By Kathleen Nemetz, MBA, CFP®, CDFA®
Originally published on Nerdwallet.com, 2015
When passion is in its prime, it’s hard to see how finances could turn marital life into a fiasco.
But passion can wane and differences over money can put enormous pressure on a marriage.
Whether you live in a community property state like California, or another state, you might choose to keep some assets separate in marriage. To do so, consider consulting with a family law attorney before marriage to create a prenuptial agreement, or if you’re already married, something called a post-nuptial agreement. The need for the latter may arise if you acquire separate property during your marriage. This can come from an inheritance or a personal injury legal settlement, for example. You might wish to protect the separate asset even while possibly using the income from it for your life as a couple.
But before you begin, there are a few legal definitions you should know:
Marital property definitions can vary by state. That said, husbands and wives are always responsible for the expenses of the family and for the education of their children, including stepchildren. Laws generally define marital property according to sources of income, and set a fiduciary standard of care for each of the spouses when managing assets that fall into the marital or shared category.
Interestingly, married couples typically file jointly under the federal tax code, but may each be liable for the taxes levied on separate assets or activities. For instance, one spouse may have business income coming from a pass-through business entity, such as an S-Corporation. A prenuptial agreement may have defined the business as a separate asset, but the business income may be marital property and the taxes associated with it a marital debt obligation to the U.S. government.
Separate property can be anything you owned before marriage or included in a prenuptial agreement that was explicitly defined and agreed to by your spouse. Separate property can also include gifts and inheritances if kept separate and not commingled with community assets.
Couples often commingle separate and marital property and create potential problems for themselves later. Sometimes one’s spouse incurs debt during the marriage, with the consent of a spouse, but the spouse wishes to be reimbursed in the event of divorce. So try to be as clear and intentional as possible.
Here are some key do’s and don’ts for keeping assets separate in marriage, and for building a successful financial life as a couple.
- Pay attention to the titling of financial accounts. A separate account should be kept in the name of the spouse or in the name of a trust for a spouse, not as a joint account.
- Deposit dividends and interest from a separate investment account into a separate checking account.
- Consider carefully whose name goes on the deed of a house. Without a prenuptial agreement, mortgage and property tax payments made by both spouses using separate incomes can create a marital asset of the house, even if one partner initially purchased it.
- Create a shared household budget. Decide how you and your spouse will share these expenses and manage your finances as if they were all in one pool, for purposes of discussions about budgets, use of credit and tax liability.
- Establish shared long-term goals and the appropriate financial milestones to achieve them.
- Consider reciprocity. If you ask your spouse to relocate to accommodate your next job promotion, consider doing the same for him or her later on. You can also put any promises in writing. Otherwise you might find in the event of a divorce, you are asked to reimburse lost wages or earning power if your spouse suffered a salary cut from the relocation.
- Don’t deposit funds from separate property sources into joint accounts, unless you intend to convert the money to marital property.
- Don’t ignore the appreciation factor in the value of homes or in assets held over the course of a long marriage — especially if your spouse is helping improve a home or trade an investment account to which she or he doesn’t have title. The increase in value may be a jointly claimed asset.
- Don’t reduce family life to an ongoing debate about the numbers. Discuss your life goals and how to finance them openly, and talk about what priorities you may share for the children. Remember to be transparent in discussing what investment of time or money is necessary to realize these goals.
A final word
It’s always important to seek professional advice before discussions become heated. Learn how to choose a financial advisor who suits your needs. Your life as a couple should create bonds on many levels, including one of trust about money.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investment related performance references are historical; there is no guarantee of future investment results. All indices are unmanaged and unavailable for direct investment. This information is not meant to substitute for individualized tax or legal advice specific to your situation. I suggest that you discuss your personal situation as needed with the appropriate tax and legal experts appropriate for your situation prior to taking action.
Originally published on Nerdwallet.com, 2015.