Marriage, Death, & Divorce

MONEY TALKS – Back in the mid 2000’s when I was in graduate school, I took a course entitled “Marriage, Separation, & Divorce”. On our first day of class our professor, Steve Weisman, candidly said, “There are only two ways a marriage can end; death or divorce.” At first this seemed like a crude declaration to make, but the more I thought about it the more I realized he was right. While marriage, death, and divorce all have very different emotions and connotations associated with them, the one common bond they have is money in motion. Aside from winning the lottery (and having children), when it comes to the transfer of assets, there are no bigger single events than marriage, death, and divorce. For richer or for poorer, let’s take a look at the impact that each event could have on your personal finances. 

Marriage – Life as a single person is rather simple due to the fact that you don’t need to confer with anyone before purchasing a new TV, wardrobe, or iPhone. Once purchased, the item and corresponding loan (if financed), is in your name only. Likewise all bank and investment accounts are held individually in your name. Retirement accounts such as your 401(k) or Individual Retirement Account (IRA) are held in your name, and you probably listed your parents or siblings as your beneficiary(s). Your tax filing status is ‘single’ so you only need to report your income and can only take the deductions that you are individually entitled to. However, once marriage enters the picture, things can change dramatically. Significant purchases such as a home or automobile are typically done collaboratively. When applying for a mortgage, both spouses income, assets, liabilities, and credit scores are taken into consideration. Meaning if you marry someone with poor credit or significant debt (student loans), it could negatively affect your ability to secure a loan. Any jointly held accounts at banks and brokerage companies as well as jointly held credit cards are now the responsibility of both parties. Retirement accounts are individual in nature so they remain in your name only; however, you’ll probably want to update your beneficiary designation forms to include your spouse. In fact, if you are married when enrolling in a new 401(k) plan, you are required to either list your spouse as the primary beneficiary or have them sign-off that they were intentionally omitted (good luck having that conversation). Your tax filing status will most likely change to ‘married filing jointly’ meaning you now have to include income from both spouses but get the benefit of taking any deductions that pertain to either you or your spouse. 

Death – Upon your death, assets are distributed based upon the type of asset, ownership or titling of asset, beneficiary designations, and your estate planning documents. Your home, automobile, and jointly held bank accounts are generally consider to be non-probate assets and pass immediately upon your death to the surviving owner. Retirement accounts such as 401(k), 403(b), & IRA’s as well as life insurance & annuities are also non-probate assets and are controlled by the designated beneficiary on the account. Since these assets generally make up a sizable part of your estate it’s critical to review who you designated as your beneficiary(s) and make updates when necessary. After all, it would be heartbreaking to have your ex-spouse inherit your retirement savings because you forgot to update your beneficiary designation. The last major group of non-probate assets are financial accounts registered as transfer on death (TOD), payable on death (POD), or in trust for (ITF). Similar to retirement accounts, these assets transfer to the designated beneficiary automatically upon your death. It’s important to note that none of these non-probate assets are controlled by your will.  

Unlike non-probate assets, probate assets do not pass directly to your heirs, they must be distributed by the court in accordance with the terms of your will (or the state laws of intestacy if you do not have a will). Probate assets are any asset owned solely by the decedent and generally include personal property such as jewelry, furniture, collectibles, and recreational vehicles. It should also be noted that non-probate assets, such as your home, can convert to probate assets once the second spouse passes away if another owner or beneficiary is not added after the first spouse passes.  

Trust accounts contain any assets you put into your trust while alive. One common mistake many people make is to create a trust and then forget to “fund” or move assets into the trust. In order to get the assets into a trust they must be retitled in the name of the trust. This could include changing the deed on your home or title on your automobile. For smaller or miscellaneous items, often times a pour over will can be created to direct probate assets into your trust upon your death.

Divorce – The old adage that the only one who wins in a divorce is the attorneys may seem tongue-in-cheek, but the truth of the matter is splitting what was once “ours” into “his” and “hers” is a no-win situation. The division of property among divorcing couples depends on the classification of the property. Marital property is a term used to describe income that was earned, debt that was incurred, or assets that were acquired during the marriage. Whereas separate property, as the name indicates, belongs to only one spouse and generally includes property owned by one spouse before marriage and gifts or inheritances made to one spouse during the marriage. To further complicate things, each state has their own property ownership system to determine what gets put into the marital property bucket versus the separate property bucket. 

The vast majority of states use the “common law” property ownership system. Common law states are generally reliant on the titling of the specific asset. If the car title is in your name and the boat title is in your spouse’s name, you own the car and your spouse owns the boat. In cases where both parties are on the title, each party is deemed to have a 50% interest in the property, unless otherwise specified on the certificate. Assets that do not have a title are typically owned by the party who bought and paid for the item. 

Meanwhile community property states take a more inclusive approach when determining what’s included as martial property. These states generally include all property acquired during the marriage (regardless of title) as well as income earned and debts incurred during the marriage. Separate property is typically reserved for gifts or inheritances to one spouse or property owned before the marriage. It should also be noted that, regardless of whether or not you live in a common law or community property state, mixing separate property assets with marital property assets can have disastrous consequences. For example, if you use a joint checking account to pay household bills and you deposit your inheritance into that account. Since the assets are now comingled, your inheritance would now be considered marital property whereas if you had deposited your inheritance into another bank account in your name only, it would remain separate property. 

Make a Plan – Good, bad, or indifferent; marriage, death, and divorce can all have a significant impact on your finances as well as that of your family. Educating yourself and speaking with a qualified attorney, if necessary, is critical to ensuring your assets are protected and your wishes are honored. Most importantly, make sure you have a plan in place, as Benjamin Franklin once said; “By failing to prepare, you are preparing to fail.”