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| The Basics | Make marriage No. 2 -- and the finances -- work
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Optimists heading for a second marriage -- and most people who divorce will do just that -- carry mountains of personal and financial baggage. To succeed, you have to clear up money issues.
By Janine Latus Musick
Youre young, youre idealistic, and, lets face it, you dont own anything. So you get married, throw your paychecks into a Mr. and Mrs. joint account and start living by the seat of your pants. And then, if youre like half of American couples, you divorce -- more likely than not, before youre 30.
According to Census Bureau figures, the average first marriage that ends doesnt make it past the eighth year.
So then, in that old triumph of hope over experience, eight out of 10 divorced people remarry. Half do it within three years. But the second time around, they have the 401(k), the house, the kids. Most of all, they now have their own way of doing things, which may be why even more subsequent marriages crash and burn than first marriages. A whopping 60% end up back in divorce court, half of them within seven years.
Given those realities, there are things you and your new beloved should talk about before you pick a caterer for the reception. (We should note that anecdotal evidence suggests couples are more likely to discuss the furniture for their future living room than long-term financial arrangements.)
Heaps of old baggage, plus a few carry-ons
When you get into the new marriage, you're typically dragging three suitcases of old baggage:
- Preexisting debt
- Old spending and budgeting habits
- Financial obligations to a former family
Plus, most people have at least a carry-on of insecurity and distrust left over from the separation of assets at the end of their prior marriage.
When Trish Wurster, 42, of Sunrise, Fla., got divorced after nine years of marriage, she discovered that her husband had been more diligent about paying the bills that were in his own name than the ones that were in hers. Thus her credit rating was ruined, there was a lien against the house and the phone line in her name had a $600 balance.
When she remarried four years later, she and her husband, Jim, set up a joint checking account for household expenses, but she kept a separate account to pay her own bills.
One thing Ive learned is, when I am responsible for my own income and expenses, I manage well, she says. Obviously, my finances are not as important to anyone else as they are to me.
Wurster also is more aware of the household expenses than she was the first time around.
Its a relief for him when I pay attention to the budget because, surprise, surprise, hes not an expert either, she says. And its something I know I can do because I did it when I was on my own.
Patricia Schiff Estess, 62, of New York almost didnt make it up the aisle for her second wedding 25 years ago. Her now-husband, Gene, had tremendous alimony and child support obligations, and she was earning little working part-time for a community newspaper. Yet, they planned a Jamaican honeymoon.
We were going to have to go now and pay later, she says. About a week before the wedding, we had a big fight because he was willing to do that and I was not at all. We didnt talk that entire week.
The fight turned out to be a good thing, because it forced them to have the in-depth talk about money that every marrying couple needs.
People start out wearing rose-colored glasses, and theyre just terrified to bring up things like how to register the house or cover expenses for the kids, says Marjorie Engel, president of the Stepfamily Association of America, an organization devoted to educating people about the challenges of creating a stepfamily.
He spends the dating period discussing how he got raked over the coals by his ex," Engel says. "So, shes afraid to bring up insurance, inheritance or how they will cover expenses for the children because she doesnt want him to think shes greedy. And hes not bringing it up because he knows what happened to him last time he put things in joint names, and he doesnt want the new love of his life to think hes stingy.
No kidding: swap your credit reports
Marion Asnes, a senior editor at Money magazine, said she and her husband, both of whom had been divorced, devoted an afternoon to cooking up a written agreement. Rather than coming to grips with how we were going to handle our money while we were in an argument, we decided it would be more productive to do it while we were in love, she says.
The agreement lined out what each would contribute, what their financial goals were and how they would behave if things didnt work out. It behooves a person to go into marriage with the intention that it be a lifelong commitment, she says, but you also have to be responsible for yourself.
Among the things you need to discuss are:
- What you owe and to whom
- Whos going to pay for what?
- How you use credit cards
- What your financial obligations are to others (That includes child support, spousal support and the money you promised to provide to Grandma in her old age.)
As youre making your financial plans, take into account that spousal support generally ends when the recipient remarries and that marrying may bump the lower-earner into a higher tax bracket.
You also need to swap credit reports. We kid not.
"If someone is not willing to do that, it should put up a big red flag, says Connie Brezik, a financial planner and accountant in Casper, Wyo., and Scottsdale, Ariz. Your future spouse should be willing to disclose everything about his or her finances, including any credit problems. If theyre not, it may mean theyre hiding problems." And, she says, "Those problems will become your problems after you are married.
If you cant find a way to bring up the matter of your relative financial health, Brezik suggests meeting together with a financial adviser and letting him or her ask the tough questions.
Putting everything on the table with a prenup
You might consider creating a prenuptial agreement, although only a small percentage of remarried couples do, Engel says. But even if carefully crafted with lawyers who know how to write them, a prenup is only as good as the subsequent divorce judge says it is. If the judge decides your prenup is unreasonable, was signed under duress or made without full financial disclosure, its out the window.
A rich guy cant get his bride to sign a prenup that says he wont have financial responsibility for a child if she becomes pregnant. Once little Johnny Jr. is born, the states interest in supporting the kid overrides whatever piece of paper they signed.
If you have any assets, you need a prenup, says Brezik. It lays everything on the table. Now, if neither of them has any assets does it make a difference? Probably not. But if one side has a lot of assets, its a good idea.
Whether you draw up a prenup or not, its valuable to discuss and resolve as many financial matters as possible while youre still in love and want the best for each other. As previously divorced people know, thats generally not the case at the back end of the marriage.
The wisdom of creating three pots
Forget throwing all the money into one big household pot. Less than 20% of remarried couples close out their individual accounts and pool everything in the first year of the new marriage, according to according to a 1997 Stepfamily Association study.
More than half had some sort of "yours, mine and ours" bill-paying system, in which each partners income -- including support payments from a prior marriage -- went into an individual checking account. Then each contributed some agreed-upon amount to a joint account for family expenses like the mortgage, utilities and groceries, and used individual accounts to pay their own bills.
Theres nothing better than combining money into a we account to use as a family, says Estess, author of "Money Advice for Your Successful Remarriage" (iUniverse), but its also important to have your own account, especially when you are paying support for children from a former marriage. Its just psychologically easier on the marriage if that doesnt come out of the familys account.
Keeping money separate, including filing your taxes as 'married, filing separately', may be especially important if one of you is still entangled financially with a former spouse.
Divorce settlements are not binding on creditors, so if you and the ex are still listed together on the mortgage, credit card or auto loan and the ex defaults on the payments, you might become responsible for the entire debt -- not just your share. If you and your new spouse have commingled income and assets, those funds may be at risk, too.
Likewise, if you filed taxes jointly with your ex and the IRS has a complaint, it can come after you to get whats owed. If you and your new spouse are filing jointly, the IRS can try to collect the arrears from both of you. (An important note: filing as 'married filing separately' may increase your income tax bill.)
In Engels study, even 10 years into a marriage, only half of couples converted to the joint-only banking system traditionally preferred by first-time married couples. That gradual blending of finances applied to investments and credit cards, too. At the beginning of a remarriage she found no mutual fund accounts held jointly; by year 10, only one-third of couples had merged them.
Your place or mine?
States have two primary marital regimes -- community property and equitable distribution. In the nine community property states -- Arizona. California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin -- assets acquired during the marriage are fair game for a 50/50 split; in the other 41 states, all assets may be divided equitably.
Youre going to want the house in both names if you want it to go to the surviving spouse, says Brezik. You may want it in just one persons name if you want it to flow through your estate and go straight to your kids with a minimum tax bite. Consult an attorney to figure out what would be best in your state.
So while it is true, as Einstein said, that you cannot simultaneously prevent and prepare for war, its important to make each decision knowing that the odds are against this marriage surviving. Make sure your will and estate plan are up to date and that your retirement and insurance polices have the right beneficiaries. (For more on estate planning, see "Remarriage means revising your estate plans.")
Stepchildren dont inherit under the umbrella term children, so name them specifically if you want to leave them something. If youve got a complicated, high-end estate, consider creating a trust. A QTIP (Qualified Terminable Interest Property) or ABC Trust, for example, will allow each of you to give your home or other assets to your surviving spouse for his or her lifetime. Then the property will pass to your children when the surviving spouse dies. (A QTIP trust can cause some unforeseen issues of its own. For more, see "Beware an estate with strings attached.)
All of these things should be discussed by you, your fianc, your financial advisers if you have any and maybe even lawyers before you even think about the reception, buffet menu and song list.
If your children are old enough, tell them the details of your expected financial plans, too. Theyre more likely to support your new marriage if they know youve protected their inheritance.
If you worry that this all seems cold, think of it this way: There is nothing more romantic than to talk about how youre going to take care of each other forever.
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