Are you planning a spring or summer wedding? You might have had a fleeting thought that you should have a premarital agreement before you marry. Premarital agreements, also referred to as prenups or prenuptial agreement, define a couple’s financial and fiduciary responsibilities to one another, the ownership of assets and debts, and the management of income and expenses. The agreements are entered prior to marriage with the intention to circumvent California law in the situation of a divorce or death in regards to property and debt.

What can you do in a premarital agreement or prenup?

premarital agreementIn a premarital agreement or prenup, you are able to contract out of California’s community property laws. These laws apply whether you are in Santa Clara County or Los Angeles County, or in any Californian city: San Jose, Campbell, Los Gatos, Milpitas, Sunnyvale, and the like.

In California, a party’s assets owned prior to marriage, or received by inheritance, gift or devise, is the party’s separate property. In other words, he owns 100% of the property.  All other property falls under the catchall as community property (belonging equally to the married couple). However, it can get tricky.

Many assets have both community and separate property qualities, known as “mixed character.” For example, Paul purchases a home prior to marriage. He keeps the title in his name throughout the marriage, but pays down the principal with income from his salary (community property). The community (i.e. the couple) now has an interest in Paul’s separate property home. In addition, if Jessica, Paul’s wife, spends time improving the property with her time (a community property asset), the community would be entitled a reimbursement for her efforts.

A premarital agreement or prenup can prevent this. In a premarital agreement, a couple may contract that all income earned during marriage is the separate property of the person that earns it. They might also agree that any person’s efforts, time or skill used to improve the other’s separate property is a gift to that person.

Here are some other agreements a couple might make:

  • No community property be created during the marriage;
  • All property owned prior to marriage remains separate property, regardless of the change in character or if community property is invested in that property;
  • Any loans taken are the responsibility of the person who assumed the debt.

Why would you want a premarital agreement or prenup?

Here are a few reasons why a couple may consider a premarital agreement or prenup:

  • Insurance against a nasty or costly divorce: Premarital agreements are like automobile or disability insurance. You pray you never need it, but rest assured you have it in case the worse does happen.
  • Prior divorce: For those who have already divorced, they may want to avoid the potential of another divorce resulting in a loss of financial assets, read more here.
  • Define financial relationship: This may feel so unromantic and so unlikely for many lovebirds, but premarital agreements require a couple to do some important thinking in advance of financial marriage woes. For some, having this financial structure, this might put them at ease. And can be an opportunity for the couple to identify their financial expectations and even their roles in marriage.
  • Blended family: If an individual has children from a prior marriage, he or she may want to take extra measures to protect his or her estate for their children.
  • Retirement age: If a couple is older, and closer to retirement, they may want to make sure their nest egg is protected, especially from the possibility of a protracted and costly divorce.
  • Waiver of spousal support/alimony: You can also waive spousal support in a premarital agreement. California is a no-fault state. Think about the difficulty when one spouse has had an affair, resulting in the divorce, but that spouse is still entitled to receive spousal support from the spouse on whom she or he cheated.

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