Sharing your emotions and physical affection with the one you love comes naturally for most of us early in the marriage. But, even in this honeymoon stage, when it comes to finances and money, many spouses typically hold their cards close to the chest and avoid difficult discussions on the topic. If you haven’t kept up with the family financial details and want to avoid future surprises, suspicion or distrust, it is much better to place all cards face up on the table BEFORE you take the first step to get a divorce.
We all hope our marriages will last forever, and that we stay together, holding hands, well into our nineties. Yet, the truth is that, depending on which trend statistic you believe, between 33 – 50 percent of marriages end in divorce. So it’s just plain smart to have your eyes wide open to the implications, should divorce happen to you.
What is separate property?
When you marry, all of the assets owned prior to the date of marriage are legally your separate property. That means that a wealthy individual can marry, spend earnings on joint support, and yet have the same separate property later should he or she eventually divorce. The appreciation (growth in value) of the separate property assets remains separate. In fact, it is important to preserve the statements showing values on or about the date of marriage. From that point on, only the dividends and interest on that separate property become part of the community estate. Even if that portfolio income is paid out and spent during the marriage, the original separate estate is still preserved.
If separate property funds are used to purchase a home after the date of marriage, this creates a reimbursement claim by the separate estate should the marriage ever end. If you are the “moneyed” spouse, careful records must be maintained from the date of marriage onward in order to document the paydown of the mortgage and community interest.
If separate property includes mutual funds and the reinvestment of dividends (dividends are community), it is possible to “trace” the activity during marriage to identify the community interest and separate property.
If you have no separate estate upon marriage, then you still need to be aware of the separate estate of the other person, as well as their income. It is in your best interest to stay knowledgeable about the finances and understand the rules.
What is community property?
The income earned during marriage is entirely community property. Thus, any contributions to a 401k or IRA during marriage are community, along with the earnings on those investments. Any savings created or assets purchased during marriage are also community property. Think of such earnings as “community earnings.”
All properties or investments funded through community income during the marriage are community property and subject to division should the marriage end. Pensions earned during the marriage are also community in nature. If the pension was partially earned pre-marriage, then a fraction determines the separate and community portions.
What about debt?
Debts from before marriage are also considered separate. If paid off during the marriage and the marriage later ends, there is a reimbursement due to the “community” aspect. For example, if the husband has $20,000 of credit card debt prior to marriage and this is paid off during the marriage (no matter whose paycheck supplies the money), the $20,000 should be repaid to the community estate when dividing assets during divorce.
What about a prenuptial agreement?
If there is a prenuptial agreement signed prior to marriage, this can change the rules above for determining separate and community property. These agreements almost always benefit the moneyed spouse. Such a preliminary arrangement will serve to set guidelines should there be a breakup of the marriage.
What about a comprehensive financial statement?
To clarify all finances, both assets and liabilities, it is sometimes advisable for married couples to employ a Certified Financial Planner (CFP) with knowledge of the information above. This will create trust and open up a more detailed discussion of finances between the couple while they are still in the marital relationship.
Each person would supply the CFP with statements showing retirement plans or other financial assets, along with a credit report. With this information, the CFP can clearly document the assets and liabilities of the couple, as well as any items that are separate property.
This might be a good time to create a budget as well, in order to assure that the couple remains secure. The CFP can provide that guidance.
Sharing full knowledge of finances generates trust and openness between a couple, contributes to the development of a budget and a financial plan and helps build a secure future for both parties, whether they remain together or not.