Adults entering a remarriage are likely to bring assets, debts, obligations and established spending habits into the relationship. Since credit reports aren’t required for a marriage license – and you generally only see them when you apply for a mortgage together - "your new partner's finances are often unknown, even though you usually need to agree as a couple on how to handle them," says Michelle Smith, a senior vice president, investments with Wachovia Securities in New York City.
Smith encourages couples to talk about their finances in detail before or no later than six months into a marriage. The first step is pulling together a big-picture assessment that balances the needs of the new family with any obligations to, well, pre-existing families. "By listing all financial considerations on a ‘needs’ worksheet with a financial advisor, new spouses can develop a financial structure and estate plan designed not to blow up," says Smith.
Talking It Over
Indeed, discussing your finances can be uncomfortable. "The end of a [previous] marriage is often a crash course in finances, and one of the last things people want to revisit upon remarriage is their finances," says Smith. "But it's important to look at your financial psychological history and identify your hot buttons, because there can be real issues. You don't want to recreate past experiences that can negatively impact the new marriage." For example, an occurrence such as receiving a late bill notice or not knowing the status of a checking account might trigger an emotional reaction in one spouse - anger, mistrust, sadness or feelings of inadequacy - that may seem illogical to the other.
"Money is psychological," says Smith, "and in a remarriage it's loaded. It's about how people feel about their kids or step-kids or an ex-spouse." Bringing in a financial advisor who can help mediate the conversation and walk through the pros, cons and options of merging finances can be helpful. "The more neutrality a third person can bring," says Smith, "the more a couple can decide together what their financial future looks like."
Merging Your Assets
When looking at how to handle your money as a couple, there are three general models. Smith suggests thinking about it in terms of different "pots," or groupings of assets:
- One Pot: By putting all accounts under joint names, assets are pooled and expenses are drawn from there. "This works well for couples with no kids, no ongoing financial obligations and similar spending habits," says Smith.
- Two Pots: Each person keeps his or her income, savings and investments separate. This works best for very autonomous people, but the downside is that you may spend a lot of time negotiating or arguing about who is paying for what, especially when it comes to the household or vacations. "One way to counter that is to negotiate ahead of time exactly how joint expenses will work," says Smith. “And put it in writing so you don't have to revisit the conversation every month, which can be draining."
- Three Pots: A blend of the first two methods. The couple retains individual accounts - and the independence that allows - along with a joint account for shared expenses. Smith suggests the three-pot method for remarried individuals, especially those with special circumstances such as children or large amounts of individual debt.
Creating an Estate Plan
Though it often takes a crisis for people to deal with their finances, says Smith, it is essential to revisit your estate plan when you remarry. Following are some key areas to review with your financial advisor:
- Pre- or Post-Nuptial Agreements: While your financial advisor cannot draft this legal agreement, he or she can offer guidance to help determine what financial facts and assets should be included in such a document. Considerations include mortgages, equity lines, investments, credit-card debt, pledges to charity and income from all sources, including retirement accounts, insurance coverage and expected inheritances.
- Beneficiary Designations: "Upon remarriage, one of the most frequently overlooked changes is the beneficiary of life insurance," says Smith. "If the ex-spouse is still listed, that can cause serious problems later." Be sure to update any documents that name a direct beneficiary including your will, retirement plans and life insurance policies, "as soon as possible to make sure your intentions are expressed in writing," she says.
- Trusts: Many types of trusts can be set up to further your estate planning, especially if there are significant assets or children from previous marriages to provide for. Talk to us and your estate attorney about the best options for your situation.
- Taxes: Lastly you'll need to determine whether to file a joint or individual tax return. Work closely with your financial advisor and CPA to determine which approach is best for your circumstances.
We always talk about what it means to “Live Life on Purpose.” That concept is a little different for everyone, but there is one constant: Everyone wants to get rid of the complexity and stress in their life so that they can have the freedom to focus on the things in life that are most important to them. Once you know the complete picture of what is brought into the mix a remarriage and have a plan, you have arrived at the easy part. Take action!