Just kidding, that probably didn’t happen, but if it did, they’d likely have something to say about how marriage and taxes can create legal headaches. When you and your loved one take that big step and decide to commit yourselves to one another for all of eternity, you’re probably more interested in planning fun details of the big day than you are discussing tax liabilities.
Absolutely no one would blame you, because choosing between cupcakes or a traditional wedding cake is infinitely more enjoyable than deciding how you should handle your taxes before, during, and after marriage. Especially after! Why would anyone make plans for the end of their marriage while they are actively planning the start of their marriage?
Discussing prenups and taxes before you’ve even tied the knot can be a bummer, but in many ways, it is simply one of those things people do to prepare for the worst—kind of like preparing a Last Will and Testament or buying life insurance. Just because you have it, doesn’t mean you will be blindsided by the worst.
Taking steps to discuss tax management in a marriage doesn’t just prepare you for unfortunate outcomes, it builds healthy communication that facilitates the foundation of every happy, healthy, and everlasting marriage.
Pre-Existing Tax Debts and Prenups
Maybe you know everything about your soon-to-be spouse and could easily name off a list of their top 10 favorite foods, TV shows, and vacation spots. But, could you populate a spreadsheet with all of their tax debts? While knowing what kind of cheesecake to bring home to your partner when they’re having a hard day is important, you can avoid a whole host of bad days if you discuss your tax debts before getting married.
A prenuptial agreement can help you and your partner manage pre-existing tax debt in a couple of ways. Firstly, it will provide a great starting point for your money discussions. Talking about debt can be hard, especially when you’re ready to start your new life together. To create an effective prenuptial agreement, you need to do a personal inventory of your assets and your financial obligations. By using a prenup to help you organize the financial starting point of a marriage, you’ll be better able to move forward with a budget-friendly agenda.
There is also another way that a prenup can be beneficial to a couple who may bring their individual tax debts to the marriage table. If your partner owes a significant amount of money to the IRS, then you should proceed with caution. That doesn’t mean you shouldn’t get married, but you should consider how you plan to own your assets. Assets owned individually by one spouse can be protected in IRS debt collections. A prenuptial agreement is ultimately a contract that allows each spouse to agree on what they own individually and what they own jointly in the event of a divorce.
Once you’ve prepared a prenup and described how you intend to own your assets, then you need to stick to the game plan. Some issues that can pop up to muddy these waters during marriage are:
- Adding your spouse to the title of a home
- Buying a car under both spouses’ names
- Co-mingling funds from separate bank accounts
Creating a prenuptial agreement with HelloPrenup can be fairly straight forward. However, you should always reach out to an attorney if you have any questions on the law and how it applies to you. Not only can an attorney help you fine tune your prenup, but they can point you in the direction of other professionals who can help you navigate the accounting questions.
Prenups Help You Manage Taxes During Marriage
In addition to protecting spouses from one another’s pre-existing tax liabilities, a prenup can also help you keep the tax obligations incurred during the marriage separate. Sometimes when relationships first begin, neither person has many assets or debts. It may seem like a prenup will overcomplicate fairly straightforward matters.
Before you even tie the knot, it is interesting to note that gifts given by one fiancé to another are taxable. For example, if you gift $20,000 to your significant other before you are legally married, then the money would be subject to the gift tax and possibly other types of taxation. Married couples that transfer gifts between each other, however, are allowed to utilize an unlimited marital deduction when it comes to the gift tax.
Then, as your coupled lives develop, you or your spouse might find that suddenly, one of your investments starts to pay off big time. A windfall of extra income is great news, but Uncle Sam is never far behind and soon he’s going to want his share. Who’s responsible for this tax bill? A solid prenup will anticipate the individual responsibilities of each spouse in situations like this.
A prenup can also specify how a couple should file their taxes. For example, many happily married people decide to file separately. This could result in paying a little more in taxes, but many agree the benefits outweigh the costs.
In addition, the prenup could say who will pay penalties, fees, or who will defend a tax audit during the marriage. Perhaps you agree to this because one of you will be more likely to incur the tax problems. Sometimes a partnership works best if obligations are made clear from the start!
Prenuptial Agreements and Taxes After Divorce
The most popular reason couples decide to enter into a prenuptial agreement is so they have a clear road map of how their assets and debts will be divided if their marriage ultimately doesn’t work out. While you can absolutely use a prenup as a tool for opening communication about finances, the purpose of the agreement is best known for helping you navigate divorce or separation.
After divorce, one spouse commonly pays alimony to another spouse. The provisions of your prenup may describe how alimony is to be paid and the expectation is generally that the spouse who pays alimony gets to deduct this expense on their taxes, and the spouse that receives the alimony must pay taxes on the gift. Because few things in life are straight forward, tax laws frequently change. You should periodically reevaluate your prenup to make sure a change in tax law isn’t affecting what you had agreed to.
Fortunately, your prenup can be renegotiated, like any contract, so long as you and your spouse are in agreement. Sometimes, such as the case with ever changing tax laws, the change to your prenup may simply serve to ensure the outcome of divorce is actually what you intended. Never hesitate to seek out the advice of a qualified attorney to help you navigate some of these more nuanced issues.
Prenups Prevent Problems
A good mantra to adopt when drawing up a prenuptial agreement before the big day is: Prenups Prevent Problems. Say it again, Prenups Prevent Problems! There are so many unpleasant tasks that we do to save time and trouble down the road. Taxes are a great example of one of these tasks. So, in many ways, taxes and prenups go hand in hand.
When preparing your prenup, think about how it may not only protect you from pre-existing tax liability, but tax liability incurred during and after the marriage. The prenup can also be a tool to ensure you don’t pay extra taxes at any point during your marital relationship. It is a lot to think about, and consulting with the right professionals can be intimidating. At the end of the day you, your spouse, and even your children, will be better protected.
Julia Rodgers is HelloPrenup’s CEO and Co-Founder. She is a Massachusetts family law attorney and true believer in the value of prenuptial agreements. HelloPrenup was created with the goal of automating the prenup process, making it more collaborative, time efficient and cost effective. Julia believes that a healthy marriage is one in which couples can openly communicate about finances and life goals. You can read more about us here Questions? Reach out to Julia directly at [email protected].