Combining finances after marriage

Financial planning

Getting married is a joyous occasion. You’re planning to share your life with someone, and you’re looking forward to your future together.

Sharing your finances, however, can be complicated, particularly if you’re remarrying, there are children from previous marriages involved, or if there’s a large disparity in net worth between you and your partner. Before you walk down the aisle, here are a few topics you and your soon-to-be-spouse should discuss so everyone’s on the same page.

Addressing disparities in net worth

Sitting down with your partner to discuss merging your finances before the big day is an important first step, especially if your net worth is unequal. It may be uncomfortable, but full financial disclosure gives you the chance to bring up important questions or concerns before you say “I do.”

For instance, alimony owed to a previous spouse, substantial wealth or debt, a large inheritance or money tied up in a risky venture can all trigger concerns about what will be shared or kept separate in the marriage. Still, it’s important to keep the conversation positive and remind your spouse that you want to talk about these things for your mutual benefit.

“Begin with a certain mindset and presumption, which is that you really love each other and want to do the right thing and treat each other fairly,” says Shannon Baustian, vice president and private wealth advisor at U.S. Bank Private Wealth Management. “This reframes your thinking and conversation, so you don’t take an overly protective mine-versus-yours stance.”

Handling beneficiaries in blended families

Money can be an emotional topic in any marriage, but a blended family makes combining finances after marriage even more difficult.

When step-siblings grow up together, it can make sense to divide assets equally among them, but some people prefer that wealth pass through their biological children. As natural as that desire may seem, it doesn’t happen without careful planning. Simply leaving your estate to your spouse could lead to your children’s disinheritance if your spouse remarries and doesn’t put your children in their estate plan.

But until that time, you need to protect your new spouse. Updating the designated beneficiaries for your retirement accounts, bank accounts and life insurance policies can help ensure your spouse is covered in case of the unexpected. It’s also important if you intend to pass assets to charity or to a family member other than your spouse.

“People sometimes put [updating these documents] off or, for example, forget they have a 401(k) from a previous employer that they never rolled over,” Baustian says. But your will doesn’t supersede outdated beneficiary information, so it’s important to get these documents updated right away. “We’ve seen situations where someone remarries, but they still have their previous spouse as the designated beneficiary,” she adds. “An oversight like that can have huge, and obviously unintended, consequences.”

Sharing your finances can be complicated, particularly if you’re remarrying, there are children from previous marriages involved, or if there’s a large disparity in net worth between you and your partner.

Using a trust to find the middle ground

When combining finances, a trust can help you protect both your new spouse and any children from a previous marriage. With a revocable trust, you put your assets into the trust, and the trust becomes the initial beneficiary of your estate.

When you pass away, your trust can fund two separate entities:

  • A family trust to take advantage of unused federal exemption amounts for the ultimate benefit of your children, but that may also provide income for your surviving spouse.
  • A marital trust, which can take advantage of the unlimited marital deduction for estate value that exceeds the available federal exemption amount, for the immediate benefit of your surviving spouse and ultimate benefit of your children.

It’s important to note, though, that a marital trust is not as restrictive as a family trust. One possible solution? A qualified terminable interest property, or “QTIP” trust.

A QTIP trust is an irrevocable trust that allows your surviving spouse to receive income from your estate while reserving the principal for another beneficiary upon your spouse’s death. In addition to honoring your estate objectives, a QTIP qualifies for a spousal exemption from the federal gift tax. That said, estate tax rules do apply to the remainder of the trust when it’s given to the final beneficiaries.

Taking into account your business — and your age

Certain circumstances make blended-family dynamics even more complicated. “Business interests are a huge one,” Baustian says. “If you’re a business owner, you should consider business succession and who gets the equity, the ownership and managerial control over that business.” When merging finances, be clear about who you’d like to inherit the business and talk to beneficiaries ahead of time about what that will involve and what your plans are.

A significant age difference between spouses is another special circumstance when combining finances after marriage. Baustian says if your new spouse is similar in age to your oldest child and you don’t plan ahead, your children could have to wait much longer for their inheritance. Make sure you set clear provisions in your trust document that specify your wishes.

Exploring the upsides of a prenup

Even with the best of intentions, situations can change. It may not be the easiest topic to broach, but a prenuptial agreement can help you and your partner align on your goals when combining finances, and it’s a practical way to safeguard your wealth in the event of divorce. It allows you to explicitly protect the assets you’re bringing to the marriage. Plus, you can always revise your prenup later or include clauses that make it null and void after a certain number of years of marriage. “These are not ‘set it and forget it’ provisions,” Baustian says.

Having conversations about blending your finances, beneficiary status, and estate planning is never going to be easy. But addressing these topics in an honest and straightforward way before the big day is the best way to ensure your loved ones are taken care of and your wealth is protected.

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