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Did You Buy Marriage Insurance? The Importance of Prenuptial Agreements in Community Property States

Posted on July 5, 2023 by Lasher Holzapfel Sperry & Ebberson

Around the world there are millions of people who rely on insurance for homes and vehicles to celebrity body parts.  Nowadays, there is even insurance to cover the postponement or cancellation of one’s wedding.  Ironically, the average couple prefers to forgo the “marriage insurance” a proper prenuptial agreement can provide because of the stigma associated with the agreement.

A prenup, short for prenuptial agreement, is a written legal contract between two people prior to marriage that is intended to cover a variety of financial issues and concerns such as real property, cash accounts, and financial obligations.  A prenup also allows couples to plan, while they are usually on good terms, for rainy days such as divorce or death.  The process should afford both parties opportunities to be informed and to perform their due diligence about their future spouse’s current financial standing and projected growth while establishing a baseline agreement for how expenses are to be handled during marriage to help avoid surprises after saying “I Do.”

One of the hardest conversations in any relationship is asking for complete financial information from the other.  Couples that complete a proper prenuptial agreement can eliminate questions or ambiguities around their financial future since each party must fully disclose assets and liabilities to the other.

What about love? Couples that do not have prenuptial agreement should, at a minimum, be aware of the laws of their state for common law marriage, divorce, and death.  Depending on what the parties bring to the marriage, the laws can work in one’s favor as well as to one’s detriment.

If you live in one of the nine Community Property states such as Washington, couples should be even more cautious of the default characterization of earned income during a marriage and how this may impact other assets.  Generally, assets and debts acquired during the marriage (with some exceptions) in a community property state are considered community property and obligations of the community respectively, regardless of how assets are titled.  If the couple divorces, each spouse is generally entitled to half of the community assets and liable for half the debts.

If a party is uncomfortable with the typical 50/50 division of assets as Washington Community Property Laws provide, a prenuptial agreement could be used to achieve a different division of assets during the marriage.

Following is a recap of some benefits of entering into a Prenuptial Agreement:

  1. Prenuptial Agreements allow the parties to plan what happens in the event of a divorce or death, not the court. A Prenuptial Agreement can eliminate the uncertainties surrounding the disposition of property in the event of divorce and death.  The Prenuptial Agreement can provide a baseline for how community and separate property are to be divided or devised.  A Prenuptial Agreement can also help couples avoid a bitter and lengthy dispute by defining what qualifies as community property and how the parties would like to divide it in the context of divorce.
  2. Prenuptial Agreements can create financial benefits for the financially disadvantaged spouse. A Prenuptial Agreement allows the parties to create and maintain certain assets as Separate Property.  The party with the higher net-worth may create separate property from their assets for the financially disadvantaged party or allow such party to maintain more separate property to offset the benefits of their wealth.  This can help keep one’s separate property from getting tied up in the probate of the deceased spouse and can help the surviving spouse use the separate property after the death of the spouse.  In addition, a Prenuptial Agreement can allow the parties to create community property beyond default community property standards.  This is extremely important where little to no community property might accrue to one of the spouses.
  3. Prenuptial Agreements can simplify asset division in divorce. The Prenuptial Agreement is intended to set out the property division and can provide for payments to the financially disadvantaged spouse. The agreement can also provide peace of mind over what assets would be received in the event of divorce thereby eliminating financial uncertainty and the associated time and legal fees associated therewith.
  4. Protects Children from Prior Marriages. A Prenuptial Agreement can safeguard inheritance. If one has children from a previous relationship, a prenuptial agreement can help ensure prior children are protected in the event of divorce or death.  By agreeing to this kind of contract, one can help ensure that property passes to children the way one intends.
  5. Provides disclosures. Each party must voluntarily provide a full and complete financial disclosure to the other about assets and liabilities. Talking about these items can be difficulty or awkward regardless of one’s financial status.  A prenup affords parties with a reason and forum to have these conversations prior to the union.

This article only touches upon some of the basics of community property and prenuptial agreements.  Each situation is different and there can be additional complexities based on the type of asset, how the interest is held, and otherwise.  To learn more about prenuptial agreements, please contact any of the Family Law attorneys at Lasher.