What is a Marital Property Arrangement?
A marital property agreement is a contract between prospective spouses or sometimes between spouses at any point in their marriage by which they agree, generally in writing, to establish a contractual disposition of their property (property being defined as anything of value). Such a contract is beneficial for a couple because it allows them to purposefully plan for the future, allocate their property even in the event of divorce or death, and preserve a desirable sense of autonomy and independence for each party of the marriage. Also, perhaps of great consideration for each spouse will be the protection of which any property of the individually is entitled within a community property legal framework.
In Texas, the adoption of the Family Property Act in 1967 provided significant encouragement and precedent for premarital and marital property agreements because the Act codified what is known as the "community property" system of determining property rights. In a community property scheme, the spouse’s property (whether acquired before marriage, or during the marriage) is classified as either separate or community , and each spouse owns half ownership over community property (to which there are exceptions). Under the community property system, any income generated by a person’s separate property becomes community property, while also all income generated by his/her community property is considered part of the community estate as well.
However, if spouses enter into a premarital or marital property agreement that deems certain property to be separate, then such property is not subject to division in the case of a divorce because it is outside that property classified as community property (and therefore the property of both spouses). Some common examples of property deemed separate through premarital and marital property agreements are pre-existing family-owned businesses, pre-existing inheritance or gifts, and property acquired through individual efforts.
A premarital or marital property agreement doesn’t have to be a lengthy contract with multiple stipulations, but it is recommended that the agreement be signed and executed by both spouses with great consideration for the contents.
Legal Basis for Marital Property in Texas
As with other states such as California and Alaska, which have adopted community property regimes, Texas law presumes that the property acquired during marriage is community property. See e.g., Tex. Fam. Code Ann. § 3.002. In a community property regime, all property acquired during marriage, except property of every kind owned or claimed before marriage or acquired afterward by gift, devise, or descent, is community property, even if the title to the property is in the name of either spouse individually. Id. at § 3.002(1). Expressly included as community property are the "rents, issues, and profits of the property from the date of marriage," Id. at § 3.002(2), and the "personal earnings, revenue, or funds of the spouses." Id. at § 3.002(4). This includes income earned by either spouse during or after marriage, as well as any interest earned on the principal during marriage and any increase in the value of the principle. Although each spouse has an undivided one-half interest in the community estate, the spouses may create "a special community estate" in the same property and the use of the property may be separately controlled by either spouse without the consent of the other spouse. Tex. Fam. Code Ann. § 3.102.
Each spouse is entitled to manage the community estate, including the authority to buy and sell community property, borrow against community property, and pay off debts on community property. Tex. Fam. Code Ann. § 3.103. The spouses may contract regarding the disposition of all property owned by the spouses or concerning the spouses’ interests in any type of community property, even after divorce. Id. at § 3.003. Because a "right of management implies a right of control," a spouse may exercise exclusive management over the community estate. Ex Parte Sutherland, 130 Tex. 103, 105 S.W.2d 619, 620 (Tex. 1937). Thus, each spouse may execute a marital property agreement, which may be uniform in both form and substance, specifying the management, control, and disposition of the spouses’ marital property. Tex. Fam. Code Ann. § 3.103. Notably, during the parties’ marriage, a spouse’s exclusive management over the community estate cannot be coerced by the other spouse. Compare Aguilar v. Dominguez , 61 S.W.3d 872 (Tex. App.-El Paso 2001, no pet.) (spouse unable to coerce the other spouse to accept or sign a prenuptial agreement) with Engelman Irrigation Dist. v. Shields Bros., Inc., 887 S.W.2d 743 (Tex. 1994) (coercion in a contract is not actionable unless there is a threat of harm made to the victim against another person).
Just as the spouses may exercise full control over the management and use of the community estate, the spouses’ rights of control and management extend to the separate property of the other spouse. In re Marriage of Jones , 919 S.W.2d 481, 484 (Tex. App.-Texarkana 1996, writ denied). Even if a spouse acquires separate property, the spouse may consent to the other spouse’s exclusive use, management, and control over that property, so long as the consent is not obtained by fraud, duress, undue influence, or unconscionable advantage. Id. at 483-84.
If parties divorce without a valid marital property agreement or if a marital property agreement terminating after divorce is unenforceable, the spouses’ community property, with the exception of a small wifes’ equity allowance, will be divided equally, subject to any pertinent considerations raised under Texas Family Code Section 7.001. "Property Division: Effect of Disqualification, Incapacity, and Other Contingencies", 43 Tex. Jur. 3d Marital Property § 18, (2006) (citing Ex parte Caldwell , 418 S.W.2d 415 (Tex. 1967), and Ex parte Banks , 611 S.W.2d 431 (Tex. 1981)). A property division order that does not comply with the requirements for a valid property division will be reversed and remanded. In re Estate of Schreiber , 22 S.W.3d 469 (Tex. App.-Waco 2000, pet denied). The spouse who does not have the burden of proof of the elements of a common law marriage may establish the validity of a property division order by a preponderance of the evidence, while the burden of non-compliance with the equitable division requirements rests with the complaining spouse. In re Marriage of McNiel , 12 S.W.3d 17, 21 (Tex. App.-Amarillo 1999, pet. denied). If the property partitioned in a divorce proceeding was erroneously considered, then the ex-spouse may seek relief in the court of appeals. Id. (citing Rogers v. Ware , 614 S.W.2d 214, 216 (Tex. Civ. App.-Beaumont 1981, writ ref’d n.r.e.).
Types of Marital Property Arrangements
Several different types of marital property agreements exist in Texas that can have a dramatic effect on one’s financial status. The most superficial difference between them is when they are created. If they are created prior to marriage, they are known as prenuptial agreements. If the agreements are created after marriage, they are typically known as postnuptial contracts.
Prenuptial agreements are much more common than postnuptial contracts and are usually created in contemplation of marriage. The purpose of these agreements is to identify what property should be delineated as separate property pursuant to Texas law so that those assets are not subject to division upon divorce. Both parties should be represented by attorneys who are experienced in marital property agreements for the document to be binding. While this is the intent, prenuptial agreements are often the most disputed of all contracts. Areas which are specifically examined when a premarital agreement is drafted include issues surrounding child support, inheritance, alimony, and division of property.
Texas also allows couples to sign postmarital agreements which are typically called postnuptial contracts. If these contracts are executed after the marriage and property is included in the agreement, it must also be identified as separate property. This property will not be subject to division by the court at the time of divorce. Areas of emphasis in a postnuptial contract are the same as those in a prenuptial agreement.
How to Establish a Marital Property Agreement in TX
There are specific ways in which a marital property agreement must be drafted in order to be valid. The agreement must be in writing and signed by both spouses, under Texas Family Code Section 7.003. The Texas Family Code also requires that spouses make a fair and reasonable disclosure of their financial status before a marital property agreement may be valid. Many Texas appellate courts have held that the fairness disclosure requirement is satisfied so long as the spouse has reasonable knowledge of the financial status of the other spouse. Further, the Texas Family Code requires that both spouses execute the agreement voluntarily. Lastly, the agreement can be amended or revoked at any time through a written agreement signed by both spouses.
A marital property agreement should clearly state which assets are community and which are separate property. The biggest mistake spouses make is the failure to disclose all of their separate property. If separate property is included in the agreement it will automatically become community property, which spouses do not want. However, spouses should be careful not to withhold the full financial disclosure from each other either because if either spouse later files for divorce the court may hold the nondisclosing spouse liable for the attorney’s fees and court costs incurred by the other spouse. Supposedly, there needs to be enough information in the disclosure if either spouse needs to value his or her separate property.
The legally "fair and reasonable" requirement for a marital property agreement can also be tricky in the drafting process. At the time a marital property agreement is signed there is no way to tell whether it will later be "fair and reasonable" ten, twenty or thirty years down the road when spouses are seeking a divorce and there is a significant difference in wealth. Often times spouses will rely too heavily on the fairness of the agreement and neglect to ensure that full disclosure occurred prior to signing the agreement. Spouses must also keep in mind that even if a marital property agreement is valid, the judge still has ultimate authority over the property division in a divorce and may disregard the agreement if he/she feels it is unfair.
Considerations for Couples
When contemplating a marital property agreement, your first step is a consultation with a family law attorney. Your attorney will be able to advise you on the property laws of your state, and how those laws specifically apply to your individual circumstances.
The most important question a prospective client wants answered by their attorney, is how will my assets be divided upon divorce? In Texas, attorneys educate clients about their community / separate property, and how they will be divided in a divorce. A marital property agreement can address any of these issues. Clients who have children are concerned about child custody and child support determination. Marital agreements address these issues as well , and provide your children with financial security. Attorneys are able to answer all your questions about the legal implications before you sign any agreement.
Your attorney will also be able to advice you on the non-legal implications of entering into a marital property agreement. You may want to discuss the following with your spouse before signing an agreement:
Careful planning of a marital property agreement will allow a couple to define and protect their assets from division by the court in the event of a divorce or death. By carefully discussing with your spouse the implications of such an agreement, you will be able to prevent many marriage problems from escalating into a misstep that leads to the end of a marriage.
Enforcement and Issues
Marital Property Agreements are enforceable contracts. However, like any contract, they may be subject to legal challenge based on factual or technical defects or improper conduct. Perhaps the most common challenges to marital property agreements concern the adequacy of the disclosure made by the parties as well as the fairness of the agreement, i.e, terms of the agreement were so far from fair as to "shock the conscience." An additional area of attack is irregularities in the signing of the agreement or dealings between the parties in preparation of or subsequent to the agreement.
Inadequate disclosure concerns more than merely whether the parties have disclosed their property. Rather, the law requires that each party be given a fair and reasonable disclosure of their spouse’s property. Disclosure of information concerning the property of a party may be in the form of an informal list, documents or forms provided by an attorney, or by formal requests for disclosure or documents pursuant to the rules of civil procedure. The statutory language of the disclosure requirement is very general, stating "before a spouse may sign or be party to" a marital property agreement, the spouse "must either execute a written waiver of disclosure or be provided a fair and reasonable disclosure of the property of the other spouse." (emphasis added) All too often, however, the issue of whether adequate disclosure was made is colored by whether the spouse seeking to challenge the agreement knew or was in a position to know of the property at issue during the marriage. An example is a spouse signing an agreement that purports to divide a retirement account but does not provide for division of a correctly undivided 401(k) account. Arguably, if the spouse signing the agreement had not worked at the company during the marriage and thus, has never received a statement reflecting the balance in the account, she may not be charged with failing to know about the account.
Shocks-the-Conscience is a somewhat different issue. This type of challenge is generally made by one spouse or a third party (a child or parent of the deceases spouse) in a will contest. In the situation of a will challenge, what shocks the conscience may relate to how the contest affects property characterized as separate property, or more often, the community estate. If the spouse contesting the will has a large disparity in property, he/she may cite the low level of advancement in his/her career as a reason for the disparity (lower earning spouse), or make the argument that the spouse making the gift or will disinherited his first family to cater to the second families better "more deserving" lifestyle. To a third party, such as a child of the deceased spouse, the argument arises that a will providing a disproportionate amount to one child removes funds arguably needed for respect to the deceased’s aged spouse.
Irregularities concerns the witnessing and signing of the agreement. A typical problem is that the agreement was not executed before a notary or in the presence of the required number of witnesses. Another concern might be the discussions that occurred between the spouse seeking to enforce the agreement and the other spouse prior to execution of the agreement. For example, the other spouse may claim to have been coerced, pressured or even tricked into signing the agreement. There are numerous scary stories from family law attorneys about their horror stories from the other side of the table when clients have tried to pull a fast one or take advantage of the opposition.
Consultation for Family Law Attorneys
Consulting a family law attorney when drafting a martial property agreement is essential for ensuring the agreement is properly designed to achieve its intended purpose. A properly drafted martial property agreement satisfies the following conditions: A qualified family law attorney will be able to provide advice regarding the most appropriate type of martial property agreement suitable for your situation and review your agreement to make sure it entertains all the necessary protections . In the event that you later wish to invalidate or revise your agreement your attorney can assist you with this as well. In the end, a martial property can be an invaluable tool for controlling how particular property will be dealt with in the event of a divorce or death.