Getting married automatically creates a financial agreement. It's not something most people think when envisioning marriage. But it's a major part of married life and can have significant consequences down the line. By the time you realize this, it's too late to do anything about it.
California Community Property Laws
The minute you're married, all of your efforts to generate income from any source are considered community property. It's owned jointly, together, as 50/50 partners. It doesn't matter if you bring in 100% of the income or 0%.
And it's not just the income, but what you do with it. If you take that joint income and buy a house, the house is jointly owned. If the house goes up in value and you sell it and invest some of the proceeds, that investment is community property.
Your community assets can build up significantly over the course of a marriage. If those assets ever have to be split (and they absolutely will -- at either divorce or death), there can be a lot of money at stake and a lot of strong feelings on the part of your spouse, children, heirs, etc. -- whoever isn’t getting what they think they deserve.
If you get divorced, the pool of community assets is split 50/50. The lifelong financial agreement you made when you got married has to be undone.
If your marriage lasts a lifetime, you can choose who gets to inherit your 50% share of the community property through a trust or will. Your spouse owns the other 50%.
In both cases, the first question will be -- what's community property? Once that's settled, it's automatically split equally. There are times when a 50/50 split may not sound so good.
What About Property I Own Before Marriage?
Property that you bring into a marriage is your separate property, as is any money you inherit after marriage. But throughout a marriage, it's easy to make mistakes and convert some or all to community property.
For example, you might own a house before marriage, but over time you pay the mortgage with community funds like your income. Part of the house will be community property, and the community will have an interest in the increase in value of the home over time.
If you own stocks before marriage but add money to the account after marriage or actively trade them, the community could have an interest in that account. And if you can't trace where the money came from, all of it may be community property.
If you own a business before marriage, your work after marriage in growing the company can be considered efforts of the community. The community will own a share of the business growth. Your spouse may have a 50% interest in the value of your business.
If you have a 401K or IRA account before marriage, money contributed to that after marriage will give the community an interest in it. If you get divorced, your spouse is entitled to a portion of your retirement account.
Creating a Prenup Can Help You Understand and Plan Your Financial Life After Marriage
The default marriage rules in California create a robust financial partnership. That may be fine for you. Or you may want to alter some of the rules to your situation. You can do this with a prenuptial agreement.
A prenup agreement takes effect upon marriage and can address ownership of all of your assets and how you want to handle splitting assets at the time of divorce or death. It overrides the default rules in California.
Whether you create a prenup or not, it may be worthwhile to understand the financial arrangement you agree to when you get married.
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