Today, more than 40% of weddings involve a bride or groom who has been married before. Yet while most of these couples pay close attention to their wedding day budget, many fail to take the time to discuss financial issues that will have a greater impact on their relationship -- such as who owns assets accumulated before the marriage, or whether both spouses will support children from a prior marriage. The subject might not be romantic, but addressing these issues before you tie the knot could be the best thing you do for your relationship.
Without a doubt, marriage is more complicated than ever. Today, a new bride is likely to gain more than just a husband; if he's been married before, she might find herself married to his alimony and child support payments as well. A groom suddenly might be a father if his new bride has children from a prior relationship. For these reasons and more, you need to approach a second (or third) marriage like you would any other financial agreement: Very carefully.
Before you get married, you and your fiancé should discuss all aspects of your financial situations with one another. On a piece of paper, write down your:
- Credit History. Have you ever been late on payments, or had any judgements against you? Have you ever declared bankruptcy? To obtain a copy of your credit report, call Experian at 888-EXPERIAN.
- Debts. How much do you owe to credit cards? What other debts do you owe?
- Assets. Include your annual earnings, the value of your home, cars, investments, and retirement plan funds.
- Obligations under a previous divorce decree. Make sure your intended is aware of any child support or alimony payments you are required to make (including how much), as well as any disability, life, health or long-term care insurance that your settlement says you must keep in effect. You should also let your partner know if your ex-spouse has rights to any of your future retirement plan earnings.
When you're done, exchange papers with your fiancé. Expect your answers to trigger discussion about who is responsible for debts incurred before the marriage, whether you will share assets earned by one of you, and how you will meet financial obligations from a previous marriage.
Your next step is to consider drafting a prenuptial agreement. A "prenup" is especially important if you 1) are bringing significant assets into the marriage, 2) expect to inherit a business or other assets in the future, or 3) have children from a previous marriage.
Protecting Your Assets
Typically, those who remarry are older and wealthier than the first time they married. As such, you often have more interest in protecting assets you bring to the marriage. Many high-earners also are interested in protecting assets they'll earn during the marriage. A prenuptial agreement will ensure that your assets will remain separate from your spouse's, and that the spouse cannot claim a portion of your assets if you divorce.
Protect Your Children
Prenuptial agreements also can be useful if you have children from a prior marriage and want to ensure that your assets pass to them when you die. Generally, unless your spouse specifically waives his or her right to the assets in a valid agreement, he or she may claim a portion of your estate when you die.
Take John, for instance. A successful internist, he was 45 years old when he married his second wife, Melanie. To protect his two children from a previous marriage, John established a trust and named the children as beneficiaries. That way, the $2 million in assets he'd earned before his second marriage would go to the children when he died and not to Melanie.
But John's plan may be sabotaged if Melanie decides to sue for a share of the money when he dies. Virtually every state has a law that entitles a surviving spouse to a portion of the estate -- even if your will or a trust says otherwise. If Melanie does not expressly waive her right to the money in a prenuptial agreement, John's children could lose a third of their inheritance should she demand part of the money.
If you're like most, however, you want to do both: to provide for your spouse and preserve assets for the kids. To do this, consider a Qualified Terminal Interest Property, or QTIP, Trust. This trust lets your surviving spouse enjoy access to the assets during his or her lifetime, but enables those assets to pass to your children upon the surviving spouse's death.
Inheritances and Other Assets
Most states consider inheritances the property of the heir. Just be sure you keep the money in a separate account, or it might be considered community property if you divorce. Generally, any income or other property acquired during the marriage will be deemed community property also.
After the Wedding
Now that the wedding's over, it is particularly important that you revisit your financial plan. You should review:
- Insurance. Do you have enough? Now that a new family is counting on your income, you may need to increase your life and disability insurance. If you are in your 50s or older, you should also purchase long-term care insurance, because odds are high that you or your spouse may need such care in the future. The sooner you buy such coverage, the cheaper it is -- and the more likely you'll qualify for it.
- Beneficiaries. Have your beneficiaries changed? Too many newlyweds fail to update the beneficiaries of their life insurance policies, trusts, company retirement plans, and IRAs. If you're not careful, you'll leave money to your ex-spouse instead of your current spouse!
- Wills. A new marriage virtually requires a new will.
- Assets. Do you need a post-nuptial agreement? Do you need to add a waiver to your prenuptial agreement? Talk with a lawyer to find out.
No doubt, marriage can be one of the most emotionally rewarding choices you can make in your life. But don't ignore the financial implications of your impending union. Proper planning can be key to your continued happiness.