Before my wife and I got married we had the “money talk”. Since we were relatively young, and neither of us had that much money, the talk was pretty short. We discussed how much we were making, our projected future income, and how we would handle the small nest eggs we had each accumulated before we got married. After our wedding, we continued part two of the conversation on how to invest our funds. Struggling to keep her eyes open as I discussed the importance of diversification and dollar cost averaging, my wife designated me as the family’s chief investment officer. Subsequently, we purchased life insurance and updated various financial documents and accounts. That was the extent of how we handled money as newlyweds in our mid-20s.
The “money talk” is a premarital essential for every couple. After all, one of the leading causes of divorce is the handling of family finances. However, it becomes even more important for those entering a second marriage. Beyond the traditional discussions around cash flow and insurance coverage, there may be kids, an ex-spouse, and various other obligations that need to be considered. Below are some points to talk through with your significant other before tying the knot for a second time.
1) Give Full Disclosure: A marriage is similar to a business partnership. While that doesn’t sound romantic, the reality is that a big part of living life is paying for it. Therefore, it’s important to have an open discussion on all financial matters that may impact your day to day living. This may include one’s credit history, level of debt, financial obligations such as alimony and child support, and whether an ex-spouse has rights on future retirement plan earnings. Putting all your cards on the table may feel vulnerable, but it is this type of honesty that may serve as the bedrock of a strong marriage.
2) Yours, Mine, and Ours: The depiction of some merged families on TV, like the Brady Bunch, seems idyllic. While admirable to seamlessly blend family members, it’s often not practical to fully blend finances. Many folks go into a second marriage with assets they’ve accumulated over the decades prior to meeting their new spouse. It’s unrealistic to assume that all financial and personal resources will be pooled once they get remarried.
One approach that works for some couples is to establish “Yours, Mine, and Ours” accounts. Each spouse’s assets that were accumulated prior to the marriage through earnings, inheritance, or other means, are housed in their own individual accounts. A new, joint account is established to fund monthly expenses and any other shared items or experiences, like a vacation or second home. If both spouses earn equal amounts of money, then contributing evenly to the joint account is sensible. However, if one spouse is making significantly more money, which is often the case, then both parties will need to decide on a system of contribution that makes sense for everyone.
It’s important to keep in mind that assets obtained during a marriage may be considered marital property, regardless of whose name is on the account. Exceptions to this include inheritance, distributions from particular trusts, or a settlement received from a personal injury claim. In the event of a divorce, money will be divided based on the laws of the state in which you live. In community property states, all property and debts are split 50/50. In equitable distribution states, the court or a mediator will decide how to divide the assets.
3) Consider A Prenuptial Agreement: A “prenup” is a pre-marriage, formal agreement made by a couple concerning the ownership of their respective assets should the marriage fail. It can help ensure separation of assets to prevent one’s spouse from claiming a portion of their assets upon divorce. Prenups are sometimes stigmatized since on the surface it may appear as though a couple is going into a marriage with the expectation that it will fail. Practically, it’s just a prudent financial planning strategy to prepare for the possible unfortunate scenario that the marriage falls apart.
These agreements are recognized in all fifty states and Washington DC, and are enforceable if prepared according to state and federal law. Furthermore, since the 2015 U.S. Supreme Court ruling granting same-sex marriages the same legal footing as marriage between opposite-gender couples, a prenuptial agreement entered into by a homosexual couple in one state is fully enforceable in another state in the event of a divorce.
Prenuptial agreements can also be useful if you have children from a previous marriage and want to ensure that your assets pass to them when you die. People who want to provide for a surviving spouse, as well as preserve assets for their kids, may consider establishing a Qualified Terminal Interest Property (QTIP) Trust. This trust lets the surviving spouse enjoy access to the assets during his or her lifetime but enables the remaining assets to pass to your children upon the surviving spouse’s death. Naturally, consulting a competent attorney is advisable to determine if this an appropriate strategy for you.
4) Review Insurance coverage: A major life event, such as a second marriage, is generally a great time to review your insurance to ensure that you have adequate coverage.
If there is a large age gap between spouses, young kids are in the picture, or a new spouse is not working, it may make sense to increase or extend life insurance coverage. The life insurance policy promises to pay a designated beneficiary a sum of money upon the death of an insured person. Evaluating your life insurance need and getting an appropriate policy is imperative in the event of the breadwinner’s untimely death.
Additionally, long-term-care insurance is an important consideration for all couples approaching retirement. As people live longer, it is more common to need nursing-home care, home-health care, or personal or adult daycare for individuals with a chronic or disabling condition. These costs can be extremely expensive, so obtaining a long-term-care policy to help pay for such care in the event it is needed is an important consideration to help ease a new spouse’s financial burden.
5) Update Beneficiaries: It’s important to keep in mind that there are assets that pass outside of one’s will. This includes retirement accounts, life insurance policies, and some bank and trust accounts. After getting remarried, it’s imperative to go through each of these items to ensure that the assets pass to the intended parties.
There is no shortage of horror stories where people die having never updated their beneficiaries so all their life insurance money and retirement assets go to an ex-spouse. This is a devastating situation that is not easily rectifiable. It’s particularly important to review current and old 401(k) accounts to ensure that they reflect the proper beneficiary designations. Sometimes these accounts get neglected because they are not top of mind, especially if you haven’t worked at a particular company for some time.
6) Update Estate Plan: It’s essential to meet with your estate planning attorney to determine the best strategy for legacy planning. While each spouse may have their own legacy goals, it’s important to have a frank discussion on this topic so each party has realistic expectations. This is also an area to potentially include your or your spouse’s children where appropriate. While unpleasant to consider your own demise, these are some important questions to discuss: Who is the best party to serve as a financial power of attorney in case a spouse becomes incapacitated? Who should serve as a healthcare power of attorney in the event that a spouse is not able to make medical decisions? Who should serve as executor of your will? Are there clearly defined backup plans in case the desired party cannot fulfill their duties?
Additionally, if you’re getting on in years it’s important to discuss funeral and burial arrangements. Do you want to be buried together or is there an individual family burial plot? Have arrangements already been paid for? If not, who will pay for them? A couple from differing faiths may have additional considerations that must be factored into the equation as well. The more comprehensive a couple’s estate plan is the more it will help alleviate the stress and burden on the surviving spouse and other family members.
7) Focus on joint financial goals: Discussing finances does not have to be stressful. It can also be a great way for a couple to dream of goals that they’d like to accomplish together. These may include exploring how they envision their retirement, their next vacation, hosting family gatherings, or new experiences they’d like to pursue. It’s important to remember that money is not an end goal. It is merely a tool to achieve the lifestyle you want. With proper planning, money will hopefully not serve as a burden for folks who get remarried. Instead, it will help enhance their lives and the lives of their family members.
Disclaimer: This article authored by Jonathan Shenkman a financial advisor at Oppenheimer & Co. Inc.
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