Community or Separate Property

Dear Len & Rosie,

A few years ago when the housing market was down, I gave my daughter money for a down payment on a home. She has been making her mortgage payments ever since. Her name is on the title. Recently, her boyfriend moved in with her and he’s paying her rent each month and she’s using that money to pay part of her mortgage. Their relationship is looking pretty serious. I’m already anticipating a wedding. If they get married, can he still pay her rent? In other words, can a spouse charge the other spouse rent?

Terri

Dear Terri,

If your daughter's boyfriend is paying the rent on time, and he’s helping around the house, then he may be a keeper. If they get married, the situation changes. It’s easy enough for your daughter and her boyfriend to enter into an agreement by which he agrees to pay her rent, and this agreement could be extended during the marriage, but that’s not enough.

Under California’s community property system, anything earned by either spouse during the course of the marriage is community property, owned equally by both spouses. The same applies to anything purchased with community property. The exception to this rule is that anything earned with separate property (such as rental income on separate property) remains separate property.

But it gets complicated. If your daughter and her boyfriend marry, then their paychecks are community property, and whatever they buy with those paychecks is community property. So, if your daughter pays all or part of the mortgage with money from her own paycheck (or her husband’s paycheck for that matter) then part of the home becomes community property even though the home remains in your daughter’s name alone. If they divorce, there could be a battle of accountants to determine how much of the home is hers alone, and how much of the home is owned by the both of them together.  Also, if there’s no written agreement about her husband paying rent, he could argue that his payments aren’t rent at all, but are really contributions of community property to help pay the mortgage.

If the relationship is that serious, and your daughter wants to consider a prenup, she should consult with an attorney on her own (or may be with you). Her future husband shouldn’t be there because in a prenup, each person has to have his or her own legal representation. This agreement could spell out, amongst other things, that the home remains her separate property despite any contributions of community property to pay the mortgage.

There are, however, problems with this. Leaving aside the usual objection to prenuptial agreements that they are unromantic and prevent a couple from fully committing to one another when marrying, what’s in it for him? He may be reluctant to sign a prenup that could leave him with nothing if she divorces him thirty years from now after he spends his working life helping buy her a home. If there’s to be a prenup, it has to be fair, and it has to be something that both of them can agree to.

Len & Rosie

Father-in-Law Worth Millions Won't Seek Estate Planning Advice.

Dear Len & Rosie,

My father-in-law is a shrewd businessman who owns a great deal of land and is worth millions. He’s also difficult to talk to and says he has a will, end of story. He says he doesn’t care what the kids have to go through after he dies because he’ll be dead! My husband has three other siblings, two who live on Dad’s property.

My husband also has an unpaid child support arrearage from 20 years ago when he was in an accident and didn't know that he had to go to court to stop support payments while he was injured. When my father-in-law passes away, there will be a big mess.

Is there anything we can do? My husband’s siblings want to sell it all after their father’s death and pocket the money, but they seem blissfully unaware of taxes and probate

Rene

Dear Rene,

Some people remain unaware of the need to do estate planning, and are under the impression that everything will work out after they die without a lot of effort. These people are usually wrong, but do not mistake your father-in-law for one of them. He’s a multi-millionaire, and he’s no dummy. He probably knows what he is doing.

There is not a lot that can be done about your husband’s child support debt. Even a spendthrift trust or a dynasty trust will not protect your husband’s inheritance from child support creditors. As a matter of public policy the courts will not allow a trust for your husband’s benefit to avoid paying this child support debt if the trustee has any discretion to give your husband any money under any circumstances.

The only way your father-in-law can guarantee his wealth won’t be used to pay off your husband’s child support arrearage is to disinherit him. Unless the child support debt is so great that it will eat up most of your husband’s share, your husband will be much better off inheriting his share outright and doing the right thing by paying off his child support debt.

Your father-in-law should have a revocable trust, because it will save his beneficiaries thousands of dollars in legal fees. He may also want to consider creating a family limited partnership with his children, to reduce the amount of federal estate tax that will be due upon his death. He should also consider creating dynasty trusts for each of his children, so that their inheritance won’t be subject to estate tax when they die.

Unless your father-in-law is willing to explain himself to you, there’s no way that you can know for sure why he does not want a trust. It’s a good idea to urge your father-in-law to seek the advice of an estate planning attorney, but remember that it’s his money, and he does not have to justify himself to you, and he does not have to create a trust to avoid probate. Sometimes parents react poorly when children or in-laws talk to them about estate planning, especially if they come off as being pushy or even worse, greedy, so tread lightly. Your husband will be much better off if your father-in-law dies with a will leaving him a one-quarter share, rather than dying with a trust that leaves your husband nothing at all because he didn’t like his daughter-in-law, even if she was right all along.

Len & Rosie