How to protect yourself in a community property state

A couple of weeks ago I read an article from a Buzzfeed contributor named Evie Carrick titled, “I don’t share money with my husband, and I think it’s saved our relationship.”  

I shared this article on my Facebook profile with the caption, “If this couple ever gets divorced in a community property state, she’s really going to hate life.”

I was surprised on the amount of feedback this article received. My attorney friends, who primarily practice law in either Idaho or Washington, which are both community property states, knew why she’d hate life if she were ever to get divorced in Idaho or Washington. My non-attorney friends wanted to know why. They were also concerned that they don’t share money with their spouses and wanted to know how that could impact them in the future, should they ever find themselves in the middle of a divorce proceeding in a community property state.

Generally speaking, when you get divorced in a community property state, everything earned or acquired during the marriage is subject to division between the community at the time of divorce. This also includes debts. 

It’s not uncommon for one spouse during the marriage to be responsible with their money and invest it in their retirement accounts, investment accounts, or real property, including their primary residency. At the time of divorce, all of this is community property. 

Debt works the same way. All of the debt acquired during the marriage is community debt and subject to division between the community at the time of division. This includes student loans, credit card debt, and literally all other types of debts. It’s not uncommon for a spouse to acquire a lot of debt unbeknownst to the other party.

It’s like that joke that says there are only two types of people: (describe people as total opposites) and they usually marry each other. In this case, those two types of people typically divorce each other. 

So you can imagine my concern for our author friend. Here she is being all responsible with her money, keeping it separate, feeling like she’s doing everything right and then she goes to get divorced for literally any reason at all, and BAM! she finds out her husband has tons of debt and no real assets and not only is he entitled to half of her accounts, she’s also obligated to take on responsibility for half of her husband’s debt. Talk about a worst-case scenario.

Now look, I have no idea who Evie Carrick is. I don’t know anything about her marriage. She sounds totally happy in her marriage and probably has no plans to get divorced anytime soon. I’m just saying, if she got divorced in a community property state, she could have a bad time. 

The reason for this is that it doesn’t really matter how the property or debt was acquired, by which party, or how finances were managed during the marriage. I hear all the time, “We don’t have any property together. I have my stuff and he has his stuff.” Or “I bought a car, but her name’s not on the title.” That’s great, but did you acquire that stuff during the marriage? If so, it’s likely community property. Names are on accounts, titles, and deeds don’t matter much when determining what is community property. 

In Idaho, this also includes any current or potential retirement benefits a military member may be entitled to. It includes cars purchased. Medical debt. Student loans. 401(k) or Thrift Saving Program accounts. Houses purchased without a separate agreement. Literally, everything is community property or community debt if it’s acquired during the marriage. How you managed your finances; if you have separate bank accounts; if you have a car in your name only; none of that matters when it comes time to determine who is entitled to what at the time of divorce.

Is Idaho a community property state? Yes, here’s what you need to know.

In Idaho, there are three expectations to this rule, and that’s separate property. Separate property is property that either party owned prior the marriage; property acquired by gift or inheritance during the marriage; or anything purchased with the funds of separate property during the marriage. 

Community property is all other property. In Idaho, community property isn’t necessarily divided equally, but divided between the parties in a fair and equitable manner. This generally means that there is a substantially equal division in value between the spouses unless there are good reasons to divide it unequally. Simply put, 50/50 is a good place to start unless there are good reasons not to do so. 

So some of my friends were like, “you mean I can be held responsible for debt my spouse acquires I know nothing about?!?” And other friends asked if they would have to split their retirement account with their spouse if they got divorced. The answer to both of these questions is yes, which was followed by shock. But there’s good news!

There are a few things people can do to protect themselves from this harsh reality while still enjoying life with the person they love most.

How to Protect Yourself in a divorce in a Community Property State

1. Sign a prenuptial agreement prior the marriage.

This is commonly known as a prenup. Prenups are legal in Idaho if they meet these criteria. 

Prenups basically say, “If we ever get a divorce, we agree that at the time of our divorce, we will divide our community debts and assets as follows:”

It’s not uncommon to simply include some variation of “What’s mine is mine and what’s yours is yours.”  If parties ever do get divorced, figuring out who gets what is pretty easy at that point. If they never get divorced, then it was just a couple of pieces of paper laying around somewhere taking up space. 

But the problem with prenups is that you have to sign them before you get married, and everyone thinks their marriage is going to last forever before they get married. And it always does. Until it doesn’t. But you can get a postnup agreement.

2. Sign a postnuptial agreement after the marriage.

A postnup is a lot like a prenup, except you sign it after your marriage has already started. There are a lot of reasons why you might consider doing this. 

Maybe three months in you realize, “I love this man, but he is terrible with money. Let’s agree to keep things separate in this area.”  Maybe you got an unexpected inheritance and you want to make sure what you spend the money on remains your own property in the event of a divorce (probably not required as the law would likely allow for this, but often times it’s better to prevent an argument than to win an argument after spending thousands of dollars on attorney fees.) 

Maybe you met someone in college and got married and then you both graduated and you got your dream job making tons of money and she decided she’d rather earn money selling beaded bracelets at the local park than get an office job. You think that’s fine, you love her and want to support whatever it is that makes her happy. You get a postnup to protect your 401(k) and carry on with your life. 

There are tons of reasons to consider getting one. Life changes all the time, especially after you get married. If some of those changes cause you to think you’d like to offer yourself greater protection down the road, get a postnup. Everyone wants to share half of nothing with their partner, but not everyone wants to split half of everything they’ve worked over 25 years for with someone who has blown every dollar they’ve ever made.

The key factor to a postnup is that it’s written to allow the parties to continue on with their marriage but with just slightly different rules in the event of a future divorce. That’s key. It’s basically saying, “Everything is good now, everyone is happy, but let’s just agree to a few things now in the event things go wrong down the road.”

3. Separation agreement

A separation agreement is an agreement parties enter into after they’ve reached a point where their marriage is no longer going to survive. It can be done before or after either party has filed for divorce, but it’s completed once it’s clear divorce is likely to happen. 

A separation agreement divides the community assets and debts between the parties in a way that the parties agree. In this scenario, it’s likely, and possible, that the parties reach an agreement that gives one party more assets or debts than the other party. Maybe the parties agree it’s fair for each to keep what they consider their own debt and property. Maybe one party really wants one piece of property more than other items and they agree to an uneven distribution of property in exchange for getting the items most important to them. The key here is that they’ve reached an agreement as to what is fair and equitable between them. The courts will generally honor these agreements within reason. 

4. Quitclaim deed/convey property to each other. 

During the marriage, parties can agree to forego any interest in a piece of property that they may have to their spouse. Or avoid taking any interest upfront. For an example, one party might save a little bit of money every month for a long time and then decide they want to buy a vacation cabin in McCall, Idaho. The parties agree that she should be able to do so and that the spouse should have nothing to do with the cabin or have any ownership whatsoever in the property. The parties can agree to do this between themselves and sign the appropriate documents to facilitate their agreement. 

Regardless of how you and your spouse manage your joint and individual finances, the keys to success are open and honest communication and decide if additional legal protections are necessary for your individual situations. 

(Also, Evie Carrick appears to live in Colorado, which is not a community property state.)