Post Nuptial Agreements and Asset Protection for the Family

In this day and age most people have heard the term, post nuptial agreement, or "post-nup", but few actually know what it is.  Is it a way to back out of marriage?  Is it a document only the rich and famous need?  Is it something signed at the time of divorce?  The answer to all these question is NO.  A post-nuptial agreement is a document which enables you and your spouse to specify the division of your assets, rather than leave it up to the property division laws in your state.

In California, property (meaning, real property, personal property and even things like wages) acquired during your marriage is considered by law to be owned by both spouses equally, or rather, by the "community".  For example if you start a retirement savings plan during marriage, and deposit a portion of your wages into the plan, the plan technically belongs to the community, not just to you.  A post-nuptial agreement allows you and your spouse to "opt out" of the California community

property system and to hold assets as separate property.  In this way a post-nuptial agreement is less about your marriage and more about a savvy way to protect your wealth.

We counsel our clients that a post-nuptial agreement is a valuable asset protection tool.  Because property acquired during marriage in community property states vests in both spouses immediately, this property will also be subject to the claims of the creditors of either spouse. The act of transferring property from community status to separate status can, in most instances prevent creditors from attaching property. It is said that creditors "step into the shoes of their debtors", meaning the right of a creditor to your property is the same as the right of a married person.  This classification of property is important for asset protection because it determines:

• The rights of a spouses' creditor to reach assets
• The rights of both parties in the event of a divorce
• The rights of each spouse's creditors in the event of a divorce
• Management and control rights to property, including the ability to make gifts and to dispose of the property 

In most cases then, substantial property should be held as the separate property of the spouse who is not at risk from creditors.  The community property system is abandoned in a post-nuptial agreement and all earnings and property is converted to separate property.  By holding your property as separate property rather than as community property, you do lose the step-up in tax cost basis to fair market value in the event that one spouse dies.  A step-up in cost tax basis will eliminate any income tax on property at the date of death.  This loss can often be countered by either not selling the property in question or by acquiring additional life insurance to offset additional monies you would owe in this situation.  The agreement must meet certain

technical requirements, including making a full disclosure of all assets to your spouse and being fair.  The agreement is then recorded with the county which makes it binding on creditors.

After a post-nuptial agreement has been signed and recorded, both spouses should continue to maintain separate accounts and avoid commingling property.  After this transfer of property, the transferor cannot continue to treat the transferred property as his own, meaning it can't be listed as property owned on any financial statements.

If you have questions or an interest in a post-nuptial agreement, please contact Jennifer DeRosa, Esq. at either (714) 704-4828 or Jennifer@hmbfinlaw.com.