A marital property agreement, often referred to as a post-nup, can be a powerful asset protection tool against creditors, especially creditors from lawsuits. A marital property agreement is a contract between a husband and wife to convert some or all of their community property into separate property. Separate property is any property owned or claimed before marriage. Separate property also includes property inherited or received as a gift during marriage. Finally, separate property also includes any recovery for personal injuries sustained during marriage, excluding recovery for loss of earning capacity. Community property is any property acquired during marriage that is not separate property.
Texas courts have the right to divide a couple's community property during divorce but cannot divide a person's separate property. Consequently, most people believe the distinction between community property and separate property only comes into play during divorce. However, the separate/community character of your property can also play a big role in which creditors can reach your property. For an in-depth review of which creditors can reach which property, read our article titled, "The Reach of Your Spouse's Creditors." In this article, however, we will proceed with the example of imaginary couple Brian and Amy to illustrate the benefits of the post-nup as an asset protection tool.
Our imaginary couple Brian and Amy has been married for 5 years. Brian is a doctor in private practice and Amy is an executive for a local oil company. Both Brian and Amy earn over $100,000.00 a year, and because they don't have children, they saved most of their earnings over the past five years of their marriage. Soon after getting married, they opened separate bank accounts for their earnings to make doing taxes easier. Currently, Amy's bank account has a balance of $300,000.00 and Brian's bank account has a balance of $325,000.00. The money in both bank accounts is community property because it's Amy and Brian's earnings during marriage.
Amy and Brian run into some bad times. Brian prescribes the wrong medication to a patient, who then dies because of Brian's mistake. The patient's wife sues Brian and wins a judgment against Brian for $1,000,000.00. Brian's malpractice will only cover $500,000.00, and Brian is on the hook for the other $500,000.00. To collect the remaining $500,000.00 Brian owes, the patient's wife obtains a Writ of Garnishment. The Writ allows the patient's wife to take a total of $500,000.00 out of Brian and Amy's bank accounts. In this situation, Amy is an innocent spouse. She hasn't done anything wrong, but her savings are still on the hook for Brian's mistake. This is because, in Texas, a tortious judgment creditor (a.k.a. a person who sues you for an injury and wins) can go after any unprotected community asset to satisfy the judgment.
Let's put a post-nup in Brian and Amy's story. Right after Brian and Amy were married, they entered into a marital property agreement, a.k.a. a post-nup. The post-nup says that Amy's earnings will be Amy's separate property and that Brian's earnings will be Brian's separate property. In this situation, Brian's patient's wife can only go after the money in Brian's bank account to satisfy her judgment. This is because, in Texas, a a tortious judgment creditor cannot go after the the separate property of the debtor's spouse to satisfy the judgment.
What if it was Amy and not Brian that made a mistake? Let's assume that Amy ran a red light and side swiped another car. The passenger in the other car was disabled because of the accident and sued Amy. The passenger is awarded a $500,000.00 judgment against Amy. If Amy and Brian entered into a post-nup prior to the accident, then the passenger can only go after Amy's bank account, and Brian, the innocent spouse in this case, and his savings are safe. Without a post-nup, the passenger can go after both Brian and Amy's savings.
Just from this small example, it's clear how a post-nup can protect a married couple's assets from creditors. However, the asset protection advantages of a post-nup go beyond the benefits shown in this article. For more information, contact the Puvvada Law Office.