I'm a newlywed. Because we lived together before our marriage, my husband and I are already in the habit of discussing our finances. We even talked about how they would change once we were married.
While this may not sound terribly romantic, I'm very glad we talked about money at some length and have begun to map out a practical approach to handling our daily finances. I say begun, because, as our life together changes with the advent of kids or purchasing a property, we'll have to rethink our finances.
Like me, your joint financial plan has to be tailored to your specific needs as a couple. The starting point is figuring out what you and your spouse have, from your respective salaries and other income to the assets you own -- be they stocks and bonds, real estate, or your car. "How you split expenses is very different according to the relative economic status between the couple," says Tamara King, executive vice-president and co-chief operating officer at Women's Financial Network at Siebert, an investing Web site that caters to women's investing needs.
JOINT OR SEPARATE? For example, it was a strange feeling to be discussing setting up a joint checking account after so many years of handling my own money. "A lot of people when they're both still working keep separate accounts, but once the kids come, they spend down the woman's savings and move to joint checking and investment accounts," says Paula Ryan, a trusts and estates planning attorney at Davis, Polk & Wardwell, a New York-based law firm. "But keeping assets separate makes them easier to trace in case of a divorce." My husband and I have decided to keep our own accounts and set up a joint account for household expenses.
If you're making a lot less than your spouse, you need to be up front about what you can contribute to household expenses. "It's an uncomfortable conversation, but it's a necessary evil," points out Mandee Heller, WFN.com executive vice-president and co-chief operating officer alongside King. "Statistically, the biggest arguments among married couples arise over finances."
It's not just your current earnings you've got to consider. You've also got to decide how to share accumulated assets going forward. If you're assuming that you'll drop out of the workforce for a while once the kids come, you need to be sure that your future spouse is comfortable shouldering the financial burden alone.
ASSET SHIFTING. At the same time, the parent who stops working may lose his or her financial identity. That can be a real problem in the event of the untimely death of a spouse or a divorce. "When we started [our financial advisory business] a widow came in who was worth several million dollars but couldn't buy a house," recalls King. "She had no credit history because all the assets were in her husband's name."
It's simple enough to make sure that some assets are carried in each spouse's name. "We counsel our clients to shift assets into both spouses' names," says Ryan. There are compelling tax reasons to make sure that both members of a couple hold assets in their names, she adds.
Starting in January, anyone is allowed to pass on $1 million of his or her estate free of inheritance taxes. Today, the amount that's sheltered is $675,000. If a couple holds all their assets jointly under one name, they can avail themselves of only a $1 million credit when one of them dies. But if each person owns some of their accumulated assets separately, each will have a $1 million credit against their estate. That will allow you to pass on more to your children.
TWO IRAs. Another factor in looking out for your children's well being is insurance. If you're both working, you should figure out whose insurance offers the best benefits, starting with prenatal care. You should think about making your spouse the beneficiary on your life insurance, and vice versa, so that, in the event of a tragedy, the survivor has some financial help.
It's also important that both members of a couple have their own individual retirement accounts. If you stay happily married into your dotage, the two of you will have maximized your tax deferral as a couple and have more to live on in your retirement. If one of you dies or you get divorced, then each has something to live off in old age. "The first aspect of premarital financial planning is planning for divorce," Ryan acknowledges.
That's where prenuptial agreements often come in, although there are certain circumstances that make prenups more important to some couples than others. Prenuptial agreements about how to divide assets in the event of a divorce are most common when there are children from a prior marriage to be provided for.
ALL IN THE FAMILY. It's also smart to have a prenuptial agreement if you're entering your marriage with a family business in tow. That way, you can keep business and personal assets separate. Finally, Ryan says that partners who come from wealthy families are more likely to specify the amount that would go to a spouse in the event of a divorce. "Often it's the parents [of the bride or groom] who ask about a prenuptial agreement for their kid. Sometimes they prevail in the interest of preserving the family wealth," she adds.
If you're thinking that you don't want to go off on your honeymoon with your heads full of finances, how to provide for children, and what's going to happen if you split up, you don't have to. Begin the discussion well before you get married so that by the time you do, the way you and your spouse handle your finances is already established.
Margaret Popper covers the markets for BW Online in our daily Street Wise column
Edited by Beth Belton
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