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
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
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.