How To Keep Separate Property Separate -- Without A Premarital Agreement

KEEPING SEPARATE PROPERTY SEPARATE-----
WITHOUT A PRENUPTIAL AGREEMENT

Agreements entered into before marriage between prospective spouses are called premarital agreements, prenuptial agreements, or antenuptial agreements --- but each label means the same thing. When married couples sign these agreements after they marry, the documents are called post-marital or postnuptial agreements. Regardless of what they are called, these documents are designed define the property (and sometimes, support) rights of the parties should they later divorce or should one or both of them die.

Although we read that premarital agreements are a simple solution to the high cost of divorce, we rarely hear about the problems folks run into when they negotiate these agreements.

Although most think these agreements are a fast, easy solution to problems that might crop up after marriage, the person who is asked to sign the agreement – usually the less dominant economic spouse – often believes these agreements are prepared by smart lawyers to keep them from getting what they deserve at divorce or death of a spouse.

That’s why when “prenuptial agreement” is brought up, the wedding is sometimes called off. And that why, although planning is essential, it is often difficult or impossible to negotiate a premarital agreement. But that does not mean that without such an agreement, assets can not be protected.

Create An Accounting System For Separate Property

Although not fool-proof, accounting systems by which the holder of separate properties keeps detailed records of these assets and the income derived therefrom may give the owner of the separate property an edge if -- and when -- marital problems occur.

In order to trace the assets and income, it is important to identify and list these separate assets and to create separate accounts to accept the income derived from these assets. If separate income is necessary to support the marital household, it can be transferred from the separate account into the marital account as needed. Although it may be a good idea for promissory notes to be signed each time separate income or assets are used for marital purposes, whether this “debt” would hold up in divorce court is unknown.

There Should Be A Balance Sheet For Separate Property

To try to protect separate assets when there is no prenuptial agreement, you should inventory, value and then list on a balance sheet each of the separate assets and each liability. Valuation should take place as close to the date of marriage as possible. Valuation should by “fair market value” -- that is, what a willing buyer would pay a willing seller for the asset. When there is a going business or professional practices involved, the complexity increases, and CPA’s should be involved in this process. It is probably a good idea to get a business appraisal from a business valuation expert close to the date of marriage. If the business owner had been divorced shortly before remarriage, that valuation may suffice. But if business valuation is too expensive or otherwise is not accomplished, keep tax returns, income statements, and balance sheets for each business for five years since these records can later be used to determine value as of the ate of the marriage.

If there is jewelry, real estate, or collections of valuables, lists and appraisal should be maintained. If there are stocks, attach copies of The Wall Street Journal financial pages as of the date of marriage since this will be sufficient to show the value of the stocks when married.

Make Sure To Open And Keep Separate Bank Accounts

Income from separate property should be maintained in separate bank accounts. For the sake of accounting, it is better to open new accounts rather than to re-label existing accounts because problems can occur if the spouse who created the account dies and there is no one who can testify as to the reason the accounts were re-labeled.

And new bank accounts should be opened to receive income from marital property -- that is, income earned income after marriage. Income from marital property should never be deposited into separate property accounts -- and vice versa -- as this will cause "commingling" -- which can change the character of the property from separate to marital. Generally speaking, assets purchased with commingled funds are presumed to be marital property.

All marital or family expenses should be paid from a marital property account. If any investments are to be made for marital purposes, payments -- including down payments -- should be made only from marital accounts. At the same time, if investments are intended to remain separate property, these payments should be paid from the separate property accounts. And payment on separate liabilities for property, etc. should be made from separate property accounts.

If separate property investment is to be made into an on-going business in which personal skill or management is a factor, this investment from the separate account should be in the form of a loan to the business and should be repaid as soon as possible. Mortgage payments on separate real estate should be made from a separate property account in order to avoid the apportionment of some or all of the appreciation in the real estate which may occur after marriage.

Make sure to deposit marital earnings into marital property accounts, and separate earnings in separate property accounts. Keep strict records, and if an error is later discovered, reverse the transaction on the ledgers and in the accounts.

Always Maintain General Ledgers

A general ledger is a month to month and annual summary of the activity for each account that deals with assets, liabilities, and income. General ledgers should be kept for separate and marital property accounts in order to provide the record-keeping necessary to maintain the integrity of the system and to allow for appropriate tracing later.

Loans made from the separate property account to the marital property account to maintain the marital lifestyle should be recorded. It is important that marital maintenance needs that exceed current marital income handled by incurring marital obligations to third parties; however, borrowing by the marital estate from separate property should be discouraged -- and vice versa.


Although loans from the separate property to the marital property account will be generally uncollectible, if such loans are made, they should be documented because there is a chance that a judge find these obligations to be valid -- and a large loan balance at the end of the marriage might provide some bargaining power. Although a transfer of assets from separate to marital accounts may be presumed to be a gift in some states -- even though in the form of a loan, the court probably will not treat it as a loan -- whether both parties sign a not or not.

Repayment of Notes Can Be Dangerous

If loans from the marital estate to the separate property accounts are repaid, there may be a problem since these loans generally will not be looked upon as true loans -- even if both parties sign notes. If transfers of funds from separate to marital accounts are not loans, they are gifts. And, in turn, if funds were "gifted" to the marital account, they will become marital property, and when transferred back to the separate property as are payment of a loan, these martial funds will taint the separate account and make it a commingled account. This means that later purchases from the “commingled account” may well be treated as marital assets. In other words, trying to repay a loan to the separate from the marital account may well undermine the whole record-keeping system and with it, all separate property.

Transactional activity with respect to separate property securities should be segregated for greatest protection. Only clearly separate property infusions of capital should be made into these accounts if they are to be keep separate.

Problems Of Dealing With Real Estate

A house or other real property owned before marriage will remain the separate property of the owner after marriage -- even if the parties live in it; however, it is hard to remove a spouse or even a live-in companion from a residence, even though that person has no ownership interest in the property.

Should an existing, premarital mortgage debt be paid from marital property, the marital estate will develop a small, but increasing interest in the property. When determining how much, the amount of principal paydown is the numerator and the total equity in the property is the denominator. When you multiply this fraction by the total value of the property, the answer is the marital interest in the property.

Another problem comes up when separate property is refinanced during marriage. If the lender relies for repayment on the borrower's income stream or general credit, the proceeds of the loan may well be marital property. On the other hand, if the loan is a purchase money loan, in all likelihood, the property will remain separate. In order to maintain the separate property nature of the property, payments on any such loan should be made from separate property.

The Bottom Line

If you want to preserve separate property during a marriage, you can’t be careful enough. Although there are no guarantees that these procedures, if followed to the letter, will keep separate property separate, they will help the court to understand the intention of the owner and the steps that were taken to promote that intent.

Be sure to keep good records, keep marital and separate property accounts separate, and don’t commingle separate and marital assets.