You wouldn’t merge companies without combing through a potential business partner’s finances. In financial terms, the joint venture known as marriage is similar.
Sound unromantic? Consider this: the most commonly cited cause of divorce in the U.S. is unexpected financial stress. So it follows that one of the wisest ways to protect a marriage is honest financial openness and planning.
“Regardless of your attitudes about money, spouses must give full disclosure on their finances because each person is liable for the other,” says certified financial planner Dean Harman of Harman Wealth Management.
Want to be good at the business of marriage? Take a deep breath and put everything on the table.
The Debt Talk
For many couples, talking about debt is the most difficult, but most important, financial discussion to have. Past debts from either spouse can affect your ability to buy a home, lease a car or even rent an apartment.
“Assess where you are today in terms of debt levels and you’ll avoid surprises down the line, when it may be too difficult to recover,” says Luke Vandermillen, vice president at Principal Financial Group. “You cannot determine whether you’re in a position to buy a home or save for retirement, if you aren’t aware of debt.”
Past debts show up clearly on your personal credit history — a document each spouse should review. “The big ones are student loans and credit-card debt. We see this all the time. If one spouse has $100,000 worth of student loans, one way or another they both end up paying it back,” says Harman.
Past bankruptcies or foreclosures must also be discussed because their impact is long-term. (Experts say the standard is seven years for bankruptcy forgiveness). “You can’t just say ‘Oh, by the way, I had a bankruptcy I didn’t tell you about, so now we can’t get the mortgage.’ That’s a disaster from a trust standpoint,” Harman says.
What’s Yours Is Mine?
Once you’ve sifted through your financial pasts, long-married couples say the key to long-term financial planning is figuring out what to combine and what to keep separate. We’ve broken down the majors:
Mortgages & Home Ownership: Experts agree that, in general, married couples should buy houses together with both names on the title deed for the house and in the mortgage contract. First, they cite what’s called the "right of survivorship." That is, if one spouse dies, ownership automatically transfers to the surviving spouse.
“It’s also easier to qualify if both names are on a mortgage,” says Kelly Campbell, CEO of Campbell Wealth Management. “Many companies won’t lend to you unless you are joint on a house, because it protects the bank. If one spouse passes away, they still need to collect.”
Health-Care Benefits: Consensus on this says not to pay double for health-insurance coverage. “It’s typically less expensive for both spouses to be covered on one plan,” says Vandermillen of the Principal Financial Group . “But insurance varies from one employer to the next, so take a close look at what is covered.”
Determine which insurance package will pay for the best benefits at the lowest cost. This one takes legwork, but the savings may make it worthwhile.
“If both spouses have employer-based insurance, pick the best one,” says Harman, adding that the single insurance plan for couples can accommodate life changes. For instance, if one spouse is working part-time, or if one retires but is not yet eligible for Medicare, becoming insured as your spouse’s dependent makes sense.
Non-Retirement Investments: Any investments you have that are not related to your 401(k) plan or IRAs should be owned and reviewed jointly, say financial planners.
“When it comes to investment accounts, I think they should be joint because it’s a commitment that both of you make to your goals,” said Campbell.
Whether it’s a brokerage account intended for a vacation home or a 529 Fund (these grow tax-free, if used to pay for college), committing to an end goal helps couples plan for the future.
“Ask yourselves how much you need to reach these goals, and when you’re going to use the money. Then, while there’s no easy answer, discuss your desired level of market risk,” says Vandermillen.
Taxes: This one’s not optional. Uncle Sam considers married couples one household, so you can’t file your taxes as a single person. It’s a complex issue often requiring the services of a professional. (More:)
What’s Mine Is Mine… Or, What to Keep Separate
Credit: Debt is typically shared, but credit is always separate. There is no joint credit score for married couples — just the summation of each individual score.
“Keeping separate credit cards in your own name is important no matter who pays, because if something happened to your spouse, you still need your own credit history,” says Harman of Harman Wealth Management.
Financial planners recommend being very familiar with — and careful about — the separate strength of your credit scores. If one is strong, and the other isn’t, you each have an interest in maintaining it, because it may be what keeps you both going during periods of financial hardship.
401(k): Not much choice here, either. You cannot combine 401(k) or IRA accounts, but you should of course discuss each fund’s amount and each spouse’s contributions. (More:Most Widely Held Stocks You May Not Know You Own)
“If you’re working, you should both be contributing to your 401(k). It’s foolish to put less than the maximum amount in, and most employers match at least a percentage of what you put away,” says Vandermillen.
It’s important to monitor retirement funds closely, because many couples find they need to save over and above what their employer is matching.
Family Matters: It’s usually best to think twice before you involve each other in family-related finances. If you need a reminder, hearken back to the days of planning your wedding.
When it comes to inheritances, Harman advises clients to keep it separate. “It’s legally a separate asset, and there’s no reason to commingle it.”
The choice of what to do with an inheritance can be deeply sentimental. It’s a similar matter when it comes to trusts. Trusts allow people to say when and how loved ones receive money after they die. “If I’ve got a million in a trust, after my death, my wife can collect interest dividends, and the principal can be given to my kids. Trusts have that flexibility,” says Campbell of Campbell Wealth Management.
Similarly, estate planning should be discussed jointly, but should be carried out separately. In the simplest terms, estate planning involves designating beneficiaries of your assets in your will. As stated earlier, if you own property jointly, right of survivorship means your spouse becomes sole owner. But an estate can include other assets. If these were acquired before marriage, the choice of who receives the assets after death is ultimately an individual one.
Big picture, consider the life of your marriage. Know that shared goals and aspirations have a much better chance of coming to fruition if you are aware of your joint resources — and liabilities.
And make no mistake: marital liabilities are shared. At the same time, you’ll gain strength because the toughest financial hurdles are best tackled together.