It’s no surprise that the winter season, known for beautiful snowscapes and romantic nights by the fireplace with the one you love, is the most favored time of the year for engagements. Christmas, New Year’s Eve and Valentine’s Day are among the most popular days of the year to propose.
But now that you have said “yes” to the ring…will you both say “yes” to combining finances?
It is well-known that money is the leading cause of disagreements in marriage as two individuals must come together to form a cohesive financial unit. Oftentimes couples have contradictory attitudes about their finances: one is a spender whereas one is a saver. In order to maintain both a peaceful and successful relationship with each other in regards to finances, it is important to be open, communicative and collaborative about your goals and wishes.
There are a few items to take into consideration before deciding whether or not to merge your assets as a newly-married couple. Although likely not top-of-mind for someone who is freshly married, the possibility of divorce is something to think about, with divorce rates of 40-50% in the U.S. It is a good idea to plan for the future and what could happen if a separation or divorce does occur.
Within the U.S., there are two types of marital property ownership systems: 41 states follow common law, or the equitable distribution system, and the other nine states follow the community property system. In common law states, it is usually easy to tell who owns what — if your name is on the deed or title paper than it’s yours. If both spouses’ names are on it, then it will be split equitably, not necessarily equally, should a separation occur. If a separation occurs in community property states, assets will generally be split 50/50 between the two parties, including property, income, etc. Inheritance, gifts, and property owned before the marriage and kept completely separate are considered separate property. Both of these marital property ownership systems can become tricky, however, when funds get commingled.
You should consider whether you want to keep some or all of your assets separate, but keeping them in a separate account may not be enough. If both spouses contribute to the same account, it becomes commingled and marital property. Proceeds from separate assets (i.e. dividend returns from pre-marital assets as long as they stay in the separate pre-marital account) would typically remain separate property. Anything contributed after marriage usually is considered marital property unless you have good records to prove otherwise, as commingling makes it challenging to disentangle assets if a divorce does occur. Remember that guidelines vary state to state. Also remember to consult a tax professional regarding tax filing issues.
Combining finances is a significant step in any relationship and an important decision to make. As with many life-changing decisions, it may be wise to seek qualified input from a tax and/or legal professional, accountant and financial advisor. A marriage proposal is exciting so enjoy the moment but just remember to think ahead about your forever.
Information contained herein has been obtained by sources we consider reliable, but is not guaranteed, and we are not soliciting any action based upon it. Any opinions expressed are those of the author and based on interpretation of data available at the time of original publication of this article. These opinions are subject to change at any time without notice. D.A. Davidson & Co. does not offer legal or tax advice. Investors should consult their financial and/or tax advisor before implementing any investment plan.