Marriage has many implications both personal and financial that should be considered. One important, yet often ignored consideration is what happens to your personal and real property after you tie the knot. Most couples operate under the old adage “what’s yours is mine.” While this may be a good rule-of-thumb for property acquired after you are married with money that was earned after you said “I do,” it doesn’t necessarily apply to ALL property purchased before and after you exchange vows.
Washington is one of nine states, including Alaska, Arizona, California, Idaho, Louisiana, New Mexico, Texas, and Wisconsin, that recognizes the concept of community property ownership. This ownership concept presumes that property acquired during the marriage is held for the benefit of community. As such, each spouse technically owns an undivided one-half interest in the property. While this concept may seems simple on its face, in practice it can be difficult to navigate without an attorney’s help.
For example, say husband and wife marry on January 1st and husband then purchases a piece of rental property for 100k on January 2nd with money earned before the marriage, the rental property is deemed “separate property” and “what’s yours is mine” doesn’t apply. However, if that same husband uses 10k of money earned before the marriage to make a down payment on the rental property and the couple mortgage the remaining 90k, 10% of the property’s value is deemed separate property and the remaining 90% is deemed community property.
Taking this example one step further, assume that husband purchases the property on January 2nd with 100k of money earned before the marriage and the couple expends community funds and effort on improving the property, the resulting value increase is deemed community property. While “sweat equity” is not necessarily rewarded, courts will look to the increase in value resulting from community efforts, and husband and wife will own a separate one half interest in the value added by any improvements. Regardless of when the rental property is purchased, or whose funds are used to purchase it, the income generated by that property is likely going to be considered community property.
Even investments acquired before you walk down the aisle cannot escape the community property presumption. Interest, dividends, and added value earned during marriage will be presumed community property. The amount that will be subject to the community property presumption is prorated based on the portion that was acquired during the marriage.
While it may seem like the community property presumption is as inescapable as your in-laws at Christmas, some property remains separate property no matter when it is acquired. For example, gifts are considered separate property. That’s right; you and you alone own that singing Santa Claus tie your mom sent you last year. Likewise, inheritances under a will or trust are exempted. But remember, if you are willed grandma’s diamond necklace and you give that necklace to your spouse as a gift, what was once your separate property has now become your spouse’s.
The community property presumption not only affects assets, but liabilities as well. Debts, like assets that are acquired during the marriage, are presumed community debts. This means that even if your spouse finances that new bedroom set without your knowledge or signature, you may be responsible for one-half that debt.
With the national divorce rate hovering around 50%, half of you will never have to consider which property is community and which separate. That being said, the other half of you will need to confront these issues. Keeping with this blog’s theme of asset protection, you may want to consider a “prenuptial” or “antenuptial” agreement. An attorney can help in drafting this document, but you are on your own when asking your potential spouse to sign it. If you are considering a prenuptial agreement you should be aware that the Supreme Court of Washington recently set forth strict requirements to create a valid prenuptial agreement. An attorney should be consulted to determine if it is appropriate to your situation and to make sure it is properly drafted and executed.
Joe Schodowski is a contributing author to this blog and has been admitted to practice law in the state of Washington. He limits his practice to the areas of family law and criminal and civil traffic matters. The Law Offices of Joseph Schodowski, PLLC can be reached at (206)-504-2100 in the Seattle Area or (360)-821-8873 on the Olympic Peninsula.