Newlywed Planning Center

Premarital Agreements and Estate Planning

Given the high divorce rate, an excellent consideration prior to marriage is to establish a California premarital or postnuptial agreement. With financial issues being a major cause of divorce in Southern California, couples who establish premarital agreements are actually taking a positive step toward preventing future financial misunderstandings. The process of creating a premarital agreement with an Orange County estate planning attorney at Mortensen & Reinheimer, PC can actually help couples talk about monetary issues in a neutral environment, as well as establish future rules for the management of assets and property.

Premarital agreements also play an important role in estate planning. For example, they provide documentation for the IRS as to which assets will receive a stepped-up basis on the death of one spouse, and which assets are includable in the deceased spouse's estate. They can also resolve disputes among family members if the distribution of one spouse's separate and community property varies from the distribution of the other spouse's separate and community property.

Persons marrying for a second time may want to consider a California premarital agreement. A premarital agreement can serve to identify the assets that are owned at the time of the marriage and to ensure that those assets and any appreciation in those assets will remain separate property. A premarital agreement can also set forth the parties' understanding with respect to their retirement plans.

Planning for a Second Marriage

Merging two families and finances inevitably brings challenges and it is particularly important to have a solid estate plan. A common concern among blended families is how to divide assets so that all children are included fairly after the death of one or both spouses. How do you maintain fairness, be impartial and get along with your spouse all at the same time?

The creation of a revocable living trust will help to ensure that your wishes are carried out and that your children are protected. For example, an A-B trust or Q-TIP trust allows you to have your share of the assets held in a trust for your spouse's health, support, maintenance, and education, and then passes the remainder of your assets to your children upon your spouse's death. While this does not guarantee that your children will inherit your "full share," because your spouse may utilize some of the assets, it does ensure that they will receive the balance of your share and will not be disinherited.

If you and your spouse have different beneficiaries, it is extremely important to have a Q-TIP trust rather than an A-B trust if there is any possibility that the estate of either spouse could ever exceed the Federal Estate Tax exclusion amount. With an A-B trust, the excess of the decedent's estate over the Federal Estate Tax exclusion amount will be allocated to Trust A, and ultimately be distributed to the surviving spouse's beneficiaries, rather than to the deceased spouse's beneficiaries.

You should not rely upon the laws of intestate succession to control the passage of your assets upon your death. If you die as a married person without an estate plan, your share of the community property will pass to your spouse. A portion of your separate property will also pass to your spouse, and the percentage will be determined by how many children you have. Once your assets pass to your spouse, your spouse can leave the assets by will or by trust to whomever your spouse chooses. Similarly, if you create a will that leaves everything to your spouse, and then your combined estates equally to children from both sides of the family, your surviving spouse may change the distribution and disinherit your children.

The distribution of your retirement plan and IRA accounts should also be thoroughly considered. If you designate your spouse as the beneficiary, he or she has the advantage of being able to roll over your IRA and take minimum distributions, as you would have done. This is an excellent means of support for your spouse during retirement years. However, your spouse may designate new beneficiaries after your death, and any balance in the retirement funds may not go to your children. If you designate your children as beneficiaries, you deprive your spouse of any use of the funds in your plan during his or her lifetime, but ensure that your children will inherit your retirement funds.

What Is "Community Property"?

The term "community property" frequently relates to estate planning. Essentially, community property is a form of property ownership recognized in only nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

The marital "community" consists of all assets acquired during marriage, except those acquired by inheritance or gift. Any income acquired by either spouse during marriage is automatically split so that each spouse owns an equal half (whether it comes from wages or self-employment). Since each spouse owns an equal half of the community property, each may dispose of his or her half of community property in a will or trust as he or she so desires. It does NOT have to be given to the other spouse.

If the will or trust of a deceased spouse attempts to dispose of both halves of an item of community property, the surviving spouse should petition the probate court to prevent the transfer of his or her interest that the decedent had no right to give away.

What Is "Separate Property"?

"Separate property" are those assets that are acquired by one spouse before marriage, by gift or inheritance, or in exchange for separate property or money. In California, income that is generated by separate property remains separate property. However, commingling of separate property assets with the community can cause it to become community property. This often happens with checking and other financial accounts with both spouses' names on the accounts, or if the money is used to support the community.

It is possible in some community property states for the spouses to change the ownership of an asset from community property to separate property, and vice-versa, simply by written agreement between them. This is called an ante-nuptial or post-nuptial agreement. The process of re-characterizing property is called a transmutation.

Also, if either or both spouses is, or ever was, a legal resident of a "common law" state, records should be maintained pertaining to the estate of each spouse prior to marriage, the state of the current marriage, the identity, value, and source of funds used to buy property during marriage, as well as the legal residence at the time of acquisition. Property acquired separately by a spouse in a common law state is treated like community property (a.k.a. "quasi-community property") if the couple moves to California later on, even though only one spouse's funds paid for the asset in the common law state.

Talk to an Orange County Estate Planning Lawyer

At our law corporation we can fully assist you with a premarital agreement and estate plan tailored to your individual objectives and needs. Our law corporation offers an initial consultation to get you started.

Contact an Orange County estate planning attorney at our law corporation to discuss your legal needs regarding your marital property and estate today.

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