For richer or poorer again
(Article from Consumer Reports Magazine, June 2002)
Follow these steps to harmonize your finances in a second marriage.
|This is the first report of a new series called "Transitions," which will identify turning points in life when individuals and families must make complex financial decisions. The focus is to guide readers through decision-making in a second marriage. Subsequent reports will address paying off college debt, working past retirement, and other stage-of-life issues. If you have a topic you would like us to cover, e-mail us at transitions@CU.consumer.org or write to us care of Your Money, Consumer Reports, 101 Truman Ave., Yonkers, NY 10703-1057.
If remarrying is the triumph of hope over experience, then Americans have to be among the world's greatest optimists. According to the most recent census data available, an average of 76 percent of divorced Americans remarry. Adjusting to a second marriage is never easy; the divorce rate is even higher--around 60 percent--the second time around. The primary reason things fall apart, however, is the same: disagreement over money.
That's not surprising considering the challenges facing those who remarry: piecing together a joint financial life from two solo ones; meeting additional obligations such as the support and education of children from a first marriage; payments to an ex-spouse; and debts. There are also the tasks of meshing investments and other assets, deciding who should get what if and when one partner dies, and replenishing retirement accounts and other savings that may have been depleted by divorce.
The problems are not insurmountable, but solving them requires frank discussion, careful planning, and gentle negotiation. In this report we lay out steps you should take to find your way through the thicket of second marriages.
Step 1: Get your finances out on the table. Reviewing each partner's finances in detail may not be your idea of some enchanted evening, but doing so may prevent a great deal of heartache later on. Preferably before marriage, both partners should reveal to each other their annual income, assets, and debts; legal obligations for child support; expected future inheritances, pensions, and retirement accounts; and life-insurance policies and beneficiaries.
Even if you and your prospective spouse are bringing little more to the marriage than a 19-inch TV set and a 1992 Honda Civic, the discussion is useful because it may surface deal-breaking information that could dissuade you from marrying--that one partner owes a five-figure amount to MasterCard or has failed to pay income taxes since 1995, for example.
Step 2: Consider a prenuptial agreement. A prenup (or postnuptial agreement, if you are already married) is not just for the likes of Donald Trump and Elizabeth Taylor. Drafting one makes sense if either of you has more than $100,000 in assets and children or other heirs to whom you want to leave money, says Linda Ravdin, a Washington, D.C., matrimonial attorney and author of a forthcoming book on prenuptial agreements. Another reason: You expect to receive a large inheritance that you want to keep separate lest it become part of marital property in a future divorce.
A prenuptial agreement spells out the assets each partner is bringing to the marriage--which will be owned jointly, and which will be kept separate. The agreement also lays out who gets what in the event the marriage fails or if either partner dies. A prenuptial agreement has more legal force than a will. Under most state laws, your new spouse can receive an "elective share" of your estate, even if your will states that it should all go to your kids after your death. A prenuptial agreement overrides such laws.
Use an estate-planning attorney to draft your agreement to make sure it will hold up in court. Legal fees run from $1,500 for the simplest document to $10,000 or more if you have millions of dollars in assets to protect.
Step 3: Set up a budget. Keeping tabs on spending can be critical for "renewlyweds." Supporting two families can strain any budget, and if your divorce settlement required you to give a portion of your 401(k) to your former spouse, you will have to make up those funds by ramping up contributions.
To identify budget leaks that could be turned into savings, you and your spouse will have to track your individual and collective spending. Chances are, you have a fair grasp on household essentials: how much disposable income you have and how much you can spend on big-ticket items--housing, transportation, and child care. After that, keep a record of daily spending to help you find money that could be used for savings. Steve Rhode, cofounder of Myvesta.org, a nonprofit debt-counseling firm in Rockville, Md., says that in his experience, people automatically trim about 20 percent from their spending just by tracking it.
A budget, of course, can be a source of friction. Says DeJuana Gatling, 39, an administrative assistant for the U.S. Postal Service in Washington, D.C., "We had a rocky first six months because I had always lived alone and wasn't used to recording what I spent." DeJuana married David Gatling, 36, a social worker, in early 2000, and the pair have custody of his children -- Daisha, 14, David, 13, and Deonnae, 11. "I quickly learned how to stop splurging and stick to a strict budget," DeJuana says.
Step 4: Decide who will pay for what. There are three ways to organize your finances: 1) You pay bills from a joint checking account into which both spouses pour their incomes; 2) each spouse pays specified expenses from separate accounts; or 3) you maintain yours, mine, and ours accounts that allow husband and wife to keep personal spending separate and pay for common expenses, such as the mortgage and utilities, from a joint account.
The first arrangement may work best for couples who need to maintain a tight control on spending because of limited income, says Patricia Estess, author of "Money Advice for Your Successful Remarriage," (ASJA Press, 2000). The other two are more appropriate for couples like Misty Morgan, a 39-year-old vice president of a telecommunications firm, and Brad Thompson, 39, a chiropractor with his own practice in San Diego. Both came to their marriage with significant incomes that they wanted to keep separate. "I pay the phone and water bills; he takes care of the utilities," Morgan says. "We just make sure each of us ends up paying about the same total amount."
Step 5: Title all property. Assets you owned before you were married that you don't intend to share should stay in your name. "Just make sure you keep them truly separate," says Robert Timineri, a Sausalito, Calif., financial planner experienced in community-property issues. "If you pay to renovate a rental property you owned before your marriage out of a joint account after your wedding, your spouse's divorce attorney five years later may be able to successfully claim that the increase in value is joint property."
Assets you acquire after the marriage generally belong to both of you. But you should decide which title best works for you. For example, if you own a home as "joint tenants with a right of survivorship," then, when one of you dies, the other spouse automatically becomes the sole owner. A "tenants in common" arrangement allows one spouse to leave his or her share to someone else, perhaps children from a previous marriage. That may work well enough for a stock portfolio or some other easily divisible asset, but not for the family home. If the children want to cash out their share, they might have the right to force the surviving spouse from the house.
Step 6: Spell out what happens after you're gone. You may not realize it, but in most states, a divorce invalidates your will. Drawing up a will may cost between $900 and $1,500 each. Among other elements, a will should name your assets and heirs as well as guardians for your minor children.
Splintered loyalties to different sets of children and a new spouse can make decisions about where property should go problematic. A qualified terminable interest property (or QTIP) trust may resolve the dilemma. The assets placed in it by a husband, for example, during his lifetime can provide an income for his second wife after his death. After she dies, the principal goes to his kids from his first marriage, protecting them from being disinherited. Establishing a trust may cost $1,000 to $5,000.
Step 7. Update all your papers. Make adjustments in dependency exemptions on your W-4 form. Child-custody arrangements affect your taxes. Generally, the parent who has custody of a child for the greater part of the year claims the exemption, no matter how little he or she contributes toward the child's financial support. Also on your agenda: new durable powers of attorney, living wills, and health-care proxies.
You'll also need to review your insurance plans to make sure you have the proper life and disability coverage for additional dependents. To assess your new family's insurance requirements, check out worksheets at leadfusion.com or the learning center at insure.com.