Getting a pre-nuptial agreement (aka a pre-marital agreement) is a smart move for both spouses, with or without large assets or debts. It protects your spouse from your creditors and most notably, makes sure you won’t be “taken to the cleaners” in the event of a divorce (for more info on pre-nups, see our blog on them here). But what most people don’t know about pre-nuptial agreements is that they can be undone—no not in the tearing up the contract sense, but they can be unintentionally nullified by opening up a bank account with a common clause hidden in it: Joint Tenancy with Rights of Survivorship Clause (“JTWROS Clause”).
Recently, we had a bankruptcy attorney consult us about this very situation. The attorney represented the husband, who was not filing for bankruptcy, but his wife was. The wife wanted to protect her spouse from creditors and keep his separate property investment account (inheritance money) out of her bankruptcy. Normally, the non-filing spouse’s separate property would not be subject to the other spouse’s creditors in bankruptcy. However, that was not the case here.
Although the account was the husband’s separate property originally, when the husband opened the account it contained a JTWROS Clause. This clause says that in the event one of the account holders die, the remaining funds automatically become property of the surviving spouse/party. Usually, banks include these clauses by having already checked the JTWROS box in the account paperwork. So unless you’re looking for the clause and de-select it, you’d probably never notice it and inadvertently opted in.
This simple clause changed the characterization of this investment account from the husband’s separate property into community property, and as community property, it is now part of the wife’s bankruptcy to pay off her debts. Holy Schnikes.
The reason you should pay attention is because if you have a pre-nuptial agreement, are thinking about getting one, or know someone else that has one, you MUST know about the JTWROS Clause. If you have a pre-nuptial agreement with your spouse and either one of you open up a financial account that contains this clause, it will completely void your pre-nup regarding any funds in that account. Those funds are now community property—no matter whether you intended them to be or whether how much money is in there. For the unfortunate husband here, it was tens of thousands of dollars—his entire inheritance from his family.
To be clear, JTWROS Clauses can be wonderful when used in the proper situation. If you don’t have a pre-nup or do not want one, these can be great for you. Upon your spouse’s death, you immediately have access the account and its funds. If you didn’t have this clause, you’d have to go to court to gain access to this account, which can be expensive. However, if you have a pre-nup, a JTWROS Clause can ruin it and come as a nasty shock in the event of bankruptcy, divorce, or death.
Take control of your finances and your future with a pre-nuptial agreement, give us a call at 214-494-9916 for more information.