Managing Your Finances Like You Would Your Relationship

April 3, 2017

CSQ C-Suite Quarterly

Money matters. Protecting your money, matters. Protecting your money during marriage, and especially during divorce, matters even more.

When most people enter into an intimate personal relationship, they don’t give much thought to preparing financially before jumping in with both feet. Often, they don’t give it enough thought during the relationship. They rarely think about what they will face if the relationship ends. Why? Mainly because people are too busy being in love. Who really wants to talk or think about “business” when the relationship is new or when it’s going well?

Not many people do, which is why after more than thirty years as a Family Law attorney (a euphemism for divorce lawyer), I meet many clients who lack proper knowledge of their financial affairs. These otherwise successful masters of their domain – from many walks of life – simply have not paid careful attention to the nuances of transactions typical in high-net-worth estates. Taking control of your financial affairs is not only important, it can have a positive effect on a relationship or marriage over the long term, and can, in many instances, make a divorce less painful.

Start by taking an inventory of your assets, including bank accounts, security accounts, real estate property, credit cards, lines of credit, trusts of which you are a beneficiary, inherited funds, and other valuable possessions (cars, boats, jewelry, art, and so on).

Then ask yourself, “are these owned separately or jointly?” Beyond that question, do you really know if what you think you own jointly is really joint as in 50/50? Do you really know if what you consider your separate property is, in fact, your separate property? How was each asset acquired and when: before, during, or after the marriage? Was the asset purchased with joint funds, from inheritance or a gift, or separate funds that one of you had before the marriage? Were funds commingled? Do you know where ready cash can be obtained? The same inventory goes for liabilities.

Once your inventory is complete, you have taken a vital step toward being in control of your wealth. The next step is to protect your interests, and this is where things can get interesting. The value of written protection cannot be overstated, be it a real estate agreement, a cohabitation agreement, or a pre- or postnuptial agreement.

Let me give you an example of a situation I deal with all the time. The law in California states that putting someone’s name on a deed of trust does not mean that person receives half the equity in the ownership of the property. A typical circumstance would play out this way:

A happy couple decides to marry. The groom promises the bride that on their first wedding anniversary, he will transmute his separate property residence (owned free and clear) to the community as a “gift.” At their one-year anniversary, true to his word, the husband asks the wife’s estate planning attorney to draft the documentation necessary to transmute the property. At the time of the transmutation, the residence is worth $4,000,000, with no debt. The attorney prepares a deed and an agreement transmuting the husband’s separate property to community property.

Fast forward five years. The happy couple is no longer happy and decides to divorce. The residence is now worth $5,000,000. Does the wife receive $2.5 million, or $2 million, or $500,000?

The reality is that the wife receives $500,000 because, five years earlier, her attorney did not get the husband to sign a written document waiving his right to claim his reimbursement (under Family Code Section 2640). Thus, only the $1,000,000 increase in the value of the residence is community property, entitling the wife to 50% of that increase. The husband, however, is entitled to reimbursement for his $4,000,000 contribution. In the absence of a waiver in writing to the right of reimbursement, the anniversary “gift” may be nothing more than one-half the asset’s appreciation since the date of the gift – if there is any appreciation.

Relationships aren’t easy. Making them work or having them fail are two of the most difficult challenges anyone can face. Whether you are newly in love, happily married, contemplating separation, in the midst of a divorce or regrouping in its aftermath, there is one pot of gold that everyone wants: peace of mind. Protecting your wealth goes a long way toward achieving that.

“Managing Your Finances Like You Would Your Relationship,” by Stacy D. Phillips was published in CSQ C-Suite Quarterly on April 3, 2017. To view the article online, please click here.