It’s probably not the most romantic topic, but discussing finances with your partner before you get married is incredibly important. You’re devoting time and money to planning your wedding and getting ready for your lives together, and your finances deserve just as much attention. Pre-wedding money talks often come up surrounding the idea of a prenup, but that’s not the only way to make sure your assets are protected. Taking care of your premarital assets can be just as important and learning how to protect yourself before getting married is key. Mela Garber, CDFA and tax principal at Anchin, is here to walk you through other ways to keep your assets protected without a prenup—and why it’s important.
Meet the Expert
Mela Garber, CDFA, is a tax principal at Anchin. She is the tax leader of Anchin Private Client and the leader of its Trust & Estates Services and Matrimonial Advisory Groups.
Why You Should Protect Your Assets
Prenups and asset protection often sound like you’re preparing for divorce instead of your marriage, but that’s not really the case. “Statistically, we know that about 45 percent of marriages end in divorce, but that isn’t the only reason to make sure your assets are accounted for or to discuss your finances,” says Garber. “It’s important to understand the full picture of your partner’s finances, including assets and debts.”
If your partner has debt of any kind, combining all of your assets means any assets you have are accessible by your partner’s creditors. “By keeping your premarital assets separate, creditors cannot come after you to cover your partner’s debts,” Garber explains. This means maintaining separate finances or keeping some of your premarital assets separate adds a level of protection that could be hugely beneficial down the road. “Don’t look at the conversation as divorce preparation. If your marriage is successful, there is no downside to properly handling and maintaining your assets,” says Garber. “You can always still use them for the benefit of your marriage, even if the funds are maintained separately.”
But how can you keep your premarital assets protected without drafting and signing a prenup? Here are Garber’s tips.
1. Consider Keeping Separate Accounts and Opening a Joint Account
Organization and separation are key. Instead of combining existing accounts after you’re married, open new accounts and title them jointly. “These new joint accounts should be used for any finances after you’re married and won’t jeopardize the funds in your existing separate accounts,” says Garber.
2. Keep Your Property (and Taxes) in Separate Names
Even if you and your partner will both be using the property, such as a home, if it’s in your name, make sure any major payments come from an account that is solely yours as well. “When you are paying property taxes, have your accountant prepare them separately—in your own name and using funds from your own account,” says Garber. “Then your accountant can prepare a ‘true-up’ schedule that will still allow you and your partner to file your taxes jointly and reap those benefits.”
Any improvements made to the home should also come from your own account. “Basic maintenance can come from a joint account, but an improvement that would increase the value of the property [think a new roof or major renovations] should come from a single account so that the paper trail specifies that the increased value is your individual property, not joint property shared with your spouse.”
3. Keep Diligent Records
This is absolutely crucial. Good records will help you keep track of any acquisitions made from a separate fund, proving that those acquisitions are still separate property. The same goes for any inherited property or gifts from a third party. “If you receive a gift, such as money or a stock portfolio, it needs to be kept separately and should not be contributed to with joint property. Doing so results in commingling, which makes the gift subject to division in the event of a divorce,” Garber explains. “For example, let’s say you receive a stock portfolio from a relative. The portfolio should be transferred into a new account in your individual name only, not a joint account.”
The real issue arises with future earnings. “If you add any funds to the portfolio after your marriage, you’ll have to have proof of exactly how much you contributed and where the funds came from in order to prove that there isn’t commingling,” says Garber. “Instead, it’s recommended to set up a joint account with your partner for any investments you’d like to pursue after your marriage, leaving that gift and the funds in it protected.”
4. Keep Property Appreciation in Mind
“Any postmarital appreciation of premarital separate property can be considered marital property,” says Garber. “It all depends on whether the asset appreciates actively or passively.” Passive appreciation would be something like publicly traded stock. If you have an account in your name and the stock increases in value, that gain is not marital property since you didn’t do anything causing the stock to increase in value. “If you purchased the stock with your own funds before your marriage, those funds (and the increased value) would be individual property,” says Garber.
Active appreciation, however, would be something like a home. If you do anything to cause it to appreciate after your marriage, even if your spouse is not involved at all, the gain in value is considered marital property. Garber recommends having any property appraised right before your wedding to establish the premarital value as a baseline.
5. Consider a Revocable Trust
Do you have funds you’d like to manage (and hopefully see grow) over the course of your marriage? To keep them separate, put those funds in a revocable trust, which is a legal entity that adds an extra layer of protection. Revocable trusts usually make use of a trustee—a third party who is responsible for managing the funds. By employing a third party to manage the funds, any appreciation of the funds in the trust are considered individual—not marital—property because you personally are not causing them to appreciate. “It’s also much easier to keep track of your funds this way,” says Garber. “It’s easy to forget which bank account is a joint versus individual account, meaning you might accidentally deposit postmarital assets into your premarital account. This would commingle the funds, effectively eliminating your claims to protected premarital assets.” Just remember not to add any funds earned during your marriage into the trust.
Start by discussing the funds you and your partner have available, as well as your debts. From there, discuss your options to keep funds protected and set yourselves up for financial success.
6. Work Through it With a Pro
It’s a lot to address, so consider getting a trusted financial advisor involved. “Even before you set up your accounts, meet with a financial advisor who can help you and your partner discuss your options,” says Garber. “The conversation can be incredibly emotional, so turn to an independent party who will help keep the conversation professional instead of personal.”
Another good reason to work with a professional? You can take a break! “If there is any tension or problems arise, you can press pause and take some time to think about things, then make another appointment,” says Garber. “If you’re talking about it at home, it’s much harder to take a break and avoid extra tension.”