A prenuptial agreement is a contract that soon-to-be-spouses enter into that sets certain rules concerning their marital relationship. Often, such agreements establish rules relating to how assets are to be treated in the event of a future divorce. Many people are familiar with the story of a person entering into a prenuptial agreement that limits what they get in the event of a future divorce. From these stories many people have come to believe that simply having a prenuptial agreement protects them from losing their premarital assets in the event of a divorce or dissolution. However, this is not the case. While the importance of a well-written prenuptial agreement cannot be overstated, there are other steps a person needs to take to ensure that their prenuptial agreement effectively protects his or her premarital assets.
Generally speaking, in the event of a divorce or dissolution of marriage, the court will categorize assets as marital property or separate property. All assets accumulated during the course of a marriage are considered marital property and are equally divisible by the court in the event of a divorce or dissolution. On the other hand, assets acquired prior to the marriage are considered separate property and the court will award this property to the party who came into the marriage with the property. This is true even in the absence of a prenuptial agreement.
The purpose of a prenuptial agreement is not only to identify premarital assets but also to provide guidance to the court as to how the parties intended to govern their relationship during the marriage and in the event of a divorce or dissolution. The problem when terminating a marriage is not usually identifying the property that a party owned on the date of marriage, but tracing the property as it exists on the date of divorce back to its original separate identity. The person claiming the property is separate property bears the burden to trace the property back to its original identity. This “tracing” becomes particularly difficult if a party has commingled separate property with marital property during the course of the marriage.
For example, assume Jane comes into the marriage with a retirement account and then continues to contribute to the retirement account during the marriage. Ohio law provides that the portion of Jane’s retirement account accumulated prior to the marriage will be categorized as separate property. However, how does Jane also receive the growth which accumulated on this premarital balance? While a prenuptial agreement can and should identify the amount of Jane’s original retirement account which was premarital in nature, the only way for Jane to also receive the growth on her account is if she is able to provide an accurate tracing of the value of her premarital interest in the account over time. Rather than relying solely on her prenuptial agreement, Jane should maintain her retirement statements from the date of marriage forward to assist an expert to accurately trace the growth on the premarital portion of her account.
Non-retirement financial accounts are another area where a party is at risk for losing his premarital property. Let’s say John has a checking account with $25,000 in it on the day the parties’ marry. Over the parties’ ten year marriage, John and his partner have used John’s checking account to deposit their paychecks and pay regular household bills, make improvements to their home, and take vacations. The balance has fluctuated over the ten years (sometimes more than $25,000 and sometimes less than $25,000). Rather than using this account during the marriage, John should have kept his $25,000 balance in a separate account. By using his premarital account during the parties’ marriage, John made it nearly impossible to prove that the $25,000 which remains in that account is entirely his separate property.
Financial and investment accounts are not the only areas which present a risk to individuals. The problem also exists with real property interests especially if the property is still encumbered by a mortgage, is refinanced during the marriage, or if the parties make improvements to the home during the marriage. Tracing a party’s separate property interest in these situations can be daunting, if not impossible.
Consider taking the following steps for added protection (and to save immense amounts of time and expense in the future):
1) Maintain a record of all financial statements of each account owned prior to the marriage.
2) If accounts are transferred from one financial institution to another, keep a record of both accounts so that the transfer can be easily documented.
3) Avoid using premarital accounts during the course of the marriage.
4) Avoid commingling marital property with separate property.
5) Have real property appraised prior to the marriage, before any significant improvements are made during the home, and at the time of any refinance.
The bottom line is that a party should not rely solely on a prenuptial agreement to assume all premarital assets will be protected. Be proactive, document everything, and consult an attorney to assist in drafting a prenuptial agreement that will protect your assets.
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