It’s always tempting during marriage to simply put all the money in one jointly titled pot, or succumb to the pressure to put your spouse’s name on the deed to your property, or use your separate funds to buy something that belongs to both of you. Here are some GOOD REASONS NOT TO DO IT!
The first thing you need to understand is the definition of sole and separate property. Arizona is a “community property” state– which means that unless you have a prenuptial or post nuptial agreement to the contrary, everything you earn from your job during the marriage belongs to both spouses. But what remains sole and separate after you marry? Here are the basics:
1.All property you owned on the day you got married.
2.Things that you received during the marriage that came to you as a gift, or from a Will, or other inheritance.
3.Your bank and investment account balances as of the date of marriage.
4.Your retirements you earned prior to marriage.
5.Your debts that you accumulated prior to marriage.
Why is it important to keep these possessions and accounts separate? There are a lot of reasons, here are just a few:
This is the most common and often the most financially devastating. If you co-mingle
assets or change the deed to property and then become divorced, your co-mingled sole and separate property will likely be subject to division by the court, with your spouse receiving half of something that belonged 100% to you. Here are some examples:
1.Husband and Wife marry, and Wife decides that she will put Husband’s name on the deed to the house she owned prior to marriage. She executes a deed in both names in joint tenancy with right of survivorship, since she wants him to have the house if she dies. Husband later files for divorce. Arizona divorce law states that when a spouse transfers an interest in real property to the other spouse, the law will assume, under most circumstances, that there was a gift to the community. The court then divides the equity in the property, giving the unentitled Husband half. (The better way to achieve the desire result would have been to execute a beneficiary deed, which would give Husband the house only in the event of Wife’s death.)
2.Husband and Wife marry, and Husband puts Wife’s name on his investment accounts earned before marriage. Community earnings comes and goes in and out of the accounts, so by the time the divorce is filed, it’s impossible to trace what is now sole and separate vs. what is community. What is the court likely to do? Give each spouse half. Is this fair? Probably not, but that’s what would happen.
DEATH OF A SPOUSE:
People tend to only think about issues of community property in the event of divorce.
But often, these issues come up after the death of a spouse during a probate proceeding or in trust administration. How?
1.Husband and Wife marry when both are in their 50’s, and both had children from prior relationships. Husband dies at age 75, without a Will or a trust. Husband’s children, incensed that their inheritance is likely going to their step-mother, sue in probate court to determine what is community and what is sole and separate.
Probate litigation is particularly vicious and usually happens when the surviving spouse is at his or her most vulnerable point. It’s also very expensive, and it’s hard to prove because often the documents needed were discarded years before.
Those are just two circumstances that arise as a result of spouses commingling funds. There are many more. Here is some advice about what needs to be done if you are contemplating marriage:
1.See a lawyer, and think about a Prenuptial Agreement that lays out what each of you owns and owes. This is for the protection of both spouses, including protection from claims of creditors.
2.Make a list of everything each of you owns. Don’t get too crazy here, start with assets valued at $500 or more, but include things of particular sentimental value. Copy into a special file the following documents:
- a. statements from each and every bank account at the date closest to the date ofmarriage;
- b. statements from all investment accounts at the date closest to the date of marriage;
- c. statements from any and all retirement accounts in which you have an interest(this is particularly critical as many retirement administrators don’t have copiesthat go back years);
- d. List important assets that don’t have titles, i.e., collections of coins, guns, otherthings of value, and take date-stamped photos;
- e. Establish separate bank accounts for each asset that generates income, forexample, if you own rental properties, each should have its own bank accountwhere you deposit all the income and pay all the expenses;
- f. If you own a business, your General ledger and Profit and Loss at year end for theyear prior to marriage;
- g. The Kelly Blue Book value of cars you own;
- h. Your last year’s tax returns, both personal and business if applicable.
3.Make a list of creditors, and for the date closest to the date of marriage, copy:
- a. your mortgage statement;
- b. each credit card statement;
- c. your car loan;
- d. any personal loans you took out before marriage;
- e. any promissory notes you owe.
4.DURING THE MARRIAGE, do the following:
- a. open new joint accounts
- b. put your sole and separate bank/investment account balances in accounts in your sole name, and don’t move this money into joint accounts unless you intend to give it to the community;
- c. keep track of anything you buy from your sole and separate money, and keep those receipts in a file;
- d. keep track of the income and expenses that come from sole and separate property;
- e. do NOT put any money after marriage into your sole and separate investment, savings, or retirement accounts unless you have no choice (example, your 401k account at your employer), and keep careful track of the balance that was in that account on the date of marriage.
This article is just a summary, but it’s a good start on protecting your sole and separate Here are some others, in case you need more information: