Examples of Prenuptial Agreements: Probate Situations
When one spouse dies, either the state's probate laws or the person's will or trust determines how property is distributed. This generally depends upon how the property was titled. Generally, property is titled, or held, in one of five ways.
- Sole ownership. All of the pieces of property are titled to one person.
- Tenants in common. Two or more people hold title together. If one owner dies, his or her share of the property goes to his or her beneficiaries (by state law or will), and not automatically to the other owners.
- Joint tenants. Again, two or more people hold title together. However, if one owner dies, his or her share automatically goes to the other owners. To make certain there is no room for debate, you will often see this stated as “joint tenants with rights of survivorship.”
- Tenants by the entirety. This is basically the same as joint tenants, except that it can only exist between a husband and wife. Tenancy by the entirety is not available in all states. In states that do not have this type of tenancy, it is typical for spouses to hold property as joint tenants.
- Community Property. In some states, property earned or purchased during a marriage is considered community property, unless the spouses agree otherwise. Each spouse owns a 50% interest in the property
Property held in both spouses' names either as tenants by the entirety or joint tenants automatically becomes the sole property of the surviving spouse. What happens to other property (held by one spouse alone or by both as tenants in common or as community property) depends upon whether there was a will or a trust. If there was no will or trust, the other property will generally go to the surviving spouse, unless there are children. Then it is typical for a portion to be given to the spouse and a portion to be given to the children. In community property states, if there is no will or trust, the community property would go to the spouse.
If there is a will or a trust, the other property will be distributed as directed in the document. However, most states make it impossible to deny property to the surviving spouse. In most states, the surviving spouse is entitled to a certain share of the property-regardless of what the will says. This is called the surviving spouse's elective share or forced share. In community property states, the surviving spouse owns one half of the couple’s community property. The deceased spouse can distribute his or her share as he or she wishes.
Example: Frank is divorced and has a son from his first marriage. Frank and Lois have been married for one year; and they do not have any children together. Lois is financially independent, as she has a large trust fund set up by her wealthy parents. Frank dies, leaving a will that gives $10,000 to Lois and the balance of his estate (his business worth $800,000) to his son, who helped him in his business for fifteen years.
Under the laws of their state, Lois can claim one-half of Frank's estate, or $405,000. The main asset in Frank's estate is his business. This leaves Frank's son with a sad choice: either borrow $405,000 to pay off Lois' claim, take on Lois as a business partner; or sell the business to pay off Lois' claim. This is certainly not the situation Frank desired, and it could have been avoided with a prenuptial agreement.