If you’re planning to get married in California, you may be asking what happens to your finances once you get married. Do you share your income? Do you set up joint bank accounts? What happens to each partner’s debt when getting married? What happens to all of your assets you owned before getting married? If you’re not asking questions like these, keep in mind that money issues are the most common reasons for marital conflict and, in some cases, divorce. Educating yourself on how finances are handled now will set you and your partner up for a successful marriage after you tie the knot.
The first thing to note is that each state has rules and guidelines on how property is handled at the time of divorce. There are two distinctions: “common property law” and “community property law”. Since we’re focusing on California, let’s take a closer look at the state’s application of community property law.
Types of Property
In California, property can be any physical asset that can be bought or sold like houses, cars, furniture, or clothing. In addition, property can also be things of value such as bank accounts, cash, retirement plans (401(k) or Roth IRA), stocks, life insurance, businesses, or patents.
How Community Property Law Works
The “community” is a legal term for what is created when you and your partner as a married couple. The timeline for the community begins as soon as you are married and only ends in divorce or death. Under community property law, any property and income acquired during marriage is presumed to belong to the “community”, or both of you, equally (50/50), except property acquired by gift or inheritance. You and your partner will also be equally responsible for all debts incurred during your marriage, no matter which one of you incurred the debt.
In addition to assets and debts, most people don’t know that your personal time, skill, industry and effort during the marriage also belong to the community. Therefore, the time and effort you spent to build your business, improve real estate, or invest money could result in the community gaining an interest in such assets. Like California, there are a few states that also follow community property laws, including:
- New Mexico
- Alaska (optional community property system)
BEFORE getting married, what conversations about MONEY should you have with your partner?
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Understanding Separate Property Vs Community Property
By contrast to community or marital property, any money, assets, or debts that you collected before or after the marriage are considered separate property. However, even though the characterization of separate property may not change after you get married, there are cases when the community may gain an interest in your separate property, only some of which are:
- You transfer ownership of your separate property to the community
- Your separate and community property is mixed (or commingled) during marriage. For example, you had a bank account prior to your marriage, but once you’re married, you continue to deposit your income in that same bank account. Now, that bank account is commingled with separate and community property money.
- Increase in appreciation in value of your separate property asset during marriage.
- The expenditure of your personal time, skill, service, industry and effort during the marriage on a separate property asset may create a community property interest in that asset.
In the event of divorce, the community property will be valued, and divided evenly, subject to any reimbursements of separate property that might be owed to either party. On the other hand, the separate property of each spouse is proportionately distributed to the spouse who owns it, while considering the possible community property interest that was gained in the asset during the marriage.
At the end of the day, one of the simple ways to have a separate property remain as separate property is to make sure you keep those assets completely separate from any assets acquired during the marriage, and make sure you don’t spend any time increasing its value. Make sure whatever you want to remain your separate property is completely paid off and does not require your time to maintain it at all. Or, you can consider entering into a premarital agreement to confirm certain property as your separate property, even if you spend time managing that asset during the marriage.
Take Money Matters Into Your Own Hands
It’s always tough to discuss financial issues before getting married, yet it is the key to opening up lines of communication and building trust and honesty. A prenuptial agreement enables you to carefully review and achieve your goals with your partner and the help of a family law attorney. This comprehensive prenup guide walks you through the questions you and your partner can examine before speaking with a legal professional. Remember, in states like California that follow community property law, a judge will determine how your assets and debts get disbursed. You can override these default rules by creating rules of your own and enter into a marriage based on guidelines and goals that work for you. Please reach out to us for any prenuptial or pre-marriage related questions and we’d be happy to help you get started on your marriage—the right way.