By Grace S. Yung, CFP
If you’ve found “the one,” and you’re ready to take the next step by sharing your lives together under the same roof, you both have a lot to think about. This can be an exciting time as you think about sharing all of the day-to-day events that couples get to share, cementing your bond even further.
And since so many laws have changed in our favor over the past few years, you may even be discussing the ultimate commitment—marriage. But before you start picking out the china pattern, there are some financial issues that you both should consider—and discuss—prior to moving forward.
Protecting Your Equity
When dating, or even living together, couples should not simply assume that they have the same rights to each other’s assets as spouses do. However, when you take that next step in your relationship and tie the knot, you may also want to take steps to protect the equity you’ve built in a home that you purchased prior to the start of your relationship.
Typically, assets—including real estate—that are owned prior to marriage are considered to be separate, unless those assets become co-mingled with marital money. Co-mingling occurs when your spouse contributes toward the mortgage payment, or makes contributions toward any improvements on the property.
Therefore, in order to protect your equity in the home, you will need to avoid making shared payments for the mortgage, or for repairs and improvements. And, just to be sure, you may also want to have your spouse sign an agreement—and have it notarized—stating that he or she won’t claim the home in the future.
Holding Assets Together or Apart
That being said, there are some positives to holding real estate jointly. For starters, if something unexpected were to happen to you, then your spouse would not be left without a place to live—which, unfortunately, can be an issue for some LGBT couples whose families may not approve of the relationship.
When it comes to financial assets, there are actually several forms of ownership that may be chosen, and each can have advantages and disadvantages, depending on your specific goals. These include the following:
• Sole Ownership (Fee Simple)
As the name implies, with sole ownership, the asset is owned by one single individual. Certainly, an advantage here is that this form of ownership allows the owner to have complete control over what happens with the asset. However, the asset will typically be required to go through probate at the owner’s death.
• Tenancy in Common
With tenancy in common, each owner of the asset has a distinct, separately transferable interest. Consent of the other owner (or owners) is not required in order to sell or dispose of another owner’s share.
Some advantages of tenancy in common include the fact that owners can have unequal proportions, and they can control the disposition of their asset both during life and at death. There can also be an unlimited number of asset holders.
There are also a few drawbacks with tenancy in common, since the asset must be probated at the owner’s death. Concurrent ownership can also make management of the asset more difficult.
• Joint Tenancy with Right of Survivorship (JTWROS)
Joint tenancy with right of survivorship allows the interest in the property or asset to pass to the surviving owner or owners by operation of law—and because of this, it avoids going through probate. This makes JTWROS a beneficial form of asset ownership for couples, whether they are married or not. However, JTWROS requires ownership in equal proportions.
• Tenancy by the Entirety
Tenancy by the entirety is a type of concurrent estate in real property. This form of ownership is unique in that it occurs when the owners of the property are a married couple, and each spouse has an “equal and undivided” interest in the property. This type of ownership can also avoid probate; however, the owner has no absolute right of lifetime disposition.
• Community Property
Community property is a marital property regime under which most property that is acquired during the marriage—other than gifts and inheritances—is considered to be owned jointly by both of the spouses.
Texas is a “community property” state, which means that property acquired during marriage belongs to both of the spouses, and must be divided at divorce. Each of the spouses is allowed to keep his or her separate property when the marriage ends through divorce or death.
Considerations Regarding Tax Returns
Marriage can also bring about some considerations when it comes to filing your tax return. In general, filing your return jointly may provide you with a larger refund, or with less taxes due.
When you file your taxes separately, your tax rate may generally be higher, and you will likely not be allowed to claim various deductions such as:
• Earned Income Credit
• Education Benefits
• Child and Dependent Care (in most cases)
• Adoption Credit (in most cases)
• Itemized Deductions (if your spouse has already claimed these, or vice versa)
It is also important to note that based on the 2015 Supreme Court decision, all legally married same-sex couples are now required to file as married—either jointly or separately—on their tax returns.
In many instances, it will make sense for married couples to file their taxes jointly because you will typically end up with a lower tax rate. However, in certain instances, it may turn out that you will be better off filing separately, especially if you and your spouse earn a substantially unequal amount of income.
In fact, in some cases, it may even make sense to remain unmarried when it comes to filing taxes—especially if one spouse may be subject to the Alternative Minimum Tax, or AMT. The AMT applies to taxpayers who have high incomes, and it basically helps to ensure that these individuals pay at least a minimum amount of tax.
AMT can essentially be thought of as a different type of tax system that “resembles” the regular tax system, with the big difference being that there are certain types of income that are tax free. Some types of income that are deductible under the regular system are not deductible under AMT. For example, having a spouse and children—which are considered personal and dependent exemption deductions under the regular tax rules—are not allowed as deductions under the AMT rules.
Credit and Debt Considerations
Although looking ahead to the future with your new partner or spouse is always exciting, it is also important to have discussions about his or her financial past. This is because you don’t want any of their previous debt to come back and haunt you (or vice versa).
As an example, getting married will not affect your credit score or your individual credit report. You and your spouse will continue to maintain your own separate credit reports and scores, so if he or she has a bad credit history, that won’t be merged with yours.
However, if you become a joint account-holder on any accounts with your spouse, then the missed payments will show up on your credit report as well. This is because, as a joint account holder, you have agreed to share full responsibility for the debt. In other words, if your spouse has had a credit card for many years, and you now become a joint card holder on that credit card, you will also become responsible not only for what happens going forward on that credit card, but also for any missed payments from the past.
The same holds true for any new joint accounts that you open in the future. These accounts will affect both of your credit reports, regardless of who uses the account or who pays the bill. With that in mind, be sure that you are aware of your spouse’s past financial history prior to moving forward with merging any credit-card or other types of financial accounts.
Should You or Shouldn’t You Tie the Knot?
Meeting the person of your dreams may not always mean that he or she shares the same financial background, sense of responsibility, or portfolio size that you do. The good news is that there are ways that you can protect yourself and each other while still moving forward in your relationship.
Bad financial or savings habits are certainly not a reason to avoid getting married. However, it is a good idea to be aware of your spouse’s financial standing long before the wedding takes place. This can help to minimize a great deal of stress and conflict after the honeymoon is over.
Taking the Next Step
Because all situations are unique, there is no specific right or wrong answer across the board for everyone. So it is important to really weigh your options, discuss all of your alternatives, and ultimately make decisions that are best for you.
When you do, be sure that you continue to work with financial and tax advisors who are geared toward the needs of the LGBT community. That way, should any additional rules or laws be updated or changed, your advisors can help to guide you going forward.
This information is not intended to be a substitute for specific, individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Personal finance-related questions may be emailed to [email protected].
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly.