Marital Property Agreements - Business Tools
by Karen Blakely Turner
Under the Texas Family Code, there are three types of agreements spouses or future spouse may execute that affect ownership of presently owned property or property to be acquired in the future.
The first type of agreement is the premarital agreement, which the parties enter into prior to marriage and which becomes effective upon marriage. The second type of agreement is the post-martial property agreement entered into between spouses. The terms of both of these agreements are limited only by the creativity of the parties and attorneys. However, most address the creation of separate versus community estates and the mechanisms of how those estates are created.
The third type of marital agreement is an agreement to convert separate property to community property. This can be a stand-alone document or may be included as part of either a premarital agreement or the post-marital property agreement. All of the types of marital property agreements require no consideration to be enforceable. They must be in writing and signed by both parties.
The policy of the State of Texas is to enforce marital agreements. Therefore, there is a presumption that marital agreements are valid. If a spouse seeks to have the agreement found unenforceable, the challenging spouse has the burden of proof to show that either (a) the agreement was not signed voluntarily, or (b) that the agreement was unconscionable when it was signed and, that before the signing of the agreement, the party was not provided a disclosure of the financial estate, did not waive disclosure, and did not have adequate knowledge of the estate. The case law on “voluntariness” has narrowly construed what is involuntary.
Marital property agreements are no longer only for the wealthy. Couples with various financial situations frequently enter into marital property agreements. If a future husband has substantial debt or a business that by its nature is financially risky, the future spouses may want to consider entering into a premarital agreement to protect the future wife’s assets and income from the existing and potential creditors of the future husband.
It is sound business planning for members of a family, who either share an interest in a family business or trust, to insist that the family member who is marrying enter into a premarital agreement to protect the passing of wealth from one generation to another as separate property.
Some partnership agreements are now requiring that partners, prior to entering into a marriage, enter into premarital agreement with the future spouse in an effort to keep the partnership interest and partnership income separate property. That way the partnership avoids being dragged into a divorce business valuation situation, having to produce the financial records of the partnership, and/or potentially having the non-partner ex-spouse being awarded an interest in the partnership.
All too often, divorce clients come to their attorneys with a marital property agreement that has been signed and then stuffed away in a drawer and never looked at again. The couple then conducts their finances and business without regard to the marital agreement. This often has a devastating effect on the spouse who believed that his assets were protected. The best advice for such a client is to review the marital agreement and consult with a family law lawyer prior to doing any major purchases, business formation or restructuring of entities.
A common example is the client whose financial planner recommends that the client borrow funds on margin to make investments, since it is a better financial deal than liquidating assets. Under Texas law, assets purchased on credit are community property, unless the marital property agreement provides otherwise. So, even though the client had the intent to make the investment with her separate property funds since all the assets in her brokerage account were separate property, by borrowing the funds on margin, she created a community asset.
Another example of mistakes made when the marital property agreement is not reviewed and followed is when the agreement states that salary is community property and earned income is separate property. If the spouse who owns an interest in a closely-held company listens to financial advice that it is best to be paid in the form of salary instead of profit distributions, he will inadvertently create a larger community estate than potentially intended, instead of easily creating a separate estate by using income distributions instead of salary.
Karen Blakely Turner has been Board Certified in Family Law since 1994. She may be reached at firstname.lastname@example.org.