Archive for Friday, February 10, 2006

Debt, children reasons for prenuptial agreement

February 10, 2006

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Q: I am planning to ask my girlfriend to marry me on Valentine's Day. I bought my first home a few months ago, but she has never owned anything and still lives with her parents. Should I ask her to sign a prenuptial agreement that says I get to keep the house if we get divorced?

A: I don't know if I should praise you for doing some "advance planning," or scold you for thinking about the ramifications of a divorce before you have even made your wedding proposal.

Nonetheless, with Valentine's Day next week, it's an appropriate time to answer some real estate questions concerning marriages and split-ups.

A typical prenuptial agreement defines, before two people get married, how a couple's assets and debt obligations would be split in the event of a divorce, separation or death. Many lawyers recommend prenups for individuals who want to marry someone with much less money, much more debt or children from a previous marriage.

Others who should consider a prenup include those involved in a family business. It just wouldn't be fair for a divorce to ruin all of the hard work that one of the spouse's parents or other relatives put in to make the business a success.

Even if you don't fit into one of the above categories but the house you own now was worth far more than you paid for it, I'd still suggest that you consider creating a prenuptial agreement to protect your built-up equity.

Your letter, however, states that you bought the home only "a few months ago." It probably hasn't risen much in value, so asking your fiancee to sign a prenup might not be necessary - especially if both of you make about the same amount of money and neither of you has lots of debt or children from an earlier marriage, or shares in a family business. An attorney who specializes in family law can give you details.

Q.: I am divorcing my wife. Our home is worth about $120,000 more than we paid for it. Instead of selling, my wife wants to stay in the house and give me $60,000 for my half-interest in the property. If I agree to this arrangement, would I owe taxes on the $60,000 she pays me?

A.: No, you wouldn't owe any taxes. Internal Revenue Code 1041 clearly states that real estate transactions between spouses or deals involving a divorce aren't taxable. The $60,000 you get from your soon-to-be ex-wife should be tax-free.

Q.: I am divorcing my husband. He has agreed to give me sole custody of our 6-year-old son and to quitclaim his half-interest in our longtime home to me. After the quitclaim is signed, should I put my boy's name on the title to the home as my joint tenant so that he will automatically inherit the property after I die?

A.: I'm sure that your heart is in the right place, but adding your 6-year-old's name to the title of your home as a joint tenant would be a terrible idea.

Most states allow minors to be listed as a joint tenant on the title to a home. The problem is that they also prohibit minors from conveying their title to someone else until they turn "legal age" - usually 18 or 21 years old.

If you put your 6-year-old's name on title to the property now and then decide to sell the house before he turns legal age, you would likely first need to go through the costly and time-consuming task of getting a court-appointed guardian to protect his ownership interest in the property. The judge probably wouldn't let you act as his guardian because your co-ownership of the home could create a conflict of interest.

A better plan would be to form a simple and inexpensive living trust to hold title to the house, and name your son as the trust's beneficiary. The trust could be arranged so that, if you die or become incapacitated before he turns legal age, your hand-picked "successor trustee" could quickly step in to take care of your boy and the financial affairs until he becomes old enough to do so himself.

Unlike wills, living trusts don't have to be processed through probate court. So, if you die after your son reaches legal age, the trust could allow him to quickly take possession of the home himself instead of spending several months (and perhaps tens of thousands of dollars in attorney fees) in probate hearings.

- David W. Myers is a 20-year veteran of the newspaper and magazine business, having previously covered real estate for the Los Angeles Times and Investor's Business Daily.

Comments

Mama 9 years, 3 months ago

Regarding the woman divorcing her husband, please note a word of caution to him: If there is still a mortgage on the home and his name is on it, simply signing a quit claim deed giving the house to the wife does nothing to protect his credit in case she defaults on the loan!! I'm suffering the consequence of this 17 years after the fact. I signed a quit claim deed but my ex didn't refinance. When he and his current wife defaulted and later filed bankruptcy it's had a negative impact on my credit even though I've had ZERO to do with the property since 1989.

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