Let’s talk about the law of unintended consequences, shall we?
Sue and Sam, both Texas widowers with children, fall in love and decide to marry. They have some conflicting feelings, however.
Sue wants to preserve her assets and earnings for her children after her death. She also wants to be protected from paying Sam’s debts.
Sam wants the same thing.
They do some internet research and decide that they want a “community free” marriage. To do that, they execute a marital agreement – permitted in Texas since 1980 – with the goal of insulating their separate estate from the claims of the other spouse and that spouse’s creditors and heirs.
What could possibly go wrong? Let’s see…
What You Need to Know About a “Community Free” Marriage
Required Support
Each spouse still has a legal duty to support the other spouse for necessaries. This duty cannot be waived by a marital agreement. That means if Sam must go into the hospital and does not have the money to pay the bill, then Sue is responsible for it. Likewise, if Sue is short on money and needs new clothes, then Sam is on the hook for the bill.
Child Support
If they have children together, then their agreement cannot limit either’s child support obligations.
Filing Taxes
If they choose to file joint income tax returns, then they each remain jointly and severally liable for the tax liability arising from that year’s tax.
Business Liabilities
If they are in business together or take some type of joint action, then each remains liable for the other person’s acts. That is because each spouse is considered an agent of the other spouse.
Pre-Existing Creditors
Their agreement does not protect them from a pre-existing creditor if their intent in making the agreement was to defraud that creditor. They could also be liable to creditors under the Uniform Fraudulent Transfer Act. This is a nightmarish law (for debtors, at least) that invalidates transfers involving actual or constructive fraud.
ERISA Laws
Their agreement cannot protect them from ERISA laws. Let’s look at this more closely. If Sam is working, then Sue is entitled to be the beneficiary of his plan benefits. This can be waived by a properly drafted agreement executed after marriage, but cannot be waived before marriage.
Tax Consequences
There may be adverse tax consequences. They may lose a step-up in basis in property upon the death of the first spouse. For example, if Sue and Sam owned community property, then the entire property gets a new income tax basis when the first of them dies. As an example, let’s say Sue and Sam own 100 shares of stock. If Sam died, the entire 100 shares would get a step-up in basis.
But suppose, before Sam’s death, they enter into a marital agreement that gives 50 shares to Sue as her separate property and 50 shares to Sam as his separate property. When Sam dies, only his 50 shares get a step-up in basis. This could be a huge disadvantage to Sue if the stock value had increased significantly.
Additions to a “Community Free” Marriage
Now that we know what Sue and Sam cannot accomplish with a marital agreement, let’s look at some things they can do:
- Confirm separate property and community property.
- Define each’s management rights and powers over certain property.
- Define whether any property acquired in the future will be community property.
- Confirm if earnings will be separate or community property.
- Waive certain rights when their spouse dies.
- Provide for the disposition of property upon death.
Understand Your Marital Agreement Before You Sign
Love is a personal relationship. Marriage is a legal relationship. If you know and appreciate the difference, then you will be just fine.
If you need help finding the right marital agreement for you and your spouse, schedule a consultation with our team of expert attorneys today.
Virginia Hammerle is an accredited estate planner and represents clients in estate planning, probate, guardianship, and contested litigation. She may be reached at legaltalktexas@hammerle.com. This blog contains general information only and does not constitute legal advice.
