Prenups and Community Property
In the absence of a prenup, California community property law provides that all community property (any property acquired during the marriage that is not a gift or an inheritance) is divided equally upon divorce. It usually does not matter if the property is in one party’s name – if it is acquired during marriage, with some exceptions, it is community property. Property owned before marriage is separate property and cannot be divided by a court and belongs to that party. However, efforts to improve, enhance or contribute to separate property can create a community property interest in that separate property. That is where a prenup comes into play. A prenup can provide that your spouse never acquires a community interest in your separate property.
If you do not have a prenup, the determination of what is separate and what is community property often requires the use of forensic accountants. In high-asset cases, the accounting and legal fees can run into the hundreds of thousands, or even millions, of dollars. Furthermore, in determining whether a business owned before marriage has any community interest, the property must be valued both at the time of marriage and at the time of separation, and sometimes again at the time of the divorce trial which can be years after filing for divorce. Similar calculations are made for real estate and intellectual property. Furthermore, earnings are community property. If you married without a prenup and earned $50,000,000 during your marriage, that entire sum would be community property. That means your spouse would own one-half of that property and anything purchased with that property.
Furthermore, if you lost any of that money in a bad investment or mismanaged your assets, your spouse may have an action against you for a breach of fiduciary duty. And if you reinvested those earnings in a separate property business or any other property, your spouse could request that you reimburse the community for the money spent. In a long term marriage that tracing may be impossible to do and sometimes the person claiming a separate property interest forfeits their claim.
Under California law, the proceeds of loans are community property under certain circumstances. If an individual owns companies and uses financing or factoring to finance a business, the loan proceeds can be so commingled in the business that the owner can end up losing his separate property interest. Also if you refinance your real estate, you may be contributing community property to your separate property asset.
A prenup can regulate all aspects of how separate and community property assets and liabilities are treated. In the case of a financially independent couple with their own resources a prenup can provide that all income, assets and debts acquired or incurred remain separate property. Alternatively, in lieu of a community property distribution, a wealthier spouse might agree to pay the other spouse a lump sum based on the length of the marriage. On the other hand, a couple might agree that all property accumulated during the marriage remain community property but that certain property brought into the marriage such as family businesses or funds always remains separate property. Since each situation is different a prenup should be carefully tailored to meet the circumstances of each couple.
California law allows you to waive or limit spousal support as long as the provision is not deemed unconscionable. Unfortunately, as yet there is no case law defining the word "unconscionable." If there is a significant disparity in the amount of wealth between the parties, instead of waiving spousal support, the prenup may place limits on the amount and duration of support. The amount and duration can be based on a formula which takes account of the income of the parties and the duration of the marriage.
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