The Financial Perspective of Marriage
It's February and the stores are full of pink and red hearts, sugary candy, and flowers. It's the time of year when people are thinking more about love, partnership, and maybe the next step in their relationship. A common question I get asked is “Should I get married to save on taxes?” It's more complex than just taxes, so, given that it's the season of love, I'm going to address some of the potential benefits and costs of putting a ring on it.
Is there a Tax Benefit of Marriage?
My initial answer is that taxes are only a small part of why you might choose to get married—financially speaking, of course. In some cases, a married couple may end up paying less in taxes together than if they filed separately. On occasion, getting married could increase your taxes or cause you to owe additional taxes. I'm not here to give tax advice, but there are other financial benefits of being married than just taxes. Some of those benefits include division of community property, an equalizing of assets in marriage, access to employer benefits, estate planning protections, and the security of long-term joint goal planning.
California, where my wife and I live, is a community property state. This means that assets earned or acquired during marriage are owned 50/50 by each spouse, with some exceptions. The notion originally came about when men would go to work while women stayed home to raise children. If the husband left, the wife would have nothing. So, the state acknowledged that the work provided by the wife—child rearing, household maintenance, and all other duties—had value and should be treated as paid labor. Thus, community property was born. The world is very different from the era which birthed community property, but the principle—marital and financial equity for both spouses, regardless of their profession—remains.
Employer and Government Benefits in Marriage
A benefit of marriage is usually the ability to join a spouse’s employer benefits. This could include health insurance, life insurance, and survivorship pension options, along with potential access to spousal social security benefits, and other government benefits. It’s often wise to review and assess each person’s benefits to decide if joining a partner’s employer benefit plan will increase coverage or spare the family budget. Also, spousal social security and other benefits can provide financial comfort in a time of great loss. Marriage may afford a surviving spouse the ability to inherit their partner’s retirement account. Instead of having to deplete their own retirement account, they may be able to treat their spouse’s account as their own. This option may provide a huge benefit as it sometimes allows the surviving spouse to leave the investments in the account to grow, tax free, for a longer amount and time.
Equalizing Assets and the Prenup
Marriage may also ease the transfer of assets between spouses without the same tax consequences that can occur in a non-married relationship. It provides flexibility around when and how to share assets, which could allow for more financial equality within the relationship.
Speaking of financial equity, a prenup can often be a smart choice. A prenuptial agreement allows couples to talk about how their assets might be divided should they divorce, and it allows this conversation to come from a place of openness and love rather than the anger and hurt that often exists in separation. It also offers the opportunity for couples to begin their marriage with open communication, an understanding of each other’s financials, and a clear picture of one another’s values.
Long Term Financial Planning
While all the financial and monetary benefits are important, I find marriage is important in that it can also provide the opportunity for long-term planning between partners. I personally never saw myself getting married and didn’t see the benefit until some good friends of ours got married. They talked about the additional comfort and security that it brought to their relationship, and that made me think differently. I do think marriage can give couples a stronger sense of commitment, and it allows them to be more open and candid about goals and values. This openness has allowed my wife and I to be more thoughtful around our own financial planning, and it's a benefit I talk to with my clients.
It's easy to get swept up in love and romance. But the truth is, both life and love require thought and planning. If you’re thinking of going ring shopping or running off to Vegas, I’d encourage you to speak to a financial planner or coach about the benefits and risks of that choice. As someone who originally didn’t find marriage important but ultimately decided to take the leap, I’d love to talk through the pros and cons of marriage and prenups.
Happy season of love to all!