In California, married couples must always be mindful of the state’s community property system when drafting an estate plan. Whether property is classified as separate property or community property affects what happens to that property when one spouse dies. Failing to account for the distinction between separate and community property can result in costly unexpected consequences.
But spouses in California aren’t powerless when it comes to defining separate and community property. In fact, the community property rules in California are more like default rules than immutable dictates from the state. By using a premarital agreement or marital property agreement, spouses can redefine each other’s rights in marital property.
More popularly known as prenuptial agreements (or prenups), premarital agreements are authorized by California Family Code §§ 1600-1617. A premarital agreement is “an agreement between prospective spouses made in contemplation of marriage and to be effective upon marriage.”
The premarital agreement can cover many different topics, but here are the ones most relevant for estate planning:
- The property rights of the prospective spouses during the marriage.
- The rights to manage and control property.
- The disposition of property upon death.
- Making a will, trust, or other arrangement to carry out the agreement’s provisions.
- The rights to life insurance policies.
In fact, if prospective spouses want to, they can use the premarital agreement to preclude the creation of any community property interests during the marriage. In other words, they can say that all property acquired during the marriage will be the separate property of the spouse who acquired it.
Why would anyone want to do that? There are several reasons. First, it can eliminate confusion or conflict over what property qualifies as separate or community property. Additionally, it can protect the assets of one spouse from the liabilities of the other. Finally, it gives each spouse full testamentary control over that spouse’s own property. (Recall that a spouse can only dispose of his or her 50% interest in any community property.)
This kind of arrangement can be especially attractive to prospective spouses who are entering their second (or later) marriage, or when one spouse has a significant amount of pre-existing debt.
Marital Property Agreements
Californians’ ability to modify how their marital property will be characterized doesn’t end when they get married. During their marriage, spouses can change separate property into community property, community property into separate property, or one spouse’s separate property into the separate property of the other spouse. They do this through a process known as transmutation through a marital property agreement.
Final Thoughts: Don’t Try This At Home!
Importantly, both premarital and marital property agreements must satisfy certain requirements to be effective. It’s easy to mess up on these formalities, which is why prospective spouses or spouses should seek the assistance of an experienced attorney before attempting to enter either kind of agreement.
As a final note, because premarital agreements and marital property agreements change how California’s community property system applies to a married couple’s assets, be sure you discuss them with your estate-planning attorney if you are party to such an agreement. That way, your plan can be tailored to the specifics of your property arrangements.