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A prenup, also called a prenuptial agreement or premarital agreement, is a contract between an engaged couple that decides how property will be split up in the event of a divorce or death. An engaged couple agrees on the terms of a prenup and signs the agreement prior to the date of their marriage. A well-drafted premarital agreement can provide peace of mind and reduce financial stress both prior to and during the marriage.
What difference does a prenup make?
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Most people don’t realize this, but when they enter into a marriage a whole slew of legal rules go into effect that govern their property rights both during the marriage and in event of a divorce. These rules are not bad rules, but they don’t work for everybody. Working with an attorney to draft a premarital agreement allows you to override those legal rules and take control of your financial present and future.
Default Rules on Community and Separate Property
Texas is a community property state. That means that any income earned, property acquired, or debts accrued during a marriage are presumed to be the property of the community—that is both parties have a more or less equal interest in both the good and the bad. For example, if you buy a car after your marriage and title it solely in your name it’s equally the property of your spouse regardless of whose name is on the title. The same goes for debts. If your spouse runs up a large credit card bill solely in his or her name, in the event of death or dissolution of the marriage, that debt will be attributed to both parties.
Separate property, on the other hand, is property you owned prior to the marriage and any property received by gift or inheritance during the marriage. Separate property is not subject to division by a court. However, funds can become "comingled" over time, making it difficult to determine what property is separate and what property is community. It's important to note that Texas law says that all property acquired during the marriage is presumed to be community and it’s up to the party claiming the separate property interest to prove that property's separate status in the event of a divorce. Therefore disputes can arise during a divorce over what property is community and what property is separate.
READ MORE ABOUT COMMUNITY AND SEPARATE PROPERTY HERE
Default Rules on Alimony
What is traditional considered “alimony” is called spousal maintenance in Texas. Spousal maintenance in Texas is rather limited. Unlike in other states, it is not used to even out parties’ earning potential after a divorce. Rather, it’s a mechanism by which a party who is unable to provide for basic necessities can get temporary support from their ex until they can “get on their feet.” Many stay-at-home parents are unpleasantly surprised upon divorce to discover that they do not have the right to any spousal support whatsoever.
READ MORE ABOUT ALIMONY HERE.
Overriding the default with a premarital agreement.
Setting up a premarital agreement lets you make your own rules. You can craft an agreement that makes it so that the community/separate property definitions do not apply to either some or all of your property. Or you can use a premarital agreement to make sure one or both members of the couple get either more or less alimony than would be provided by Texas law. Here are some scenarios where couples commonly use a prenup to override the default:
A couple decides that they don’t want to create a community estate at all, but instead want to keep all of their finances separate.
One or both members of a couple has adult children from a prior marriage and wants to make sure their inheritance isn’t effected in the event of a divorce.
One member of a couple has rental properties at the time of the marriage and wants to make sure income from that remains separate.
One member of a couple is part owner of a family business and wants to make sure the business is protected in event of divorce.
One member of the couple intends to be a stay-at-home parent and wants to be provided for financially should the marriage end.
The items in list above are only examples--the possibilities with a well-drafted prenup are virtually endless. Working with a competent attorney can allow you to draft an agreement tailor-made for the complicated realities of your life.
What is included in a prenup?
A premarital agreement is a flexible tool that allows you to make decisions covering almost any aspect of your finances. Many people are surprised to learn that a prenup can govern not just finances in the event of a divorce, but also financial management during the marriage itself or upon death. Following are some common premarital agreement provisions:
Separate and Community Property Designation. A couple can decide that some, all, or none of their property and income will be designated as community or separate property. They can also decide how the community estate will be divided in the event of a divorce, whether that be a provision for alimony, a 50/50 split, or anything in between.
Personal Residence Provision: For couples living in the separate property of one couple or for couples whose community home is partially or entirely paid for by separate property, a prenup can allow for reimbursement of mortgage payments between the community and separate estates.
Employee Benefits: Federal law mandates that the spouse be the beneficiary of ERISA retirement accounts unless the spouse agrees otherwise in writing. A prenup, combined with a postmarital ratification agreement, can agree to remove the spouse as beneficiary. Some chose to do this in order to provide an inheritance for children from a prior marriage.
Liability for Debts: The default rules surrounding debt reimbursement during a marriage can get very complicated. Suffice it to say that a premarital agreement allows you to customize your debt reimbursement plan to maximize or minimize the sharing of debts during the marriage—or anything in between.
Income Taxes: Even if one couple has significant income from separate property or if a couple has decided not to allow any community property to be created during the marriage, they can still file their taxes jointly and agree that each member of the couple pay his or her pro rata share of the total income listed in the joint tax return.
Management of Property: A premarital agreement can determine how household expenses and joint bank accounts will be managed during the marriage.
Estate Planning Decisions: A prenup can include an agreement about the execution of a will or the disposition of property upon death.
The Family Code says that a prenup can also include “any other matter, including their personal rights and obligations, not in violation of public policy or a statute imposing a criminal penalty.” During a consultation with an attorney, you can determine how a premarital agreement could be custom-tailored to fit your unique circumstances.
Postmarital agreements, also called postnuptial agreements or postnups, allow married couples to change the nature of their community or separate property estates during marriage. This may occur when a marriage is very happy, but a couple desires more financial independence. A couple can divide assets into separate property estates and even make it so no community property is created for the remainder of the marriage. A post marital agreement can also be used to convert separate property into community property, such as a home or vehicle. It is important to remember that putting your spouses name on a deed or title is not enough to convert your home or vehicle to community property. Texas law requires that an agreement be signed specifically effectuating the conversion.
A properly drafted and executed premarital agreement is just as enforceable as any other contract. However, just like any other contract, prenups are subject to challenge for flaws such as fraud, duress, coercion, or lack of transparency. One way to minimize the possibility of such a challenge is to get your prenup completed well before your wedding so that there can be no argument that one member of the couple was pressured on the wedding night to sign "or else." In addition, it is well worth the expense to insure you and your fiancé are each represented by separate attorneys. Doing so will seriously undercut any argument that one party did not fully understand the prenup's terms before signing.
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If you are interested in crafting a premarital or postmarital agreement, we can help. Contact us and you will hear back directly from one of our attorneys.