One of the most important questions to consider when preparing a prenuptial agreement is not simply what happens to the property you own today, but what happens to the wealth you build during the marriage.
Can a prenup protect future income in California?
In many circumstances, yes. A properly drafted California prenuptial agreement can substantially alter the property rights that would otherwise arise during marriage, including rights relating to future earnings and assets acquired with those earnings.
This can be particularly important for business owners, entrepreneurs, executives, professionals, investors, and individuals who expect their income or net worth to increase significantly after marriage.
What Happens to Income Earned During Marriage Without a Prenup?
California is a community property state.
Under California law, earnings acquired by either spouse during the marriage while domiciled in California are generally community property. This means that even if only one spouse earns the income, the income may belong to the community rather than solely to the spouse who earned it.
The same issue can extend beyond a paycheck.
Income earned during marriage may be used to acquire investments, fund brokerage accounts, purchase real estate, build savings, make retirement contributions, or invest in a business. Without careful planning, the characterization of those assets can become an important issue if the marriage ends.
A prenuptial agreement allows a couple to establish different rules before marriage.
How Can a Prenup Protect Future Earnings?
California’s Uniform Premarital Agreement Act permits prospective spouses to contract regarding their rights and obligations in property, including property acquired in the future.
Accordingly, a properly drafted prenuptial agreement may provide that each spouse’s earnings during marriage will remain that spouse’s separate property rather than becoming community property.
For example, the agreement may provide that:
- Salary, wages, bonuses, commissions, and other compensation earned by each spouse remain that spouse’s separate property;
- Income generated from separate property remains separate property;
- Property purchased with a spouse’s separate earnings remains that spouse’s separate property;
- Contributions to certain investment or financial accounts remain separate;
- Business interests and specified increases in their value are treated according to the terms of the agreement; and
- The parties waive or modify rights they would otherwise have under California’s community property laws.
The precise language matters. A sophisticated prenuptial agreement should address not only the income itself, but also what happens after that income is earned.
Protecting the Assets Purchased With Future Income
Declaring future earnings separate property is only part of the analysis.
Consider a spouse who earns substantial income during a 15-year marriage and uses those earnings to purchase stocks, acquire real estate, fund investment accounts, or establish another business.
A carefully drafted prenup should address whether those subsequently acquired assets are also intended to remain separate property.
Otherwise, disputes may arise regarding the source of funds, characterization of property, commingling, reimbursement rights, or whether the parties’ conduct during the marriage changed the character of an asset.
This is one reason customized drafting matters. The objective should be to create a coherent property system for the marriage rather than simply inserting a sentence stating that “earnings are separate property.”
What About Bonuses, Stock Options, RSUs, and Other Compensation?
For high-income employees and executives, compensation is frequently more complicated than a salary.
A prenuptial agreement can address various forms of compensation, including bonuses, commissions, restricted stock units (RSUs), stock options, deferred compensation, partnership distributions, and other employment-related benefits.
Timing can become particularly important because some compensation may be earned over a period that spans both before and during the marriage.
A well-drafted agreement can establish how the parties intend these forms of compensation to be characterized and can reduce uncertainty regarding assets that might otherwise require substantial tracing or litigation.
Can a Prenup Protect Future Business Income?
Prenuptial agreements can be particularly valuable for business owners.
Owning a business before marriage does not necessarily eliminate every potential community property issue associated with that business.
California law may recognize a community interest when a spouse’s efforts during marriage contribute to the growth or profitability of a separate-property business. Depending upon the circumstances, disputes may arise regarding compensation, appreciation, distributions, retained earnings, and the value attributable to marital efforts.
A carefully drafted prenup can define the parties’ respective rights regarding an existing business and address businesses formed or acquired in the future.
For entrepreneurs, physicians, attorneys, executives, real estate investors, and other professionals, these provisions can be among the most important parts of the agreement.
Can Future Investment Income Remain Separate Property?
Potentially, yes.
A prenup may address dividends, interest, capital gains, appreciation, rental income, and other returns generated by separate property.
This can be significant because a person’s wealth may ultimately come less from salary and more from investments accumulated over decades.
For example, someone entering marriage with a substantial investment portfolio may want the agreement to address not only ownership of the original portfolio but also dividends, appreciation, reinvestments, replacement assets, and property purchased with proceeds from that portfolio.
The agreement should reflect the client’s actual financial circumstances rather than relying on generic language.
Does Keeping Future Income Separate Mean Couples Cannot Share Money?
No.
A prenup does not require spouses to conduct their marriage as though they were financial strangers.
Couples can agree that their respective earnings remain separate property while still creating joint accounts or jointly acquiring property.
For example, spouses may maintain separate earnings but each contribute an agreed amount to a joint household account. They may purchase a residence together while maintaining separate investment portfolios. They may also agree that specifically designated assets will be jointly owned even though most other property remains separate.
The advantage of a thoughtfully drafted agreement is flexibility.
The parties can determine which aspects of their finances they want to combine and which they want to keep separate.
Can a Prenup Protect Income Earned Many Years Into the Marriage?
Yes. A prenuptial agreement is not limited to assets or income existing on the wedding date.
The agreement can establish property rights that apply throughout the marriage, including to property and earnings acquired years later.
This is particularly important for younger professionals and entrepreneurs whose present net worth may not reflect their future earning potential.
Someone entering marriage with relatively modest assets may ultimately create substantial wealth through a successful business, professional practice, investments, equity compensation, or a high-income career.
Prenuptial planning therefore is not limited to people who are already wealthy.
It can also be about establishing rules for wealth that has not yet been created.
What About Spousal Support?
Property characterization and spousal support are separate issues.
A provision stating that future earnings will remain separate property does not necessarily determine whether one spouse could later seek spousal support.
California permits prospective spouses to address spousal support in a premarital agreement, but special statutory requirements and enforceability considerations apply to those provisions.
For that reason, an agreement intended to address both future earnings and future support obligations should be carefully drafted with both issues considered independently.
Why Financial Disclosure Still Matters
Even when the primary objective is protecting future income, proper financial disclosure remains an important part of preparing an enforceable California prenuptial agreement.
Each party should have meaningful information regarding the other party’s existing assets, liabilities, income, and financial circumstances.
A prenup should not be treated merely as a document to sign before the wedding. The process by which the agreement is negotiated and executed can be critically important if its enforceability is later challenged.
Timing Matters When Preparing a California Prenup
Couples should begin the prenup process well before the wedding.
Waiting until immediately before the ceremony can create unnecessary complications and potential enforceability issues.
Starting early gives both parties sufficient time to exchange financial information, consult independent attorneys when appropriate, negotiate provisions, consider revisions, and review the final agreement without the pressure of an approaching wedding.
For complex estates, businesses, substantial investment portfolios, or significant executive compensation, additional time may be necessary.
A California Prenup Can Be Designed Around the Wealth You Expect to Build
The value of a prenuptial agreement is not limited to protecting what someone already owns.
For many clients, the more important issue is protecting what they expect to earn, acquire, invest, and build in the future.
California’s default community property rules can create rights in earnings and property accumulated during marriage that may be very different from what the parties expect.
A properly structured prenuptial agreement gives prospective spouses an opportunity to establish their own financial framework before marriage.
At Atighechi Law Group, P.C., we represent clients in Los Angeles and Orange County in the negotiation and preparation of sophisticated California prenuptial agreements, including agreements involving business interests, substantial income, investments, real estate, executive compensation, and other complex assets.
If you are considering marriage and want to understand how a prenuptial agreement may protect your future income and assets, consulting with an experienced California family law attorney well before the wedding can help ensure that the agreement reflects both your present financial circumstances and your long-term objectives.