This post was published on the now-closed HuffPost. Edited for length and clarity
You are going to get married. You have substantial net worth. You have a business that you have built up over the years and it is now doing well. You are excited about your upcoming marriage and you don’t want to do anything that might take the excitement out of the process. Since you already own the business and you already have accumulated your worth, there seems to be nothing to worry about. After all, community property, as you understand it, encompasses that which you acquire during the course of your marriage. You already have the business and the assets going in, so in the off-chance it does not work out you will be okay financially.
While it is true that in California assets that are acquired prior to marriage, or that are acquired through a gift or inheritance are separate property – they don’t always remain so. If the business you are operating continues to grow through the marriage, the appreciation in the value of that business becomes community property. As a community property state, the law provides that accumulations made through the efforts of a spouse while married are community property.
As a result, that growth that your business has experienced becomes community property as well. It does not mean that the entire business becomes community property, but some portion of it is jointly owned by you and your new spouse which means that if things do not work out – your new spouse is going to have his or her share of that business coming to them. This can create significant problems when it comes time to divide up the marital estate. It may be that most of your assets are tied up in that business and it may then become difficult to buy your new spouse out of it.
A similar problem can arise with separate property money. If it is passively invested, then in theory there is no issue — you put no effort into causing it to increase in value after marriage, and provided that you never put it into a jointly titled account, or transferred it to an account opened after marriage it will be safe. The problem is that in real life things don’t usually work this way.
Inevitably, some effort may go into managing it or at some point money will be moved from one account to another. And in the course of a marriage that lasts many years, things may come up that require the use of funds for a joint purpose that came from a separate property source and now require extensive accounting to trace back to that source.
There is one way to avoid these problems. As unpleasant as the discussion may be, by addressing these issues in a premarital agreement one can ensure that what is intended to remain separate does so.
Don’t be afraid of premarital agreements. They can actually be really useful. Premarital agreements are sort of like insurance policies. You can protect your assets and, also, insulate yourself from risk of loss. And, even if you have no assets prior to marriage, you can use the premarital agreement as a tool to create some element of financial security for yourself, e.g. spousal support or reimbursement of certain costs, in the event of a dissolution of marriage.
~ Audra Petrolle
In addition, there are benefits to creating such an agreement prior to marriage: it forces the couple to discuss what they are going to do with their finances. It educates both parties about the other’s financial situation.
It causes them to reflect upon what it arrangements they need to make to ensure that everyone’s needs and expectations are taken care of. As unpleasant as the subject matter may be, in truth there are reasons to bring the subject up that may make the relationship going more smoothly, and offer the asset protection that either or both spouses are looking for.