Getting married (or divorced): some financial guidelines
What are the financial implications of marriage (and of divorce and re-marriage)? Those who have recently changed their marital status or who are planning such a change may have important financial and legal decisions to make. These decisions might deal with property ownership, providing for children’s welfare, post-mortem planning, and day-to-day finances.
Table of contents
This Financial Guide discusses financial considerations related to a change in marital status. And, because divorce is sometimes the flip side of a marriage–and often the bridge between marriage and remarriage–it is covered here as well.
Under a joint IRS and U.S. Department of the Treasury ruling issued in 2013, same-sex couples, legally married in jurisdictions that recognize their marriages, are treated as married for federal tax purposes, including income and gift and estate taxes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.
In addition, the ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.
Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country is covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.
This guide will also briefly touch on legal issues involved; however, variations in state law make it nearly impossible to discuss in any detail the legal ramifications that a change in marital status presents.
Related Guide: For a discussion of the impact of the death of a spouse, please see the Financial Guide: DEATH OF A SPOUSE: Financial Steps You Should Take
HOW TO PREPARE FINANCIALLY FOR A FIRST MARRIAGE
For the young, newly married couple, areas of financial concern primarily include: (1) life insurance, (2) form of property ownership, and (3) money management.
When it comes to insurance needs, the basic rule is that you need enough coverage to sustain your family’s present income level should you die. If you are the only breadwinner, or if you plan on starting a family soon, then you should purchase life insurance.
Related Guide: Please see the Financial Guide: LIFE INSURANCE: How Much And What Kind To Buy
If you intend to buy a home or other property or if you and your spouse already own property together, then you need to consider the best way for you to hold that property. Will the property be held solely by one spouse? By both spouses jointly? Because of the complex legal implications of the various forms of property ownership, you should seek legal advice about this issue.
It is important to carefully consider how the two of you will handle your day-to-day finances. New couples should be prepared to discuss financial goals, resolve differences (or at least agree to disagree) in spending habits, and establish a budget and/or saving and investment plan.
You’ll also need to think about whether you want a joint bank account, separate accounts, or both. How much do you want to spend on vacations? On monthly food bills? Entertainment? Gifts? Personal items? What are your long-term financial goals?
Do you have a financial plan? If you don’t, then now is the time to prepare one. Even if you do have a financial plan in place, since your marital status has changed it might be time to review and update it.
Related Guide: Please see the Financial Guide: YOUR FINANCIAL PLAN: Getting Started on A Secure Future
HOW TO PREPARE FINANCIALLY FOR A DIVORCE
If you are considering divorce, it is vital to plan for the dissolution of the financial partnership in your marriage. Such dissolution involves dividing financial assets accumulated during the marriage. Further, if children are involved, future financial support for the custodial parent must be planned for. While it may not be at the top of your to-do list, taking time to prepare financially during divorce pays off in the long run.
TAKE STOCK OF YOUR SITUATION
Assessing your financial situation helps you in two ways:
- It will provide you with preliminary information for an eventual division of the property.
- It will help you to plan how debts incurred during the marriage are to be paid off. Although the best way to deal with joint debt (such as credit card debt) is to pay it off before the divorce, this strategy is often impossible so compiling a list of your debts will help you to come to some agreement as to how they will be paid off.
To take stock of your situation start by preparing an inventory of your financial assets:
- The current balance in all bank accounts;
- The value of any brokerage accounts;
- The value of investments, including any IRAs;
- Your residence(s);
- Your autos; and
- Your valuable antiques, jewelry, luxury items, collections, and furnishings.
If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. These measures will help you to establish credit after the divorce.
Related Guide: For a system that makes it easy to organize and locate your records, please see the Financial Guide: DOCUMENT LOCATOR SYSTEM: A Handy Aid For Keeping Track Of Your Records
ESTIMATE YOUR POST-DIVORCE LIVING EXPENSES
Figure out how much it will cost you to live after the divorce. This is especially important for the spouse who is planning to remain in the family home with the children; it may be determined that the estimated living expenses are not manageable.
To estimate these expenses, add up all of your monthly debts and living expenses, including rent or mortgage. Then total your after-tax monthly income from all sources. The amount left over is your disposable income.
Related Guide: Please see the Financial Guide: BUDGETING: How To Prepare A Workable Plan
CANCEL ALL JOINT ACCOUNTS
It is important to cancel all joint accounts immediately once you know you are going to obtain a divorce because creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.
Your divorce agreement may specify which one of you pays the bills. However, as far as the creditor is concerned both you and your spouse remain responsible if joint accounts remain open. The creditor will try to collect the bill from whoever it thinks may be able to pay while at the same time reporting the late payments to credit bureaus under both names. Your credit history could be damaged because of the co-signer’s irresponsibility.
Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If this is the case, then try to get the creditor to have the balance transferred to separate accounts.
IF YOUR SPOUSE’S POOR CREDIT AFFECTS YOU
If your spouse’s poor credit hurts your credit record, you may be able to separate yourself from the spouse’s information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own. If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage, and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse’s credit record, not yours.
In practice, it is difficult to prove that the credit history under consideration does not reflect your own, and you may have to be persistent.
FOR WOMEN: MAINTAIN YOUR OWN CREDIT BEFORE YOU NEED IT
If a woman divorces, and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply even though the account remains open.
Maintaining credit in your own name is the best way to avoid this inconvenience. It also makes it easier to preserve your own, separate, credit history. Further, should you need credit in an emergency it will be available when you need it.
Do not use only your husband’s name (for example, Mrs. John Wilson) for credit purposes.
Check your credit report if you have not done so recently. Make sure the accounts you share are reported in your name as well as your spouse’s name. If not, and you want to use your spouse’s credit history to build your own credit, write to the creditor and request that the account be reported in both names.
Also, carefully review your credit report to determine whether there is any inaccurate or incomplete information. If there is, write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.
Related Guide: Please see the Financial Guide: CREDIT REPORTS: What You Should Know-And Do-About Yours.
If you have been sharing your husband’s accounts, building a credit history in your name should be fairly easy. Call a major credit bureau and request a copy of your report. Contact the issuers of the cards you share with your husband and ask them to report the accounts in your name as well.
If you used the accounts, but never co-signed for them, ask to be added on as jointly liable for some of the major credit cards. Once you have several accounts listed as references on your credit record, apply for a department store card, or even a Visa or MasterCard, in your own name.
If you held accounts jointly and they were opened before 1977 (in which case they may have been reported only in your husband’s name), point them out and tell the creditor to consider them as your credit history also. The creditor cannot require your spouse’s or former spouse’s signature to access his credit file if you are using his information to qualify for credit.
If you do not have a credit history, a secured credit card is a fairly quick and easy way to get a major credit card. Secured credit cards look and are used like regular Visa or MasterCard’s, but they require a savings or money market deposit of several hundred dollars that the lender holds in case you default. In most cases, the creditor will report your payment record on these accounts just like a regular bankcard, allowing you to build a good credit record if you pay your bills promptly.
CONSIDER THE LEGAL ISSUES
The best way to plan for the legal issues involved in a divorce including child custody, division of property, and alimony or support payments is to come to an agreement with your spouse. If you can reach an agreement, the time and money you will have to expend in coming up with a legal solution–either one worked out between the two attorneys or one worked out by a court–will be drastically reduced.
Here are some general tips for handling the legal aspects of a divorce:
- Get your own attorney if there are significant issues to deal with such as child custody, alimony, or significant assets.
- The best way to find a good matrimonial attorney is to ask for referrals or contact the American Academy of Matrimonial Lawyers (see the last section of this guide for contact information).
- Make sure the divorce decree or agreement covers all types of insurance coverage including life, health, and auto.
- Be sure to change the beneficiaries on life insurance policies, IRA accounts, 401(k) plans, other retirement accounts, and pension plans.
- Don’t forget to update your will.
Those who have trouble arriving at an equitable agreement–and who do not require the services of an attorney–might consider the use of a divorce mediator. Ask friends, relatives, and other professionals for recommendations or contact the Association for Conflict Resolution (see the last section of this guide for contact information). You can also look in the phone book or classifieds under “Divorce Assistance” or “Lawyer Alternatives.”
DIVISION OF PROPERTY
The laws governing division of property between ex-spouses vary from state to state. Further, matrimonial judges have a great deal of latitude in applying those laws.
Here is a list of items you should be sure to take care of, regardless of whether you are represented by an attorney.
- Understand how your state’s laws on property division work.
- If you owned property separately during the marriage, be sure you have the papers to prove that it has been kept separate.
- Be ready to document any non-financial contributions to the marriage such as support of a spouse while he or she attended school or non-financial contributions to his or her financial success.
- If you need alimony or child support, be ready to document your need for it.
- If you have not worked outside the home during the marriage, consider having the divorce decree provide for money for you to be trained or educated.
HOW TO PREPARE FINANCIALLY FOR RE-MARRIAGE
When considering remarriage, it is important to plan for the following:
- Whether property acquired before the marriage will be held jointly
- How to provide for children from a previous marriage
- Whether a prenuptial agreement is necessary to accomplish goals related to either of these issues
If either spouse has significant assets, it will be necessary to consult an attorney.
As for the estate planning aspects of providing for children from a previous marriage, trusts and/or life insurance are the vehicles most often used to do this.
Be sure to update your will before you remarry to ensure that your assets will be divided among your heirs after your death in the manner and proportions you desire.
GOVERNMENT AND NON-PROFIT AGENCIES
American Academy of Matrimonial Lawyers (AAML)
150 North Michigan Ave., Suite 1420
Chicago, IL 60601Tel. 312-263-6477
Association for Conflict Resolution (ACR)
12100 Sunset Hills Rd., Suite #130
Reston, VA 20190Tel. 703.234.4141
National Foundation for Credit Counseling (NFCC)Tel. 800-388-CCCS (2227)
Ex-Partners of Servicemen/women for Equality (EX-POSE)
P.O. Box 11191
Alexandria, VA 22312Tel. 703-255-2917
This non-profit organization provides information to divorcing or separating spouses of military service people.