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Friday, December 19, 2008

A Community Property Opt Out Agreement May Become an Unwanted Prenuptial Agreement

An article in the December 19, 2008 issue of the New York Post was brought to my attention. It was titled "French flavor in NY divorce." I thought to myself "that can't be right." So I read the Court's decision, and the case has some significance, just not that reported by the New York Post. The Article was about a recent decision from the New York Court of Appeals in the case of Van Kipnis v. Van Kipnis. The case involved a couple that entered into a foreign prenuptial marriage contract designed to opt out of a community property scheme.

For those unfamiliar with the concept, community property is property that is acquired by either partner during the marriage (even if it was originally in the name of only one partner) and that property is subject to the debts of both partners after the marriage. New York State is not a community property state, and one spouse need not worry about subjecting their assets to the other spouse’s creditors through the marriage alone.

The court in the Van Kipnis case determined that the foreign community property opt out agreement called for the separate ownership of assets held in the parties' individual names during the marriage. This is pretty much exactly what the parties needed to protect their assets from each other’s creditors. It is important to note that during the entire marriage, there was no commingling of the separate assets acquired. If the spouses had commingled their separate funds, then under New York law they would lose their separate nature and become marital property subject to equitable distribution. As a result, the husband retained his liquid assets, and the wife kept her assets. There was a great disparity in those numbers. The parties’ jointly held real property was subject to equitable distribution and divided.

The New York State Domestic Relations Law sets forth two basic kinds of prenuptial agreements. First, there is the waiver or opt out of the normal statutory equitable distribution rules. The second type allows the future spouse to decide that assets that would normally be marital, be designated as separate property. Such property would retain its separate characteristics upon the dissolution of the marriage. The agreement in the Van Kipnis case was found to be one of the latter.

The significance of the Van Kipnis case is that parties who enter into a community property opt out agreement may very well (and unwittingly) be setting themselves up for a less than equitable divorce. If one spouse wants the benefit of insulating his or her assets from the other spouse’s debts in a community property situation, they need the agreement. But, if they subsequently move to New York State, then they may likely lose the right of equitable distribution of those assets.

This is especially unjust in New York State because, as I stated earlier in the weblog, there is no need for such a community property opt out in New York. New York does not allow a creditor to access a debtor’s spouse’s assets just because of the marriage alone. The New York State marital property is protected in that regard, and is still subject to equitable distribution upon dissolution of the marriage.

If you move here from France, Spain or Germany after a marriage, you may want to revoke or at least modify your opt out agreement.

2 comments:

  1. John,
    Great post! Do you recommend pre-nup agreements for all couples contemplating marriage, especially in these rough economic times?

    Jeena Belil

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  2. Thank you for your observation. A full discussion regarding who should seek advice regarding a prenuptial agreement will the subject of an upcoming blog.

    But in summary, seeking advice about whether one should have a prenuptial agreement in tough economic times is especially important. In the current economic downturn there is an increase in the number of foreclosures, bankruptcies, defaults on credit cards and other loans. More people are at risk for losing a job now than have been for nearly a generation. These are all criteria that may make it a very good idea to have a prenuptial agreement. If a partner has debt or is likely to incur debt, that debt may become a marital liability and a source of conflict in the marriage. A prenuptial agreement along with care in keeping credit cards and loans separate will help ensure that one party is not saddled with unwanted debt.

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