This column first appeared in the San Antonio Express News and other Hearst Newspapers on April 15, 2019.
Dear Mr. Premack: My friend has a question about how to protect herself from being burdened with her fiancé’s loan debt (over $100K) once they get married. What is the best way to protect herself from having to pay it off if something where to happen to him? Prenuptial Agreement? Some other method? – NK
Her exposure depends partially on whether the debt is secured or unsecured. If it is, for instance, a mortgage loan on his home then the bank holds a lien against the home as security in case of default. When they get married, the house is still his separate property and the debt is still his separate debt. If he defaults, the value of the house in foreclosure will very likely be adequate to cover the liability. Still, if there is a shortfall, she may have some exposure.
In Texas, under the Texas Family Code, if the debt is unsecured (like a credit card or a student loan) then she should be more concerned. She is liable for his acts only if 1) she was acting as agent for him, or 2) the debt was for necessaries like food and clothing. Her separate property is not liable for his debts unless she also signed the debt contract. Community Property that is under her sole management is not liable for his debts incurred before the marriage, or other debts he incurred separately during the marriage (except for tort liability). All community property is subject to tortious liability (like a car accident).
However, those general rules are overridden by exceptions in the Texas Property Code. For instance, an IRA held by either spouse is not subject to a claim for payment of a debt (until the money is withdrawn from the IRA). A homestead is not liable for the debt (unless it is a secured debt against the homestead, or unless the homestead is voluntarily sold after a judgement lien goes in the public record).
In the State of Washington, under the Revised Code of Washington (Domestic Relations) her separate property will not be liable for her husband’s separate debt. However, any community property accumulated during the marriage will be subject to the loan and it cannot be protected with a pre- or post-nuptial agreement. A nuptial agreement (pre- or post-) can only be used to determine how the marital assets will be divided at the end of the relationship.
Husband (who incurred the debt) does bear liability from his separate property assets. Wife (who did not incur the debt) bears no liability against her separate property assets. As to community property, her community property derived from his income is at risk, while her community property derived from her income is not at risk. However, funds that are accumulated as community property (like a community savings account) are at risk for his debt.
The rules of marital property liability are complex and slightly different in both states, even though both states are community property states. A nuptial agreement (pre- or post-) cannot be used to hide from the creditors in either Texas or in Washington.
Before they marry, she could insist that he purchase a life insurance policy large enough to pay the debt should he die. The policy should be owned by her and should name her as beneficiary, but he should agree to pay the premiums. This will protect her if he dies. If he stays alive and defaults on his loan, then she’ll be needing a lawyer to help defend her exempt assets from the claim by his creditors.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Benjamin Premack is an Attorney with offices in Seattle. They handle Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.