Why Commingling Assets Can Destroy Your Prenup

Nov 16, 2022 | Prenuptial Agreements, Protecting Assets

Just like any contract, prenuptial agreements are susceptible to being invalidated for certain reasons. This is true among any contract you can think of: Non-disclosure agreements (NDA), non-competes, service agreements, etc. Under certain contract principles, a contract can be thrown out for a variety of reasons, such as coercion, duress, unlawful contents, mental incapacity, unconscionability, and others. For example, if you hold a gun to someone’s head and force them to sign a non-compete, it won’t be honored in a court of law because of coercion. What we’re trying to say is any contract you have is subject to having holes poked in it by a judge and the corresponding state laws. Now, these are extreme examples, but there are less extreme examples of how a judge can throw out a contract. For example, some states will not enforce a non-compete agreement because it restricts competition in an unreasonably large territory. This example is more akin to how commingling can affect your prenup. Before we jump into how commingling may affect your prenup, let’s get some background on the legal landscape surrounding this topic.

General state divorce laws 

Before diving into commingling and prenups, let’s take a step back and look at the state divorce laws at play. Divorce law is heavily dependent on what state law applies. However, there are some commonalities between state laws. 

Generally, courts classify property as either separate property or marital/community property. Separate property is typically kept separate from the marital pot and not subject to division upon divorce (with exceptions, again, depending on your state, separate property may be subject to division). Marital/community property is shared property subject to division upon divorce. 

There are two general frameworks that states follow when splitting up property in a divorce: community property states or equitable distribution states. 

  • Equitable distribution states will decide what is separate property and what is marital (i.e., shared) property based on a set of factors that vary from state to state. Some of these factors may include whether there are kids involved, the age and health of the spouses, and the duration of the marriage, among many others. The majority of states are equitable distribution states (41 states, to be exact). 
  • In a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), courts will consider separate property to be any property acquired before the marriage, which may include inheritances and, sometimes, gifts. Community property (i.e., shared property) is typically acquired during the marriage, regardless of how each party acquired it. 

How a prenup works 

A prenuptial agreement is a legally binding contract between two people about to get married. A prenup typically covers what should happen in a divorce regarding property division, debt division, alimony, and more. A prenup is not only a legally binding contract but also a tool for communication that helps couples align their financial and life goals and expectations. So, even if a prenup is found to be unenforceable, it achieves the goal of facilitating transparency and communication in a relationship. For example, a prenup forces the couple to communicate about certain financial topics, like houses, cars, and bank accounts. Maybe you’re dead set on keeping the house that you bought years before meeting your honey, and you set that expectation with your fiance by outlining, “I want to keep my house separate if we divorce” in the prenup. This groundwork helps with communication, and before the prenup talk, that conversation may have never arisen. 

Now, as for the meat of the agreement, the terms of the prenup typically revolve around the separate property and marital or community property (depending on which state you’re in). How do you want to treat the separate property, and how do you want to treat marital/community property? Do you want to keep all premarital assets separate? Do you want to keep the appreciation on those premarital assets separate? Do you want to keep the things purchased with the premarital assets separate? So on and so forth. And what about marital/community property–how will you define and treat property acquired during the marriage? A prenup can answer all of these questions and more. 

What is commingling? 

In the context of family law, commingling is the mixing of separate property and marital/community property. Married couples regularly mix their assets in a marriage, whether intentionally or unintentionally. Depending on your state, commingling can occur in a few ways. Property may be considered commingled in the following scenarios: 

  • Adding an owner to a piece of separate property (ex: you add your spouse as a joint owner on a piece of real estate that was originally separate property), 
  • Adding property to other property (ex: you add your separate funds to a joint bank account), and 
  • Purchasing new property with both separate and marital/community property (ex: you both purchase a boat together during the marriage with some separate funds and some marital/community funds.. 

Let’s use an example to illustrate. Let’s say Emily and Jack are married. Emily owned an apartment building before they wed. After the wedding, Emily deposits lump sum rental income into a joint marital/community bank account once a month. This is considered commingling, and in the event of a divorce, it may be very difficult to weed out what is separate (the funds from the apartment building) and what is marital/community (the joint bank account). If the funds are unable to be “weeded out,” then those funds may be declared marital/community and subject to division in a divorce. Whereas, if they hadn’t been commingled, those funds from the apartment building might have remained separate property for Emily.

Commingling becomes a problem in a divorce when parties commingle property and thereby change the categorization of the property. As a reminder, a court will generally split up marital/community property and let each person keep their separate property (with exceptions) if there is a prenup in place to dictate this. If a piece of property has become commingled, even with a prenup, then it may be “untangled” if you can pull out what was separate and what was marital/community. If you can’t untangle the commingled property, then it will likely be declared as marital/community property, subject to division at the time of divorce. 

What happens when you commingle assets with a prenup? 

Let’s turn to an example to explain how commingling may destroy your prenup. Emily and Jack got a prenup done before the wedding. They draft an ironclad contract outlining which property should be separate property and which property should be marital property. Emily is mostly concerned with her investment account, which she has been growing for years before the marriage. She makes sure that this investment account is listed in the prenup as separate property. In her mind, the investment account is protected, and she need not worry. However, a few years into the marriage, she and Jack start adding their shared marital money to Emily’s investment account, and Emily adds Jack’s name to the account so that he has easy access to add in his personal funds. (Hint: this is where they went wrong). Unfortunately, Emily and Jack get a divorce. During the divorce process, the assigned judge determines that the investment account is marital property because it was funded with shared marital money throughout the marriage, despite the fact that it was listed in the prenup as separate property. So, even though Emily and Jack created a comprehensive prenup, their commingling eventually undercut the contract. Lesson to be learned? Despite the strongest, most comprehensive prenup, if you don’t act in accordance with what you wrote, you may face the consequences later.  

The fact of the matter is if you delineate that certain property in your prenup to be kept separate (not subject to division), but you treat it like shared property, then there’s a good chance it will become shared property in the case of divorce. That is why it is best practice to actually keep what you say separate in your prenup, separate. What do we mean by this? Well, don’t go adding your spouse’s name to your “separate” property or mixing marital funds into your separate property. This is commingling, and it is a fast-track way to unravel your prenup. 

Final Thoughts 

Now, we don’t want you walking away thinking something catastrophic like “my prenup ruined my relationship” or “prenups don’t even work” that’s not the case at all. In fact, it’s the opposite. Prenups will help your relationship, and they always have the benefit of streamlining communication and transparency at the bare minimum. At the maximum, a prenup will not only streamline your relationship’s communication but will also protect your assets and save you from lengthy litigation and costly legal fees. Physically keep the property you list as separate in your prenup, separate. In other words, don’t add your spouse’s name, don’t add their funds, and don’t mix your separate property in any way, unless you want it to become marital in nature. That’s it! 

HelloPrenup can help you create a comprehensive prenuptial agreement on your own time from the comfort of your own home. You and your partner will create your own accounts, and our interactive digital platform will walk you both through a questionnaire, financial disclosure, and even negotiations.

 

 

All content provided on this blog is for informational purposes only. HelloPrenup, Inc. (“HelloPrenup”) makes no representations as to the accuracy or completeness of any information on this site. HelloPrenup will not be liable for any errors or omissions in this information nor for the availability of this information. These terms and conditions of use are subject to change at any time and without notice. HelloPrenup provides a platform for contract related self-help. The information provided by HelloPrenup along with the content on our website related to legal matters (“Information”) is provided for your private use and does not constitute legal advice. We do not review any information you provide us for legal accuracy or sufficiency, draw legal conclusions, provide opinions about your selection of forms, or apply the law to the facts of your situation. If you need legal advice for a specific problem, you should consult with a licensed attorney. Neither HelloPrenup nor any information provided by Hello Prenup is a substitute for legal advice from a qualified attorney licensed to practice in an appropriate jurisdiction.

 

Julia Rodgers is HelloPrenup’s CEO and Co-Founder. She is a Massachusetts family law attorney and true believer in the value of prenuptial agreements. HelloPrenup was created with the goal of automating the prenup process, making it more collaborative, time efficient and cost effective. Julia believes that a healthy marriage is one in which couples can openly communicate about finances and life goals. You can read more about us here 🤓 Questions? Reach out to Julia directly at [email protected] 

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