Weddings are happy and momentous occasions, turning points on the path of life. In the exciting preparations for the celebration, sometimes the financial implications of the new marital partnership can be overlooked. These will affect the newlyweds, of course, but there are also considerations for the extended family.
Personal income taxes
For tax purposes, there are no partial marriages. If a couple is married by December 31, they have been married for the entire tax year. They are eligible to file their personal income tax return as married, filing jointly, taking advantage of those tax rates.
Employers need to be notified of the change in status, as it may affect withholding taxes.
The income limits for IRA and Roth IRA contributions will be the ones for married couples. It may happen that the newlyweds’ combined income disqualifies contributions made earlier in the year. In that event, a corrective distribution or a recharacterization of the contribution will be required. For more detail, see the recent Morningstar article, “What Changes for Your IRA and 401(k) When You Get Married.”
It’s also possible that a spouse who had no income during the year will become eligible to make an IRA contribution by virtue of having married someone who did have earned income.
Beneficiary designations should also be reviewed. For ERISA plans, such as 401(k) plans, the surviving spouse is automatically the plan beneficiary unless there is an affirmative election out. The rule does not apply to IRAs, so those accounts should be adjusted as needed. Insurance beneficiary designations should also be examined.
Wills and trusts
The newlyweds need to have wills drafted contemplating their new status. Often this will be a first will for each. Insurance needs should be addressed and perhaps new policies will need to be purchased. The importance of life insurance and disability insurance changes when one is no longer single.
The family group has acquired a new member with a wedding, and the potential for additional heirs. The specific wording of wills and trusts of the parents and grandparents should be reviewed to determine if the phrases in the documents are general enough to include the new beneficiaries and potential beneficiaries. If not, new drafting or a codicil may be needed for more explicit instructions.
Second marriages present additional complications. Tensions may rise between the children from the first marriage, regarding their earlier expectations of inheritance, and how that might change given the new family dynamics. A Qualified Terminable Interest Property Trust (QTIP Trust) may prove to be especially useful in this context, as it will fix beneficial interests among all the family members.
A prenuptial agreement may provide an alternative solution. A prenup is a contract that fixes inheritance rights, after each party discloses the assets that are being brought into the marriage. Prenups are more common in situations with larger family wealth, or when there is a significant wealth disparity in the newlyweds.
There are many ways to manage financial lives after marriage. Some couples create joint accounts for everything, others keep accounts separate, or have mostly joint accounts but a few separate accounts as well. There are pros and cons to all approaches. Regardless of the approach, Garden State Trust Company trust officers would be pleased to be a part of your wealth journey. Please don’t hesitate to reach out for a meeting.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
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