By Jeff Landers
I’m often asked, “Jeff, I don’t want my daughter to make the same mistakes I did, so what should she know about finances before she gets married?” and “Jeff, what’s the most important thing I should find out about my fiancé‘s finances before the Big Day?” The exact questions can vary, but my responses are generally very similar.
I like to sum up my answers to questions like these with three rather straightforward points: Brides-to-be need to Communicate (about finances), Consider (their financial options) and Continue (to be financially independent). Let’s go through each one of these points in more detail. If you are getting married, you need to:
1) Communicate Before Getting Married
You and your fiancé need to talk openly about finances. I can’t stress this point enough. Please, don’t wait until the last minute to get answers to important questions, and please don’t be shy about the topics you discuss.
Think about it this way: Would you start a company with a friend if you were unsure about his personal finances or how he handled money? Of course not! So, don’t start a marriage with those kinds of doubts, either. Before you say, “I do,” you need to know your fiancé’s finances inside and out. Make sure you understand each other’s spending habits, current credit card debt, student loans, future plans, how your accounts will –or won’t –be blended after the wedding, etc. Here’s a short checklist to help get you started. Do NOT marry your fiancé until you know the answer to fundamental questions like these:
- How much money do you earn?
- What are your assets and liabilities?
- Have you ever filed for bankruptcy, and are there any judgments against you?
- Do you pay alimony and/or child support?
- If we purchase a home or make other investments, will these be held jointly?
- What about pre-marital assets and liabilities – will they also be shared jointly or will they remain separate?
- If your husband-to-be owns a business or professional practice, make sure you understand its revenues, expenses and net income. Does the business have assets/liabilities? Is he personally liable for those liabilities? Review all tax returns for the business or have a professional do so on your behalf.
Contrary to popular belief, conversations about finances aren’t unromantic. In fact, talking through money issues before you get married establishes a foundation of trust and establishes the good habit of sharing financial information, expectations and worries. The Divorce Financial Strategists™ here at Bedrock Divorce Advisors™ have seen how devastating it can be for a woman to be ill-prepared to deal with financial concerns –and believe me, that’s unromantic.
2) Consider Your Financial Options
These days, there are several options available to those who want to preserve their financial independence and keep certain assets as separate property. (See my earlier article for a detailed discussion about the difference between separate and marital property.) For example, years ago, prenups (short for “prenuptial agreements”) were only associated with older, affluent and/or celebrity couples. But that’s simply not the case these days. Prenups are becoming increasingly common–especially now that many people enter marriage later, with significant assets, such as cars, 401Ks, real estate, etc.
Long considered stuffy, stodgy and even insulting, the prenup is beginning to win favor as a reasonable, practical and smart sign of trust between a woman and her fiancé In other words, before you immediately dismiss the possibility of a prenup, do yourself a favor and take a minute to review its benefits. By using a prenup, both the husband-to-be and the wife-to-be can decide certain financial issues in advance. For example, a prenup can specify:
- what property will be considered separate property,
- what property will be considered marital property,
- how any marital property should be divided,
- particulars about estate planning and inheritances, and even
- how much alimony will be paid and for how long if there’s a break-up down the road.
In short, the prenup details what the couple’s property rights and expectations would be upon divorce. If done correctly, a prenup can be an excellent way to supersede your state’s marital laws; however, in order for it to be “done correctly,” both the husband-to-be and the wife-to-be must be represented by their own separate attorney. In addition, the agreement:
- must be in writing.
- must provide full disclosure (no hiding of assets and/or liabilities).
- must be executed voluntarily and without coercion.
- must be executed by both parties, preferably in front of witnesses.
- cannot be unconscionable, meaning that it cannot be completely lopsided giving one party so much more than the other.
- should be in a recordable format.
And of course, just to reiterate, the prenup must be executed before the wedding! Although it may be the most familiar, a prenup is not the only way a bride-to-be can protect her property rights and financial interests before she gets married. You can also consider a Domestic or Foreign Asset Protection Trust, other types of trusts or other options that do not require your fiancé’s approval.
If you’re a business owner, a Domestic or Foreign Asset Protection Trust may be the solution you’re looking for because it allows to you transfer the ownership of your separate property, including your company, into a separate trust. (This approach works for most entities–C Corporations, Limited Liability Companies, Limited Partnerships–but not necessarily for an S Corporation. Only certain types of trusts can own S Corporation stock, so if your company is an S Corporation, please discuss your options with a trust attorney who is experienced with asset protection trusts.)
Without going into further detail about the various types of trusts and how they work, suffice it to say that using a trust could make the entire issue of separate property, and its appreciation, a moot point. How? Because once you have established a trust, the trust, and not you, would legally own your separate property, including your company.
3) Continue to be Financially Independent
At least somewhat. Part of the romance of getting married involves sharing your hopes, your dreams, your life with the person you love. I get that. Honestly, I do. However, for your marriage to be successful–and for you to maintain your own financial security and stability–you must preserve a measure of financial independence. Remember: Not all assets have to be shared jointly. In fact, I strongly advise you to:
- Keep a separate bank account. Keeping at least some money in your name only can prove enormously beneficial. For instance, suppose that someday your marriage takes a turn for the worse. If you have a separate account, you’ll have immediate access to funds that can’t be “cut-off” by your husband.
- Establish credit in your own name. The federal government via Dodd-Frank is cracking down on who can and cannot own credit cards, and that means it’s going to get even harder for stay-at-home moms, retirees and asset-rich, but income-poor women to get credit. Make sure you have at least a credit card in your name. Also consider keeping at least some utility bills, car payments, etc. in your name, as well.
- Weigh options for filing tax returns. Most married couples file a joint tax return–but that doesn’t mean a joint return is necessarily the best option for you. If your husband owns a business or professional practice and the profit or loss from that business is declared on your personal tax returns (as is usually the case with a sole proprietorship, partnership, limited partnership, LLC, or “S” Corporation), you are responsible for the veracity of that information. If you are not privy to the finances of his business, you could be setting yourself up for a disaster. No matter how innocent or ignorant you may be of this type of activity, if you file jointly, you are equally responsible in the eyes of the I.R.S. and your state’s taxing authority. (There is an I.R.S. and state exception called “Innocent Spouse Relief” that can apply in certain circumstances. However, this exception is very limited and difficult to acquire.) In short, if you will be filing joint tax returns, be aware of what you are signing.
- Maintain access to all marital money. Even though it’s one of the biggest financial mistakes they can make, many women shy away from dealing with money after they are married. It’s essential for you to know –at least in general terms – where your money is and how it’s being spent or invested. Don’t rely solely on your husband’s word. Make sure your name is included on accounts, as well as on any LLCs or private partnerships you may be using to purchase houses or luxury goods. If you feel that your combined finances are too complex for you to keep an eye on by yourself, hire a financial advisor who can help you.
Even though the romantic movie story lines would lead you to believe otherwise, marriage is, in large part, a business relationship. If you are a bride-to-be, you need to prepare yourself in practical ways, just as much as (if not more than) you need to focus on “something borrowed, something blue.” I’m not trying to be negative, I am not a pessimist, and I wholeheartedly believe in the many wonderful rewards of a healthy marriage. (My wife and I have been married for nearly 29 years!) But, I also know the sad realities of poor financial management, and how difficult it can be for women to recover after a financially complicated divorce. Start your marriage off on the right foot and remember the three “Cs”: Communicate (about finances), Consider (your financial options) and Continue (to be financially independent).
Jeffrey A. Landers, CDFA™ is a Divorce Financial Strategist™, a GoGirl Finance expert and founder of Bedrock Divorce. Jeff’s book, Divorce: Think Financially, Not Emotionally: What Women Need To Know About Securing Their Financial Future Before, During, and After Divorce is currently available on Amazon. 50% of all profits from the sale of each book will be donated to the Bedrock Divorce Fund for Abused Women, Inc., a 501(c)(3) nonprofit charity whose mission is to help female victims of domestic abuse and the organizations that support them. Here, he gives the lowdown on what women should know before they tie the knot. He also writes for Forbes.com and the Huffington Post.