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Archive for Sunday, May 19, 2002

Premarital agreements protect assets acquired before marriage

May 19, 2002

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I married for the first time rather late in life age 38 and brought into the relationship a home, my retirement, other assets, and no debt. After our marriage, I inherited nearly $500,000 in assets from my aunt. My wife, who had been married previously, brought in an automobile and significant debt. We both work and combined our incomes to pay our monthly expenses. We have one child who is now 9.

At various times during our 10-year marriage, I bought and sold my stock and other assets, some of which I had inherited and others of which I owned before marriage, but always kept them separate. Because I used some of my assets to pay off her debt and because I am conservative, my wife was able to acquire assets for the first time in her life. I insisted that they be in her name only. We filed joint income tax returns. After we began having problems, she and I tried to work things out, but were not able. I felt it would be fair to subtract what each of us had brought in to the marriage from what we have now and then divide the rest 50-50. Now her lawyer is talking about "transmutation" of everything, including my retirement (she has none). I have tried to read up on this type of thing, but am at a loss. Are there options other than an expensive court battle and putting my inheritance and life savings on the line?

While state laws generally consider property acquired before the marriage and through inheritance as nonmarital property, most recognize the doctrine of "transmutation" by which nonmarital property is changed into marital property based upon the use of the nonmarital property during the marriage. In other words, if a nonmarital asset is commingled with a marital asset, or is used in support of the marriage, or is used in a way that reflects an intent to make it marital property (like placing an asset in joint names), transmutation can occur.

For example, if you used your inheritance to pay for an addition to a home that was acquired during the marriage, your contribution of assets would probably be found by a court to have been transmuted into marital property and divided.

And, should the income generated by your nonmarital property be placed into marital accounts and used for family purposes, the same result might occur. Because most of these situations are decided by a judge based on the unique facts of each case, there is always a risk in litigation. That's why it's always best to either have a premarital agreement or to make sure that nonmarital assets and income earned by these assets is maintained separately and is not mixed into marital property.

Yours is a textbook example of why people who marry for the second time, bring significant assets into a relationship, or anticipate inheritance should consider entering premarital agreements to deal with assets and debt before marriage. While it may seem reasonable to assume that assets acquired before the marriage and inheritance acquired during the marriage are nonmarital properties, sometimes "reasonable" has nothing to do with matrimonial litigation.

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