Episode 315: Prenups, Postnups, and Partition Agreements

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Prenuptial, postnuptial and partition agreements refer to the same concept, which is defining whose assets belong to whom inside the marriage, and how they will be divided up in the event of a death or divorce.

Many people are familiar with prenup and postnup agreements as a way to protect assets during a divorce. Collectively known as partition agreements, they are used to divide a community estate into separate estates for a married couple. It is not a romantic thought when entering into a marriage, and this is a reason why many couples avoid the topic altogether. However, prenups and postnups do not have to carry a negative connotation, and they can be used to proactively defend the relationship from future potential financial stressors.

When are Prenups and Postnups Typically Needed?

There are two notable differences between prenups and postnups. One is the timing – prenuptial agreements are developed prior to marriage, while postnuptial agreements come after both sides have said “I do.” In many cases, couples choose postnups for time or planning reasons.

The other difference is how these documents are executed. A prenuptial agreement is made official upon signing the marriage license. A postnuptial agreement will be closely reviewed by the court before it is executed in order to verify that the postnup is enforceable.

Whether the partition agreement comes before or after marriage, there are several reasons why the agreement may be recommended:

• One (or both) spouses are bringing a lot of assets to the marriage – If significant assets are coming along with marriage, then partition agreements can be used to specify what belongs to whom beforehand. This is what most people associate prenups and postnups with, as an effective way to protect assets from divorce or asset division following death.
• One (or both) spouses have children from a previous marriage – By the time someone is into their second, third (or beyond) marriage, they may have children present from a previous relationship. If this is the case, partition agreements can be used to ensure each child receives the assets they are promised. In Texas, and other community property states, community property and the deceased spouse’s personal property are passed to the surviving spouse. However, this may not be considered ideal if a spouse wishes certain assets to go a child from a previous marriage. Partition agreements can overrule the community property provisions in this regard and ensure everyone receives what is intended.
• One (or both) spouses want to make special divorce provisions – Prenups and postnups can also be used to overrule laws related to alimony, seeking to change the amount of alimony given, or to eliminate it outright. This can be used by both spouses to their advantage, as alimony can be set beyond what’s required by law.

How Community Property Laws Influence Prenups, Postnups and Partition Agreements

A handful of states in the U.S. are community property states. — this includes Texas. In community property states, any income or debts collected during the marriage are split evenly between spouses. Any assets owned prior to marriage remain solely owned by that spouse. This may include the following:

• Residences and real estate, including investment real estate
• Vehicles
• Household goods, including furniture, clothing and appliances
• Valuables, including jewelry and cash
• Securities, including stocks and bonds
• Retirement accounts
• Life insurance
• Ownership in a business

Of note in community property states is that while spouses retain sole ownership of the above if they brought them into the marriage, any income or debts incurred as a result of the above assets are shared between spouses. For example, if a spouse earns investment income on their stock portfolio that they had prior to marriage, that income is considered joint property.

Some couples enter into partition agreements to alter this arrangement. In effect, prenups and postnups can be used to overrule Texas’ community property laws, regarding who gets what in and out of the marriage, should death or divorce occur.

Additional Benefits to Consider with Prenups or Postnups

Prenups and postnups are often thought of as sowing doubt into the marriage before it begins. However, nuptial agreements can be positive for a relationship if the right perspective is taken. For instance, here are a few ways that prenups and postnups can set a new marriage up for success:

• They resolve challenging questions when both spouses are committed to a future long-term relationship – It’s natural that both parties would rather not deal with uncomfortable questions arising from potential divorce or death scenarios, especially if your life together is just beginning, but it’s precisely when both people are invested in each other and the relationship that the time to hash out a partition agreement makes sense. If each person can communicate their way through the process, then if the worst does come to pass and divorce occurs, it could save an ugly, stressful battle over who receives what. The partition agreement has already set the terms in stone.
• They ensure all children involved are taken care of – Prenups and postnups ensure that all assets that will be used to provide for children are properly allocated and protected. This peace of mind can be worth it for a relationship’s stability. Please note that partition agreements cannot be used to determine child support, custody, or visitation of children of the marriage, in the event of divorce. Those aspects will have to be determined by a court of competent jurisdiction and any agreements made regarding those issues may be completely nullified.
• They are valuable estate planning tools – While prenups and postnups do not replace a will, they can be used to articulate the decedent’s wishes and reinforce a will’s aims. If there are questions regarding inheritance and beneficiaries, partition agreements can be used to guide asset disbursement to family and loved ones.
• They can be used to protect both spouses – Prenups and postnups are usually thought of as a way to protect the wealthier spouse, but that doesn’t have to be the case. If a spouse is entering the marriage with minimal assets, they may also negotiate favorable terms in the partition agreement. For example, in exchange for one spouse receiving strong asset protection in the event of divorce, the other may argue for regular payments (not necessarily alimony) should divorce be executed.

Tax Laws Can Complicate Partition Agreements, so Consult with a Trusted Houston Tax Attorney First

Prenuptial and postnuptial agreements are complicated enough before considering the tax ramifications. Add taxes into the mix and it may be impossible to easily put together an agreement without a tax attorney’s help.

Using the community property example from above, a couple may agree to separate income earned by income-earning assets brought into the marriage. However, the couple’s tax filing status will factor into this. If both spouses file separately, they will need to calculate their earned income based on what their assets are earning (as well as wages and other sources). Failing to do so may invalidate the partition agreement.

This is one example, but there are many more. Given the complex intersection between partition agreements and tax law, many tax attorneys also specialize in putting together prenups and postnups, where they can bring their tax-specific knowledge to bear.

If you’re ready to tie the knot – or already have – working with a reputable Houston tax and estate planning attorney will ensure your partition agreement is executable down to the last detail.

By Harold "Hap" May, P.C. on January 5, 2024   /   The Legal Play Podcast   /   Leave a comment