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Why You Should Read This Book

Ending a marriage is a long process. It would be great if that process ended when you obtained your dissolution decree but there can be, and often are, many follow-up actions that need to be taken. Dealing with jointly titled real estate or brokerage accounts, life insurance policies, retirement plans and other assets are a necessity in completing the divorce process. It is the only way to make sure that you have protected your children, family members and other loved ones in the event you die or become incapacitated.

It is also important to address these issues while your divorce is pending. The vast majority of divorcing couples never think of this but the consequences can be great is something happens to you during the divorce.

This book also addresses with issues confronting those contemplating a remarriage.

Dealing with these issues usually is not difficult. But if you fail to do and something happens to you, these relatively simple issues can become very complicated. It will difficult to determine who is entitled to your property and can lead to long and expensive litigation. Following the suggestions set forth in this book should keep this from happening.

Part I – Protecting Your Beneficiaries During The Divorce Proceeding

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Your Divorce – It’s Not Final ‘Til It’s Final

You are not divorced until the dissolution decree is entered by the court that is handling your divorce. Until then, you are legally married, even if you have been living apart for years. This has several very important aspects that many divorcing couples overlook.

First, what happens if one spouse dies during the divorce? In most instances, your soon-to-be ex-spouse will inherit your entire estate. I have never seen a divorcing spouse who wanted this to happen. The way to avoid this is to execute new will or trust during the divorce. You can leave your half of the marital estate to whomever you want – your parents, your children, brothers, sisters and so on. Anyone you want. Your soon-to-be ex-spouse is always entitled to one-half of the community estate but only to one-half. The other half is yours to with as you please. The other spouse has no rights to any of that.

The reason for this is Arizona’s laws of community property. These laws state that everything you and your spouse acquire during marriage is split 50/50. It does not matter who actually earned the money. For instance, if one spouse made $75,000 in one year and the other spouse made $25,000, community property law treats it as if each of you made $50,000.

Likewise, when you die, you are deemed to have a one-half interest in all property acquired during marriage. Community property law prevents one spouse from disinheriting the other since each spouse owns one-half of the estate. A spouse can do what they like with his or her one-half, but the other spouse is always entitled to his or her one-half. This was meant to protect the surviving spouse, but with divorcing spouses, it can backfire on you. In most divorces, the last person you want to leave your property is your soon-to-be ex-spouse yet this is the unintended result.

This means that you must have a will or some similar arrangement. If not, then everything passes to the surviving spouse, even if you are in the middle of a divorce. I once had a case where a terminally-ill husband was due in court on that next Tuesday to have the court sign the decree granting him his divorce. He had not seen his wife in years. He died the Saturday night before his court date. He was still considered married, so his not-quite-ex-spouse was able to inherit from his estate since she was still his wife at the time of his death.

There is one big exception to this -- children from a prior marriage. If so, the children will take your one-half of the marital estate. But this may not solve the problem if the children are minors since the children’s other parent (ie, your first ex-spouse) will control and manage the money you left the children. Can your former spouse be trusted to be up to the job and not waste the money?

The solution to this is to execute a will during your divorce. If you have no children, most of my clients will leave their estate to their adult children, their parents or their brothers and sisters. It is a little more complicated if minor children are involved.

If you simply leave your estate to your minor children, the money will be managed for them until they reach the age of eighteen years. You need to name who should be the manager. It is the manager’s responsibility to properly invest the money. This means the manager must decide upon a sound financial advisor to make these decisions. The manager must also decide how the money is to be spent. For instance, should the children go to a private school? How much should be spent on vacations? When should the teenager get a car and how much should it cost. And so on. These are important decisions so you must seriously think about who the manager should be.

I use the term "manager" here but the courts use the terms "conservator" or "trustee" for this position. If the probate court is overseeing the children’s finances, the term "conservator" is used. If you have created a trust to hold the children’s money, the manager is called a "trustee". In Chapter *, we will discuss in further detail what a will and trust are and what a probate court does.

You will also want to re-examine jointly titled property, payable-on-death designations and beneficiary forms while the divorce is pending. There probably is not much that can be done with jointly titled property while a divorce is pending. Any sale or transfer to jointly titled real estate requires the signature of both spouses, so one spouse cannot sell the property without the consent of the other spouse. But take another look at any payable-on-death designations or beneficiary forms that you may have.

A payable-on-death designation is frequently used on bank and brokerage (mutual fund) accounts. It is a form that tells the financial institution who it will pay in the event of your death. It functions like a mini-will. If you soon-to-be ex-spouse is named, you will probably want to change that. Likewise, you have probably named your spouse as the beneficiary of your life insurance policy. That will need to be changed, usually naming your children or your parents.

You also will have beneficiary designations on your retirement plans. Most of these are governed by a federal law known as ERISA that prevents you from naming anyone other than your spouse. This will have to wait until after the divorce is final.

Part II – Protecting Your Beneficiaries After the Divorce Is Final

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After The Divorce Decree Is Entered – The Follow-Up.

It would be nice if your work was done once you obtained the decree of dissolution but there are a number of very important issues that must be addressed.

First, there is the jointly titled property, such as your home and your cars. How you deal with your home depends on what you have agreed to in the decree. If your home is going to be sold, both of you must sign the deed and related documents in order to transfer title to the buyer. If one of you will remain in the home and own it, the best procedure is to have the other spouse sign a disclaimer deed and to have it recorded with the county recorder in the county where the property is located.

The terms of the decree should require the other spouse to sign this. If this becomes a problem, the decree itself can be recorded but the decree must specifically reference the property and should include the legal description ( "Lot 123 of ABC Development as described on Page 456 in Book of Maps 789")

If the home is not going to be sold, the mortgage issue must be addressed. Most often, the mortgage will be refinanced in the name of the spouse who will own the home. The other spouse must get his or her name off the mortgage. Otherwise, the other spouse will remain liable for the full amount of the mortgage, even if the dissolution decree says it is the residing spouse’s obligation.

Likewise, your ex-spouse will need to sign off on the certificate of title to any automobile that is in both your names and that you will be keeping after the divorce. You then need to go the local Department of Motor Vehicle office. Take with you the certificate of title together with a certified copy of the dissolution decree and DMV will issue a new certificate of title in your name only.

You will need to follow the same procedure for any other property that has a paper title, such as boats, RVs, trailers, ATVs and the like.

For most other property, the divorce automatically eliminates any interest your ex-spouse may have had in your assets. The most common example is life insurance. I have had many cases where, after the divorce, the spouses never filed documents with the insurer removing the ex-spouse as beneficiary. Fortunately, there was a law passed in Arizona in 1994 that prevents the ex-spouse from receiving the proceeds in such a situation.

However, this law does not apply to many retirement plans, such as a 401(k) plans. In 2000, the United States Supreme Court decided a case involving an ex-husband who was killed in an automobile accident two months after his divorce was final. The decree award him his retirement plan but he never got around to having his benefits office remove his ex-wife as beneficiary. Upon his death, his children from a prior marriage claimed they were entitled to the funds.

The Supreme Court said no and awarded the funds to the ex-wife. For a 401(k) plan, the court ruled that special rules applied that required the ex-husband to file a new beneficiary form removing the ex-wife. Otherwise, whoever is named as beneficiary gets the money. This was so even though the divorce decree awarded the funds to the husband and even though there was a law similar to Arizona’s that automatically eliminated the ex-spouse as beneficiary.

So make sure you follow-up and change any beneficiary designations to your life insurance, retirement plans or annuities that you retain after the divorce.

Also make sure you revoke any powers of attorney in which you authorize your spouse to act in your behalf. Get the original copy returned to you. If not, make sure you notify your bank and any other financial institutions that the power of attorney has been revoked. You might also want to consider preparing a written revocation of the power of attorney and recording it with the local county recorder. This will serve as public notice that it has been revoked.

To avoid any income tax problems, make sure all of these transfers are done within one year of the date of the divorce. Under some circumstances, you may have up to six years to complete all these transfers but you will always qualify for tax-free treatment if done within a year of the divorce.

Chapter *

Now You’re Divorced – What Happens to You Children If Something Happens To You? What Happens to Your Property If You Don’t Have Children?

How will your children be taken care of if you die? What will happen to your property, especially if you don’t have children?

Your ex-spouse will get custody of your children upon your death. There is not much you can do to prevent this. There is always the chance that the ex-spouse may not want custody and will agree to another family member obtaining custody, but you cannot count on this.

The only way to prevent the ex-spouse from obtaining custody is to prove in court that the ex-spouse is unfit as a parent. This is not easy. You must show illegal and substantial drug use, chronic alcohol abuse, convictions of serious crimes and the like.

But this does not mean that the ex-spouse gets to control the money that you have left to your children if you die. If you do nothing and die without a will, then your ex-spouse will normally become conservator for your children. This requires appointment by a court after a hearing. The ex-spouse will control the funds but must file a detailed accounting with the court each year. This court oversight is helpful but it is also slow and expensive. There is also an element of uncertainty since a judge gets to decide whether the money is being properly spent, which may not be what you would have wanted.

There is also the problem that a conservatorship ends when the child turns eighteen years of age. The court has no discretion in this. The termination is automatic and your 18 year old children can do whatever they like with the money. The courts hate doing this but there is nothing they can do. You can only hope that the child doesn’t waste the money or that your ex-spouse doesn’t convince the child to give it all to your ex-spouse, who may also waste it.

The only way to avoid all of this is to create a trust for your children. I have never had a client who simply wanted her estate pass to her children when they turned eighteen years old. This is because of the "Screaming Red Escalade problem". After suddenly receiving money from his father’s estate, the 18 year old son would rather spend $50,000 on that screaming red Escalade he has been eyeing for months. College? Well, he will take a year off and then go to school…..Or maybe the year after that…..You know what will happen and he never quite gets around to enrolling in college.

But there is a way to prevent this. It is called a testamentary trust. You create a will that essentially says that, upon your death, a trust will be established to hold all of your funds for the benefit of your children. All trusts have a trustee who manages the funds for the beneficiaries. It is the children’s money, not the trustee’s. But the trustee decides how the funds will be invested and decides how and when the money will be spent.

This means the selection of a trustee is critical. It must be someone you trust – hence the name "trustee". But the trustee must also be someone who can say no to the children. The college situation is a common one. The trustee is in a position to tell the child that the trust will pay for college, but not for the Red Escalade.

The terms of the trust then instruct the trustee that, at a particular age, an amount of money can be distributed to the child to with as the child pleases. The most common pattern that my clients use is for one-third of the assets to be distributed at 25 years of age, one-third at age thirty and the remainder at age 35. While the funds are in the trust, they are protected from the child’s creditors. They will also be protected if the child gets divorced.

The probate court is usually not involved in the matter once the court creates the trust and names the trustee. This makes the administration of a trust faster and less expensive than a conservatorship that is closely monitored by the probate court.

With an amicable divorce, you may want your ex-spouse as trustee since the ex-spouse will have custody of the children. But others are afraid that the ex-spouse will waste the money. This is a real and justified fear if money mismanagement played a large role in the divorce. Or there may simply be another family member who is better suited to manage the funds, even if the ex-spouse or another family member has custody of the children. Having two people involved can provide for a useful check-and-balance to make sure the money does not get wasted.

You can also put incentives in the terms of the trust. For instance, you can delay the distribution at age 25 if the child has not completed college by then. Or you can authorize the trustee to pay for certain things, such a year studying abroad, or for participating in certain programs, such as learning a particular skill.

You must also plan for incapacity. This is often overlooked when people only focus on what happens at death. My office actually does more work for people who are incapacitated than those who die. In other words, what happens if you have a stroke or are involved in a bad car accident but survive? Who will pay your bills when you aren’t able to do so? Who will make medical decisions for you? And who will take care of your children while you are not able to do so?

The astute use of powers of attorney can solve most or all of these problems. You will need a financial power of attorney that appoints someone to manage your finances. This can be a very dangerous and damaging document if you name someone who is not trustworthy or good with money management so you must be very careful in whom you name.

A healthcare power of attorney names someone to make medical decisions for you when you are unable to do so. You may be unconscious or in a coma. Or you may be zonked out or woozy and confused due to medication. Someone has to consent to medical care when you cannot do so.

When you are married, your spouse will make this decision if you don’t have a healthcare power of attorney. If you no longer have a spouse, then there is a law that sets forth a priority list of who gets to make a decision. They are called "surrogates". In Arizona, the order of priority is:

Adult child

Parent

Unmarried domestic partner

Brother or sister

Close friend, defined as someone who "has exhibited special care and concern for the patient and who is familiar with the patient’s health care views".

There are two problems with surrogates. One problem is what happens if you have more than one adult child? Can one child disregard the desires of another child? What if you have four children and one disagrees with the other three? Or what if you have a child whom you have not heard from in years but who suddenly shows up and wants to control the situation?

The other problem concerns withdrawing life support measures. Suppose you are in an irreversible coma with no hope of recovery. A surrogate can prevent life support measures from starting. But if those measures are already in place, a surrogate cannot remove o terminate those measures. In other words, a surrogate can consent to starting or not stating the procedure but the surrogate cannot consent to ending such procedures once they have been put in place.

This may or may not be who you would like to make the decision. You can name whoever you want but you must put it in writing in a healthcare power of attorney.

A similar document is a living will. This deals with an end-of-life decision regarding whether to terminate or continue with life support measures. Usually you name the same people that were named in your health care power of attorney.

Another useful document is a medical release that allows your doctor and other health care providers to speak with your family and friends. In 2004, a new federal law regarding medical privacy rights, known as HIPAA, took effect. This law basically says that your doctor can speak with you, only with you and with no one else unless you authorize it. Some hospitals and doctors are excruciatingly strict in interpreting these laws. For instance, there are hospitals who will not tell a family member that you have been admitted to the hospital, let alone what your condition is.

To avoid this problem, you need to create a list of people that authorizes your doctor, nurses and other staff that they can talk with whoever you name in the list. These people do not make any decisions regarding your health care. The document simply allows the medical staff to discuss your situation with your family and friends – how you are doing, how long you will be hospitalized, etc.

Similar issues arise with your children’s healthcare. Only a parent can consent to medical treatment for a minor child. Grandparents, aunts and uncles and close friends have no authority to consent to treatment unless you specifically say so in writing. As a result, we have our parents complete a document that will name those who can consent to care when you or your ex-spouse cannot be immediately located. You can name more than one person in this document.

This can be very useful if the ex-spouse no longer lives in the immediate area or cannot be located.

In the event of your death, you need to make sure there will be sufficient funds to take care of your children. Purchasing life insurance is the easiest way to solve this. But thought needs to be given as to who is named as beneficiary. As already discussed, if you simply name your minor children, your ex-spouse will control these finds until the children turn eighteen years old, when the money is theirs to do with as they please. Instead, name the testamentary trust as beneficiary of your life insurance.

Be aware that, unless the dissolution decree specifically states otherwise, your ex-spouse’s obligation of support ends when the child reaches age eighteen. This means your ex-spouse is under no obligation for pay for college, a wedding, a down payment on a house or other large expenses that your children will incur at a young age. Even if your ex-spouse has every intention of paying for these, younger children from a subsequent marriage may severely stretch the ex-spouse’s finances. Having ample funds in a trust managed by a trusted family member or friend will keep this from being a problem.

Chapter *

Problems That Will Not Go Away

A divorce decree is essentially an agreement between you and your ex-spouse. No one else is a party to the agreement so they are not bound by the decree.

Debts and back taxes

The flip side of community property is community debt. Just as all property that is acquired during marriage is split 50/50, debt and taxes incurred during marriage is also the responsibility of both spouses, regardless of who incurred the debt.

Dissolution decrees will always have provisions stating which spouse will assume certain debt. As long as that spouse upholds the obligation, there is no problem. But what if your ex-spouse falls behind on the bills or ignores the obligation? There may not be much you can do. Creditors and the IRS are not bound by the decree. You will probably have a right of indemnification against your ex-spouse. This means that you can seek redress against for any debt or taxes that you paid that was the responsibility of the other spouse. But if your ex-spouse has no money, this is meaningless. You will be stuck with the debt.

This problem can last for years, especially with back taxes. A tax lien is valid for ten years. A tax lien is a tax bill that the IRS has been unable to collect on. The IRS files it with local county recorder. As with any recorded document, it is a matter of public record that any lender has access to. Many times, you may not be aware of it since the IRS sends the tax lien notice to the most recent address in their system. If you have moved in the interim, this may never get forwarded to you. Many of my clients do not find out about it until they are applying for a mortgage or other loan. Once the lender learns of the lien, everything comes to a grinding halt and no loan will be issued until the lien is released that will not happen unless the IRS gets paid in full.

As a result, always check with the county recorders in any county where you have lived in the past several years. Many large counties now have this information available on line but many small, outlying counties do not. Visit the recorder’s office or their website to determine if such a lien exists.

One option is to consider seeking innocent spouse relief with the IRS. In 1998, Congress passed a law to address the situation where tax debts were caused by the ex-spouse during marriage. While both spouses are normally liable for the full amount owed, the idea behind the law was to release the innocent spouse from this obligation that the innocent spouse had nothing to do with.

The IRS hates this law and has done everything it can to torpedo the law. As a practical matter, obtaining innocent spouse relief is very difficult. As things now stand, the only way you can qualify is if you had no knowledge of the problem. This usually means that your ex-spouse hid income from you as well as the IRS. But if you knew of the problem, even if you pleaded with your ex-spouse to correct the problem, you will not qualify, even if you had nothing to do with it. This is clearly not what Congress intended and the IRS knows it but it is how the IRS has chosen to implement the law.

Also realize that the bankruptcy of your ex-spouse for debts incurred while you were married will not wipe away the debt as to you. You will still be liable for the full amount, even if your ex-spouse is allowed to walk away from the debt or tax.

You should also periodically check your credit report to make sure there are no loans, lines of credit or credit cards that you did not know about or that have been opened in your name by your ex-spouse. There are three credit reporting agencies – Equifax, Experian and Trans Union. Get all three since the information in the reports can vary greatly.

Maintaining health or life insurance is another obligation that can be difficult to enforce. Many decrees require your ex-spouse to pay for an insurance policy. With life insurance, your ex-spouse is often required to name you or your children as the beneficiary of the policy.

There are many problems with making sure your ex-spouse is upholding this obligation. First, how do you know that the policy is paid up and current? Or how can you be sure that your remarried ex-spouse has not named the new spouse as beneficiary? I have encountered this many times. The best solution is for you, and not your ex-spouse, to own the policy. Your ex-spouse will pay the premiums but you should own it. That way, you will be notified if the policy is in danger of lapsing because your ex-spouse has failed to pay the premiums. It is very important that the policy not lapse since, after the policy was issued, your ex-spouse may have experienced health problems that will render the ex-spouse uninsurable. As long as the policy exists, this is not a problem.

If your ex-spouse does not own the policy, then the ex-spouse cannot change the beneficiary since it is your policy. I have seen too many cases where the ex-spouse gets remarried and, to placate the new spouse, the beneficiary designation is changed without the knowledge or consent of the other ex-spouse, even though the divorce decree states this cannot be done. Again, the insurance company was not a party to the divorce decree. They are not bound by it and often times are not even aware of the divorce. If your ex-spouse tries to do this, you will prevail in court, but that is a long, grueling and expensive undertaking.

It is best to be proactive and prevent the situation from ever arising

If your ex-spouse has a current insurance policy and if you are insurable, consider exchanging that policy for one that is in your own name. The value of the existing policy can be applied to the purchase of your new policy without any income tax ramifications.

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Chapter *

Death of The Ex-Spouse

This can create a real financial hardship for a family, even years after the divorce. Spousal maintenance will end. Creditors and the IRS will look to you for debts and taxes that your ex-spouse had agreed to pay. There may be no or little money to pay future child support payments, which are supposed to continue after death. And your ex-spouse may have remarried, so there is a surviving spouse to contend with who has also certain important and valuable rights. You, as the ex-spouse, have no rights other than those in the divorce decree that may – or may not – survive your ex-spouse’s death

What can you do? Proper planning with life insurance will go a long way towards resolving this mess. The children from your marriage with your ex-spouse are heirs of your ex-spouse. As an heir, the children have the absolute right to inquire as to the size and nature of their father’s estate. This is so even if your ex-spouse has disinherited them. Through this process, you may learn of assets that you never knew your ex-spouse owned. Make sure you do not limit yourself to assets passing through probate. There will likely be many assets passing outside of the probate process, such as insurance policies, retirement plans, jointly titled property and bank and brokerage accounts with payable-on-death designations. These types of assets, which could be very sizable, will not normally be disclosed on the inventory of assets filed with the probate court.

If your ex-spouse died without a will, the children from that marriage are generally entitled to one-half of his estate, with that one-half to be divided equally among the children.

Regardless of what may be in any will, your children from the marriage of your ex-spouse will qualify for Social Security survivor benefits as long they are under the age of 18 or 19 if they are still in school. The amount of the benefit, as with all forms of Social Security benefits, are based on lifetime earnings and the age of your ex-spouse at the date of death. The benefit is generally 75 percent of what your ex-spouse would have received if he or she were currently drawing benefits. For two or more children, this benefit is capped at roughly 150 to 180 per cent of the ex-spouse’s benefit.

You, in your individual capacity, may also be eligible to receive survivors benefits from your ex-spouse. To qualify, you must have been married for ten years, at least 60 years old and have not remarried. There is no ten year marriage requirement if there is a child under the age of 16 or disabled.

According the Social Security Administration, the average monthly payment to a surviving child is $625.00 and $689 to a surviving spouse with children. The average monthly benefit to a family consisting of a surviving spouse and two or more children is $1,905.00.

If your ex-spouse was a veteran who died from a service-connected disability, you and the ex-spouse’s children may qualify for a number of benefits, not the least of them being the Dependent Educational Assistance Program for students age 18 to 26 years old and the Dependency and Indemnity Compensation.

Divorce and Social Security

All Social Security benefits are based on someone’s work history. It may be your own. It may be your spouse’s. It may be your former spouse’s. It may be your parents’. But it is always tied to someone’s earnings.

It also depends on your age when you decide to retire. You can generally begin drawing benefits at age 62. But if you wait until you are 65, your monthly benefit will be significantly larger. It will continue to increase for each year that you forgo retirement until you reach the age of 70.

So how will your divorce effect your Social Security benefits when you later decide to retire?

If you have worked most of your adult life, you will likely draw benefits based on your work history. But if you are an at-home mother or if your spouse had significantly higher earnings, you often will receive a higher benefit if you base your benefit on your spouse’s work history. Generally speaking, a spouse using the higher earning spouse’s work history will receive fifty percent of what the higher earning spouse is entitled to receive.

This remains true for a divorced spouse if, as already mentioned, 1) you were married for at least ten years, b) are at least 62 years old and c) are not married at the time you apply for benefits

If your ex-spouse has died, you are entitled to up to one hundred percent of your ex-spouse benefit amount.

In determining these amounts, it does not matter whether your ex-spouse has remarried or has had more children. Your claim for benefits is only based on his work history and nothing more. In other words, your former spouse may have remarried and/or divorced with other spouses claiming based on his work history but it will make no difference in determining the amount you are entitled to. It will not impact the amount of benefits that ex-spouse receives. Your ex-spouse cannot prevent you from drawing benefits based on the ex-spouse’s work history and may not even know you are doing so. This is something you are entitled to by law.

The Social Security office will make all of these computations for you to compare when you apply. You will need your former spouse’s Social Security number or, if you do not have that, the date and place of birth and the parents’ names.

If you change your name, be sure to report the change to your local Social Security office using Form SS-5.

Part III -- Remarriage

Chapter *

Remarriage

Nothing can complicate matters more quickly than a second marriage with children from a first marriage. You have children you want to provide for yet you have obligations to your spouse. Balancing these two competing concerns can be anguishing but it absolutely must be done.

Your second spouse has no legal obligation to support your children from your first marriage. Simply leaving everything to your second spouse will not work since that spouse can do whatever he or she likes with the money without spending a dime on your children. Even if the current relationship between your new spouse and your children are good, it can always sour and the new spouse can exclude your children at a later point and after you have died.

If you do nothing, the law generally provides that your new spouse will get one-half of the community (ie, post-marriage) property and one-half of your separate (pre-marriage) property. Your children get the other half of your community and separate property. It sounds simple and this may be very acceptable to you.

But it can get complicated rather quickly. The law actually states that your estate that passes through probate gets evenly divided between your spouse and children. But what happens to property that does not pass through probate? For instance, you may have a jointly titled bank account with your new spouse. Your residence may be titled in both your names. Or title to the residence may be in your name only but you want your spouse to live in the home for the rest of the spouse’s life. Or your spouse may be named as beneficiary of your life insurance policy or your retirement plan. Title to all of these assets passes outside of the probate process and may consist of most of your estate.

In other words, your children only get half of what is left over, which may not be much. Fortunately, there are several ways to solve this problem.

Prenuptial agreements

A good first step in planning in a second or subsequent marriage is to have both spouses enter into a prenuptial or post-nuptial agreement. A prenuptial agreement is signed before the marriage. A post-nuptial agreement is signed after marriage. Both are valid and the differences between them are slight. (For simplicity’s sake, I will refer to both as pre-nuptial agreements.) The purpose of a prenuptial agreement is to set your own rules as to the rights your new spouse will have to your property upon death or divorce. It changes how the rules of community property will apply.

If you do not have a prenuptial agreement, then community property laws will govern. This means that everything you and your new spouse earn will be evenly split between you. It does not matter who is earning more. You get half and your spouse gets half.

Upon your death, community property law requires that your spouse will receive one-half of your community property and one-half of your separate property. (Separate property is the property you had before your remarriage.) Your children will receive the other one-half.

If you have no children, then your entire estate passes to your spouse.

For many couples, this works fine. But maybe you are concerned that your children will need more than one-half. Or you may have others, such as your parents, whom you want to provide for. Or you may have a large amount of pre-marital property that you do not believe your new spouse is entitled to. A prenuptial agreement can address these issues.

A big advantage of a prenuptial is that it cannot be changed unless both of you agree to change it. It is a contract and, as with any contract, one spouse will be liable to the other spouse if there is a breach of that contract. This is very important if one spouse has made promises to provide for the other spouse in a will or trust. Without such an agreement, a spouse can secretly change the will without letting the other spouse know of it.

There are several requirements for a prenuptial agreement to be valid. Courts can be very strict about these requirements. Courts have traditionally viewed prenuptial agreements with dislike and skepticism because these agreements were often very one-sided and unfair.

But the courts’ attitude toward prenuptial agreements is beginning to change and, if the requirements are met, the agreement will be upheld.

The first requirement is that both spouses must disclose all of their assets, liabilities and income. Usually, each spouse provides the other with a list of these. There is no requirement that the other spouse actually see your financial records – the monthly bank statements, deeds, insurance policies and the like – but the spouse is entitled to see these if there is a question about them. But the important point is that the list must be accurate and complete.

The second requirement is that both spouses either meet with their own lawyer or at least be made aware that they each have the right to consult with a lawyer. The reason for this is that you or your future spouse may be giving up important and valuable property rights. The courts want to be satisfied that you knew what those rights were when you gave them up. If you meet with a lawyer to review the prenuptial, then the courts have some assurance that you knew what your rights were.

The third requirement is that the agreement must be fair. This is where the ability to enforce a prenuptial agreement can get dicey if it is very one-sided or was done under questionable circumstances. For instance, it is never a good idea for one spouse to suddenly present this in the days leading up to the wedding. Likewise, a prenuptial is more likely to be overturned if only one side had a lawyer. But you never know in advance how a court will rule on your case and the courts are becoming more reluctant to overturn these agreements if the first two requirements are met.

You also do not know who will challenge the prenuptial agreement. When you die, your spouse’s children may think that you took advantage of that spouse and try to challenge the pre-nuptial agreement. Or your spouse’s creditor may want to invalidate the agreement so that they can reach your assets to pay your spouse’s debts.

In Arizona, as in many states, you can do an agreement after you are married. This is called a postnuptial agreement. The rules are the same except that the courts will look at the fairness issue a little more closely. This is because married spouses have more obligations to one another than unmarried couples.

You should also consider obtaining a credit report on your prospective spouse together with a search of county records to make sure there are no judgments or liens against that spouse. This information must be addressed in the agreement.

There is a controversy among divorce lawyers as to exactly what issues can be addressed in a prenuptial agreement. The list of potential topics is long. For instance, should one spouse be required to take the other spouse’s surname? Will there be children? How will birth control be used? What religion will the children adopt? What if one spouse is giving up a career? Or resuming a career? Whose house will become the primary residence? What if one spouse gets a new job in another state? What if one spouse gains excessive weight? What about pets? The list goes on and on but many divorce lawyers wonder if this is a productive endeavor.

You can also agree to include a "sunset" provision. This usually states that the agreement is null and void after the spouses have been married for an established number of years.

Once a pre- or postnuptial agreement is completed, a summary of that agreement, called an abstract, should be recorded with the local county recorder. This is very important. The legal effect of recording the abstract is that it says to all creditors and the IRS that there is a prenuptial agreement that limits the exposure of one spouse to the creditors of the other spouse. If the abstract is not recorded, then creditors and the IRS can claim that they knew nothing about it and are not bound by it. If it is recorded, this is not a problem.

So, if you are considering a pre- or postnuptial agreement, it is important to do it correctly. If you try to cut corners, such as by not hiring a lawyer, you may regret doing so. A prenuptial agreement can have a huge impact on who will eventually own your property, so it is worth it to have it done right.

There are actions you can follow that will protect you even if you do not have a prenuptial agreement. First, do not commingle funds. Keeping your accounts separate makes it separate, not community, property. Second, pay your bills with your funds. This is a particular problem with paying the mortgage for a home in only one spouse’s name. If some of your spouse’s funds are used to pay the mortgage, then that spouse may have a claim as to a portion of your home. Third, if only one of you is signing a contract or obtaining a loan, indicate in the document that you are signing separately and not on behalf of the marital community. This should insulate the other spouse from liability.

Will or trust

A will is actually noting more than a letter to the probate judge telling the judge who should get your property once you have died. A trust functions much like a will but the trust agreement names a trustee who will manage your assets and follow your instructions regarding who will get your property. A trust is administered outside of probate with the trustee assuming many of the duties of a probate judge. Trusts are very popular because they avoid probate which often means they can be administered faster and cheaper than with a will that must pass through probate. But trusts are much more expensive to create than a will. This is often overlooked – does spending more money now for a trust offset the later savings of avoiding probate? It is a question of the time value of money. The longer it will be before you are likely to die, the less the savings will be.

But the decision as to who will get your property remains the same under a will or trust. And it can be a very difficult decision, especially if the second marriage has been a long and happy one or if your children from a prior marriage are minors or young adults who are just now getting a start in life. It can involve many factors that are well beyond the scope of this book.

You also need to make sure that the terms of the prenuptial agreement and the will are consistent. In a will or trust, you can leave more to your spouse than was required under the prenuptial. But this can lead to litigation if your spouse is getting more than your children would like. The children can claim that any interpretation of the will should be read in view of the limitations placed in the prenuptial agreement. Again, the will can be more generous to the spouse than stated in the prenuptial agreement but be prepared to defend it.

This requires the assistance of an experienced attorney who practice emphasizes estate planning and/or elder law. This may not be a cheap endeavor but, in the long run, it is always worth it. Getting it done right can save you tens or hundreds of thousands of dollars in legal fees if a fight erupts after your death. Such litigation can, and usually does, split a family apart. It needs to be avoided at all costs, so it pays to get it done right.