Most of us don’t think of marriage as a legal contract. Yet it’s a partnership which carries multiple rights, privileges and obligations. Many are beneficial, but we also need to be prepared for unexpected consequences. Following are just some of the financial implications of saying “I do.”
Do you need a pre-nuptial agreement?
Spouses with significant financial assets, or a large differential between their net worths at the start of a marriage, may want to consider a pre-nuptial agreement spelling out the terms of a divorce, if one should occur. Common provisions include division of property, spousal support, and child custody, as well as conditions that might trigger changes in those term
Federal Income Tax
In many cases, federal income taxes are actually lower for two single filers versus a married couple. Spouses who are both drawing Social Security benefits also typically face higher income tax liability, though this can vary depending on income level and the various itemized deductions for each partner.
Married couples sometimes pay lower taxes on the sale of a primary residence, a benefit which also extends to unmarried couples IF both names are on the deed, AND both partners have lived in the house for two out of five years prior to the sale. This benefit enables you to exclude capital gains up to $250,000 per person.
Health Insurance Coverage
Many employers provide health insurance coverage for an employee’s spouse and some will pay part of the cost. Couples should compare the cost and benefits of an employer’s group plan with an individual health insurance plan. This benefit is typically not available for unmarried partners.
Social Security Benefits
Married people may have a choice between filing for their own Social Security benefits or claiming benefits based on their spouse’s income history. Higher income translates to higher benefits, but only income up to the annual Social Security wage cap — currently $128,400. Someone making $1 million per year, for example, would actually have the same expected Social Security benefit as someone who makes $128,400.
Filing strategy for your spouse – You can’t file for a benefit based on a current spouse’s record until they file on their own. Age, and not personal filing date, is the only factor in determining when you can begin to claim on an ex-spouse’s record.
Survivor benefits – It’s important to compare the value of the survivor benefit versus your own benefit, while also considering your planned retirement age and expected income levels between age 60 and full-retirement age.
This benefit is lost if the surviving spouse remarries prior to age 60, though there is no impact if the spouse remarries after age 60.
Spouses can gift an unlimited amount to each other, at any time, without tax implications.
Unmarried partners would be required to file a gift tax return if they gift more than $15,000 in one year to each other. For example, if one partner always “picks up the tab”, it’s possible to exceed the $15,000 exclusion.
In general, estate planning provisions apply only to married couples, though it can be simple and inexpensive to make arrangements for an unwed partner. Unmarried couples should be very intentional with estate planning to ensure that partners receive protections or access to assets or financial accounts. Additional documentation and Powers of Attorneys will be required for unmarried partners to make health care decisions and have unrestricted hospital visits, to make burial arrangements, or to sue for compensation for wrongful death.
Estate tax – Getting married protects couples from estate taxes when one spouse dies. However, current exemptions already shield estates from federal taxes (up to $11.2 million) and Washington State taxes (up to $2.193 million). Marriage provides additional protection, but only for couples whose separate taxable estates are above those levels.
Capital gains – Washington State is a community property state, which provides for a “step-up” in basis for all community property assets after one spouse dies. This reduces capital gains tax on future sale of investment assets and the primary residence of the surviving spouse. For people with highly appreciated assets, this could provide substantial savings.
Protecting heirs – If you have children from a prior marriage, it is easier to ensure they receive your assets upon your death if you do not remarry. If you do remarry, it’s best to update your estate plan and revisit your beneficiary designations. Your spouse typically must approve any election to leave IRA assets to someone other than the spouse.
Inherited IRAs – Getting married improves the options for spouses to inherit IRA assets, including the option to roll the account inherited from a spouse into their own existing IRA.
Survivor benefits for certain pension income are also typically available to benefit a spouse, but not for an unmarried partner. However, you can typically assign the benefits to a surviving partner at a reasonable cost.
Married couples are financially responsible for their spouse’s medical bills. If a spouse needs assisted living, skilled nursing, memory care, or other rehabilitation support, the combined assets are counted when determining eligibility for Medicaid. In Washington State, the other spouse, also called “community spouse,” may keep a maximum of $123,600 of countable assets if their spouse needs Medicaid. Some states have lower asset limits. “Countable assets” excludes home equity typically up to $572,000. This also varies by state.
Married couples can usually take advantage of large discounts on long-term care (LTC) insurance premiums when purchasing a joint policy. Certain LTC riders allow one partner to access and utilize the LTC benefit of the other partner.
Debts and Credit Rating
Spouses can be held jointly and individually responsible for debts incurred by each other during their marriage. This is especially common in community property states like Washington. Unpaid creditors or judgments against your spouse could damage your credit rating.
Marriage, remarriage, or domestic partnership have a significant impact on your long-term financial plan. We recommend consulting your attorney or CPA with questions about estate, gift, and income tax implications. In addition, a Social Security specialist can help you understand the many filing strategies available to married or divorced couples. And as always, your Paracle advisor would be happy to discuss your situation and help you choose the options that work best for you.
Disclaimer: This article has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. This material provides general information only. Paracle Advisors does not offer legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter