Have you wondered about prenup or postnup agreements and what they are? You may have wondered whether you need a prenup agreement. Or, you may be thinking about starting a business and wondered if you need a postnup agreement to protect your spouse and property? It’s nearing the end of the year. That means spring weddings are right around the corner. It also means many businesses are getting ready to finalize documents to start business in the new year. It’s a great time to look at prenup and postnup agreements. So what’s involved?
Prenuptial agreements (prenups) are simply agreements to alter marital property rights without court action. They are most common when one or both prospective spouses have property or assets coming into the marriage – like a second marriage or marriage later in life. Prenup agreement can also address a division of household responsibilities, payment of support and living expenses, sharing of child-rearing responsibilities, religious upbringing of children, and procedures for conflict resolution. They are not permitted to adversely affect child support, defraud a creditor, or violate Texas public policy. Legal requirements are governed by the Uniform Premarital Agreement Act.
Prenup agreements must be in writing. The parties must have had the opportunity to receive a full disclosure of all property and financial obligations. Best practice is to prepare and exchange full disclosures in advance of signing a prenup. The agreement must be signed prior to marriage. It should be prepared and signed far enough in advance to allow for the financial disclosures and so that the marriage date is not too close to be coercive. As best practice, both parties should have legal counsel. If the agreement addresses real property (real estate), the agreement should be sworn or acknowledged so it can be filed in real property records.
Prenup agreements are a great way to protect property and assets, especially if this is a second marriage or marriage later in life and the parties are each bringing coveted assets to the marriage. For example, if both spouses have retirement accounts coming into the marriage, they may want to ensure that they each keep those in the event of a break-up. Spouses may also desire a prenup if they have different education and business backgrounds. A spouse with less education or skills may want an agreement for support in the event of a break-up. These agreements can also protect the community estate and other spouse from liabilities for separate property. For example, if one spouse has investment real estate or rental properties, or other business that has some risk, these agreements can protect the community estate and other spouse from that risk. Prenups take the worry and anxiety out of a break-up, and everyone can just focus on the happy aspects of the relationship.
Didn’t do a prenup before marriage? Not to worry! A postnuptial agreement (postnup or partition agreement) is similar to a prenup, it’s just signed after the parties are married. Spouses can, at any time, turn community property into separate property. Why would you want to do this? Some couples prefer to have a “community free” marriage so each spouse has his/her own property. Spouses may also want to partition separate property and income. For example, a spouse may start a new business that carries risk. A postnup agreement allows the spouses to protect the community estate and the other spouse from risk and income/tax consequences posed by the new business venture. A postnup also does not have a pending wedding date that may be approaching and applying pressure to sign.
Postnup agreements have similar requirements to prenup agreements. They have to be in writing. They must specifically identify the community property being partitioned and specify the intent to partition that property (i.e. make it separate property). The property must be made separate upon signing – the agreement cannot require future action to accomplish the partition. There must be the opportunity to receive full financial disclosure (again, best practice is to exchange financial disclosures in advance of signing the agreement). It must be sworn or acknowledged if it needs to be filed in the real property records of any county.
Parties can also enter into conversion agreements to turn separate property into community property. Conversion agreements are sometimes used for estate planning purposes. Community property has some tax-planning benefits over separate property. For example, when a spouse dies owning community property, each spouse’s one-half share in the community property receives a step-up in basis. By converting separate property to community property, a spouse may save the surviving spouse from having to pay captial-gains taxes on any converted property sold. However, such benefits do not often outweigh the risks that come with a conversion. These agreements are much less common, because they can expose the community and other spouse to more liability. Also, nothing can prevent a spouse from filing for divorce after such agreements are signed.
Prenup and postnup agreements are great tools to take a lot of worry and anxiety about future financial stability. They can minimize risk and harm to the community estate and innocent spouses. They can also keep the focus of the marriage on the relationship and not the finances.