneficiary receives.
Should a divorce suit be filed, the court is obligated to divide the marital estate between the spouses in an equitable fashion. Under Texas law, the marital estate consists of the community property accumulated during the marriage – not the separate property of either spouse. If a party can prove that an item is separate property, the item is effectively removed from the divorce process because the court cannot award any part of it to the other party. Therefore, determining what is separate property vs. community property defines the parameters of the marital estate, i.e., what the divorce court divides.
What Documents Will Be Drafted?
It is usually preferable to draft four primary documents. They are: 1) the pre-nuptial property agreement, 2) the post-marital affirmation of the pre-nuptial property agreement, 3) the Will of the husband, and 4) the Will of the wife. In conjunction with the Wills, there may also be powers of attorney, directives to physicians, trust agreements and other estate planning paperwork necessary to minimize taxes and fulfill the objectives of the parties.
The pre-nuptial agreement is the most significant of the documents because it serves as the foundation for all of the other paperwork. Its terms will provide the roadmap by which the financial obligations and relationships of the parties are defined throughout the marriage or until a subsequent property agreement is made. For that reason, it is important for the parties to determine their objectives (both economic and emotional), make some reasonable projections about their future together, and fashion a property agreement tailored to their circumstances.
What Does The Lawyer Need?
It is essential that the property agreement include relatively detailed schedules of assets and liabilities of both parties. Doing so defines the separate property and debts of each person while providing the financial disclosure necessary to have a legally enforceable property agreement.
Generally speaking, the schedules of property and obligations serve as the benchmark from which all future financial transactions can be “traced”. For example, if a given item of separate property is sold and the proceeds of sale are used to purchase another item, then by “tracing” the paper trail related to the transaction, the newly acquired item is considered to be separate property. Therefore, a detailed schedule of separate property attached to a pre-nuptial or marital property agreement provides the starting point from which to sort out the nature of all ensuing transactions.
Documents & Data
It is not necessary to gather up all of one’s financial documents in order to prepare a property agreement. However, it is important that the agreement include a description of the assets, liabilities and their values or payment terms. From that data, the lists of property can be assembled and thereby provide the landmark from which future transactions can be traced.
Questions To Be Considered
The following list includes the most common of the concepts that might be incorporated into a marital property agreement:
- Income from separate property – Is the income (interest, dividends, etc.) from separate property to be separate property. Is the intent of the parties to allow each person’s separate property to grow by reason of the earnings generated by the property or is the income to be: a) utilized for payment of particular expenses, b) accumulated as jointly owned property, c) allocated in some other fashion.
- Wages and earnings – Is the income (salary, bonus, etc.) of each party during the marriage to be separate property. What ongoing expenses are to be paid from the parties’ respective salaries.
- Payment of existing expenses – Are there any existing debts that should be paid exclusively by one party from that party’s property or income. Should the party who incurred the debt before the marriage be solely responsible for paying it from his or her separate property.
- Payment of future expenses – Are there any anticipated expenses that should be paid entirely for one party’s property or income.
- Household expenses – Should there be a plan to define the contributions of each party toward the ongoing expenses of operating the household, the automobiles, etc..
- Changes in assets – Are there any assets that the parties intend to acquire in the foreseeable future that should be handled in a particular fashion, i.e. how is the purchase price to be paid or the mortgage debt is to be paid.
- Change in status of existing assets – Are there any existing assets which the parties desire to classify in a different fashion, i.e., convert to one party’s separate property or alter the percentage each person owns as separate property.
- Reimbursement for payment of debts – If there are payments toward a mortgage debt, a vehicle note, or other loan secured by a lien against an asset, do the parties desire to “reimburse” the other party or the marital estate for the payments made toward that debt after the marriage.
- Reimbursement for financing improvements – If improvements to a party’s separate property are to be made, do the parties desire to “reimburse” the marital estate or the other spouse for the payment of those costs after the marriage.
- Disposition of assets upon divorce – Are there any assets that will be significant to a particular party in the event of a divorce. For example, if a party might want to keep the house, what plan should be made to allow the purchase of the other party’s interest in it. Should there be an agreement to split the marital estate (i.e., the community property) equally between the parties. Should there be an agreement that neither party will request the assessment of attorneys fees against the other party or an agreement that if either party challenges the property agreement then that party must pay all attorneys fees for both spouses.
- Disposition of assets upon death – Are there any assets that will be significant to a particular party upon the death of the other spouse. For example, if a party wants to own the marital home, the other party’s Will should specifically leave the deceased’s ownership interest to the surviving spouse. What consideration should be given to families by prior marriages – who should receive what and how can it best be structured. Are there any assets that should go to a particular person and, if so, what is the best way to structure that disposition.
- Considerations related to other family members – If there are children by prior marriages, obligations to former spouses, etc. what provisions should be made about payment of those liabilities. How should child support or post-divorce alimony be funded. If a party desires to leave something to a family member at the time of the party’s death, should that be done through life insurance or the allocation of assets from the party’s estate.
- Considerations related to other business owners – If there are other persons who own interests in the business operated by a spouse, what provisions should be in the agreement to handle any obligations to them. Are there provisions to buy out a person’s interest in the business in the event of a death or divorce; if so, how is it to be funded.
- Life insurance – What persons should receive what part of the life insurance proceeds. Are there any obligations that should be paid off through the use of life insurance proceeds. From what funds should the insurance premiums be paid. Is it wise to establish a trust to own the policy so that it is not part of the insured’s estate. Are there any obligations to former spouses or children that take precedence over any other disposition of the policy proceeds.
- Retirement plans – What persons should receive what part of the retirement benefits. Are there any obligations to children by prior marriages or former spouses related to the benefits. What are the tax consequences of such dispositions.
- Compensation for lost opportunity – Will the marriage relationship require that a party forfeit business opportunities or other potential benefits. If so, what compensation (if any) should be provided for doing so.
- Tax considerations – What provisions need to be made concerning payment of taxes – income taxes, capital gains taxes, gift taxes, estate taxes, etc.
- Children of the marriage – If the parties anticipate the birth or adoption of children during the marriage, what provisions should be made for their ongoing expenses, education costs, automobile insurance, etc.. Should there be any assets allocated via a trust or Will to provide for the child.
There are no “one size fits all” pre-nuptial or marital property agreements. A property agreement can and should be fashioned to suit the specific needs of the parties. Therefore, spending time discussing the multitude of “what if” scenarios is worthwhile because it will enable the lawyers to write a more durable property agreement.