Finances Can Be Trickier The Second Time AroundMary Rowland
Deena Katz, a financial planner, and her partner, Harold Evensky, were in California on business last year when Katz suggested a side trip to the Napa Valley. There they were, at a romantic little vineyard, when Evensky dropped on one knee and proposed. Then, he popped the really important question: "Should we sign a prenuptial agreement?"
"Don't be ridiculous!" replied Katz, even though she was the wealthier of the pair. It was a surprising reaction from someone who had unfailingly counseled her clients to "make him sign that prenup." But Katz, who like Evensky was divorced, soon changed her mind. "It's very difficult to separate the love relationship from the very necessary things you have to do, like putting your finances together," she says.
HIGH STAKES. That's the trouble with mixing love and money. Many people fear that talking about money at such a time makes them appear greedy and may douse the romance. Yet the stakes are high--especially the second time around. Premarital financial planning is important for any couple. But it's crucial for those about to remarry. Generally, they are older, have more assets, and have more complicated finances than those tying the knot for the first time.
They must ask themselves: What do they do with assets they've accumulated separately? How will they deal with children from previous marriages? How should they combine current earnings?
Couples who ignore these issues increase the chances of another failed marriage. But airing them in advance and laying some ground rules can pay off. To begin with, you'll need a thorough understanding of the legal status of prenuptial agreements in the state where you'll reside.
Before you consult a lawyer, take a look at the way you and your prospective spouse handle money. Even if you don't want to discuss who will buy the groceries and pay the electric bill, planners suggest you map out a broad financial policy and proceed slowly in combining assets.
Even though keeping separate accounts may go against the grain of togetherness, maintaining financial independence can help you establish a better relationship. Besides, once your property is commingled, it's much tougher to disentangle should that become necessary. Most planners suggest that partners retain sole ownership of property they hold at the time of their marriage. "Other than a home and checking account, I don't think anything should be held in joint names," says Paul Huth, partner at Ernst & Young in Cleveland.
Couples who remarry need to think through their anticipated cash flow. Any alimony payments being received from a former spouse will stop at remarriage. And you should talk about how much each spouse will contribute and how bills will be paid. Most planners suggest using a household account for common needs. You'll sometimes need to go over what will be contributed to it and what will be paid from it. Connie Chen, managing director at Richard A. Eisner in New York, suggests you start by splitting contributions down the middle. "But as time goes on, the one who makes more money may want to contribute more," she says. Planners suggest you also discuss who will handle long-term investments, who will pay bills, and who will collect tax data.
It's a good idea to rethink your diversification strategies and liquidity needs. Barbara Pope, partner in charge of personal financial planning for Price Waterhouse in Chicago, says her husband's practice of staying liquid and keeping a lot of cash allows her to stay fully invested. "If I'm desperate for cash, I can get it from him," she says. Even if you maintain separate portfolios, make sure each partner understands the other's holdings and would feel comfortable managing them in case of the spouse's illness or death, says Violet Woodhouse, a financial planner in Costa Mesa, Calif.
State and federal tax liabilities will have an obvious impact on your new financial situation. If you and your spouse have widely disparate incomes, or if one of you does not have any earned income, you will probably pay less in taxes as a married couple. But if remarriage will make you part of a two-earner family with each making substantially equal amounts, expect your tax bill to go up.
KID STUFF. Another consideration is the onetime $125,000 capital-gains exclusion available to taxpayers 55 years and older who sell their primary residences. If you marry someone who has used the exclusion, you cannot use yours. Pope suggests that you or your spouse may want to sell a home before you marry to take advantage of the exclusion.
It's also crucial to accommodate the children from prior marriages. If they are still living at home, it's especially important to iron out money issues well before the wedding ceremony. "These are not big financial issues, but they're huge emotional issues," says Kenneth Davis, a Menlo Park (Calif.) stockbroker who wrote the book Kids and Cash. "A simple disagreement over whether you should pay a child an allowance can result in a huge family battle."
Once you've decided to draw up a prenuptial agreement, you and your new spouse will each need an attorney if the agreement is to pass muster in most state courts, says Sam Radin, pre-sident of National Madison Group, estate planners in New York. Each of you must provide full disclosure of your assets and liabilities so that the party giving up rights will know what is being surrendered.
WAIVED RIGHTS. In community-property states, the law considers property brought into the marriage as separate, but if it increases in value, is improved, or if taxes or upkeep are paid out of commingled funds, the increase could belong to both partners unless an agreement delineates the ownership. A prenuptial agreement can identify the property as separate and waive all potential community-property rights.
Although planners counsel against joint ownership, there should be something at stake for the two of you as a couple, too. Stuart Walzer, a divorce lawyer with Walzer & Gabrielson in Los Angeles, counsels against separating everything in a prenuptial agreement. He argues, for example, that the increase in value on property that is separately owned should be shared equally by both spouses. "Marriage is partly about money and security and about working together to accumulate something," says Walzer, who has taught a course for lawyers on second marriages. An agreement that undermines this team spirit may "doom the marriage before it starts."
Another option is to hold property as "tenants in common." This allows you to split property according to designated percentages and provides that your portion will pass to your heirs at your death. For example, you can say one spouse owns 10% of a house, the other, 90%.
You don't have to complete your estate planning before the wedding, but it may ease tension between your children and new spouse if you make financial and estate plans clear. That's especially true of people with adult children, who often have legitimate concerns about the new person in their parent's life. "If the natural parent dies, the stepparent has no legal obligation to provide for the stepchild," says Woodhouse.
One way to provide for your children is to buy a life-insurance policy and keep the proceeds out of your estate. Make your children owners of the policy. You can give them the money to pay the premiums, using the $10,000 annual gift exclusion.
UNLIMITED DEDUCTION. Another estate-planning tool is a qualified terminable-interest-property trust (Q-TIP). This allows you to use the unlimited marital deduction, under which your entire estate can pass to your spouse tax-free. But you can still control the ultimate disposition of your assets. You can leave your estate in trust, with the income--and perhaps some of the principal--going to your spouse. But the bulk of it passes to your children when the spouse dies. If you are a business owner, Fort Worth estate-planning lawyer Michael Bourland adds, you may need more sophisticated planning to be certain your children inherit your business.
Once an agreement is reached, couples seem to feel the effort was worthwhile. "Some of the happiest people I deal with are those in second marriages," says Carol Caruthers, partner in charge of personal financial services for Price Waterhouse in St. Louis. "Because they've been in a situation that didn't work so well, they don't take the marriage for granted." Clearing up financial concerns early on paves the way for a happier second go-round.