Note: I’m not a lawyer. This post describes our process of developing our nuptial agreement and not the actual legal agreement itself.
Separate or combined bank accounts don’t make a marriage. Communication and shared values do far more than your decision to keep your money legally separate or combined.
I’ve been startled as I’ve talked about our post-nuptial agreement to people in person by the number of people who keep their finances separate from their spouse’s and don’t have a nuptial agreement. I very firmly believe that if you don’t have a nuptial agreement, you are essentially accepting your state’s laws by getting married, no matter how you title your bank accounts. One friend keeps their finances separate from their spouse and bought a house post-marriage with their separate money, but hasn’t protected their asset at all.
My husband and I don’t have combined finances, nor do we have a plan at the moment to ever have them.
We do, however, have a notarized and legally binding post-nuptial agreement. It describes my pre-marriage property and liabilities, my husband’s pre-marriage property and liabilities, and our joint pre-marriage property and liabilities. It also spells out exactly what we plan to do with our money in our marriage, while also leaving us the flexibility to change our minds on some pieces later, which is great because so far, we’ve learned that the first way you come up with to run your shared finances isn’t necessarily the way that will stick.
It took us about three and a half months after our wedding before our post-nuptial agreement was signed and executed. It wasn’t a time full of arguing – it was a time full of discussions and then trying to convey our ideas to the lawyer drafting the agreement. Some of those discussions were emotional, though those ones especially were important to have. Talking about money doesn’t stop there either – we continue to talk about it and those discussions form the base of our married money plans.
There were three key pieces for us in drafting this agreement:
- We want to own our primary residence together, while protecting my separate interest in the property.
- We want to keep all separately titled assets to be separate and all jointly titled assets to be joint.
- We want to allow ourselves the flexibility to change our minds later on whether income is separate or joint by default, without having to re-draft the agreement as it did have a reasonable cost to it ($2,000).
- Later added: we want to be able to leave our separate estates not necessarily to each other.
The first piece would be really easy if my husband had half of the condo value liquid at the time of the marriage AND was willing to part with it in order to buy into the condo. (We had originally planned to get married once my husband reached that point, which we estimated would have happened sometime in 2018.) That was not the case, so we needed to come up with a new creative solution. Furthermore, based on the mortgage balance and the valuation at the time we got married I owned 75% of the condo, meaning that I already owned more than I needed to of the condo. We agreed that all appreciation up until our marriage date was my separate property, which gives me a pretty decent amount of equity in the condo. My husband will buy into the condo until he owns half by paying the existing bank mortgage and paying me back for my “extra” equity.
Having a plan to own the condo together is such a relief. We have some projects that we were procrastinating until we owned the condo together and it also helps out a lot with the (current) income differential. When we first started dating, I was making more money than my husband and I had more assets. He’s made more than me the last couple of years to the point that my income only made up one third of our household income in 2016, which is a pretty big difference, even at my also six-figure income level. I was starting to feel a bit of a pinch in continuing our 50/50 share of the shared expenses, especially considering that I was paying for all of the housing expenses for a condo where I already owned more of it than I needed to! Assigning the remainder of the small mortgage to my husband frees up just over $12,000 from my budget, which is a huge boost to my current no-income budget.
We ended up declaring all income separate to the earning party, for two reasons:
#1: It seems like a “normal” nuptial agreement declares pre-marriage assets separate and post-marriage assets joint. We decided that wasn’t a fair option since that would keep my pre-marriage assets separate while sharing my husband’s larger post-marriage income while I’m in a phase of no income. That didn’t feel right to either of us. I wasn’t comfortable sharing my pre-marriage assets (yet).
#2: The catch to having my husband buy into the condo instead of simply making all contributions to the condo equity post-marriage joint is that we need to keep our incomes separate in order for this to work.
This means that all of his income is his to keep and my income is mine to keep.
If we change our minds on this later, then we can simply deposit our incomes to joint accounts in order to make the income joint rather than its current separate form. We definitely plan to re-evaluate this plan when a big life change happens, such as having kids, selling this condo, buying a new property, retiring, or if we need to provide support to any family members. As my husband says, it’s not worth worrying about something until it happens because we don’t really know how we will feel until it does.
- If we choose to have kids in the future, we would most likely update our post-nuptial agreement with a new financial disclosure and then make future income from then joint.
- If we sold this condo, then we would distribute the proceeds according to the equity as described in our agreement to our separate accounts. We would then buy any new property in a 50/50 ratio from our separate property or share rent in a 50/50 ratio.
- If we retired early, we would consider whether with our then-current distribution of retirement and non-retirement accounts we could support our then-current lifestyle out of our separate accounts or whether it would be more jointly advantageous to re-adjust our agreement somehow while still maintaining its spirit.
- If we in the future own this condo in a 50/50 ratio, then we could make all future income from there joint.
Keeping our incomes separate will create for an annoying situation when we file our taxes each year, however, as the overall tax bill has to be split somehow. If we choose to make income not separate in the future, we will likely do it on a calendar year basis to help make the taxes clearer.
One of our lawyers suggested running Married Filing Separately returns and then using the ratio of incomes from that to determine who was responsible for what ratio of the joint tax bill. We didn’t like that because it would result in the higher earner seeing the entirety of the marriage tax bonus or penalty, which didn’t feel fair when it was a joint decision to get married. At first, I tried to suggest that we should split the penalty based on the ratio of incomes until I realized that that wouldn’t work so well in the years where there could be a bonus.
Our conclusion on taxes after hours discussing it is to treat the marriage tax bonus/penalty jointly. That means that I will have to run through two Single returns and a Married Filing Jointly return in TurboTax in order to calculate the split. That doesn’t seem so bad with our current tax situations.
We’ve already run through our 2016 taxes and it wasn’t that much more time to do the extra tax return.
Implementation: Hers, His, and Ours
The “default” for accounts in a nuptial agreement seems to be that the valuation at the time of marriage is considered separate and then any new growth or contributions is considered joint. Considering that I had about $250,000 in retirement accounts at the time we got married, that seemed to take away the value of compounding from starting to save for retirement at age 19. We ended up in the end agreeing that any growth in the condo value was joint and all other asset growth on separate assets is separate.
In practice, this looks like having hers, his, and ours accounts:
- Hers: Roth IRA, 401(k)s, HSAs, Series I Savings Bonds, checking and savings accounts, taxable Vanguard index funds, and some portion of the condo equity
- His: Roth IRA, 401(k), checking and savings accounts, taxable Vanguard index funds, some portion of the condo equity, and the mortgage
- Ours: Checking and savings accounts, some portion of the condo equity, and in the future, taxable Vanguard index funds
Each year, we’ll create a year spending plan for the year and each of us will contribute 50% of the monthly agreed upon amount to our joint checking account. We funnel all joint purchases through specific credit cards that are not used for personal expenses and vice versa. There’s no owing each other money. If we have unbudgeted expenses (i.e. how we’re paying for our wedding reception later this year), then at the end of the month, we add up how much those were and we each put half of that amount into a joint account to cover those costs.
Our system isn’t that different from a couple who does allowances for discretionary spending except that rather than depositing everything to a joint account and transferring the discretionary spending to separate accounts, we deposit everything to separate accounts and transfer an agreed upon amount to the joint accounts. We’re both pretty open with how we spend our money and we have compared spending over the last few years that we’ve been dating. We’re both relatively frugal compared to our incomes (we both have saved over 50% of our incomes the last few years), so we aren’t doing this to avoid disagreements about money.
We don’t want to inflate our lifestyles based on the other’s income. If we can’t contribute 50/50 to our primary residence, for example, then that property is too expensive to buy. If we were to re-buy this condo together, we could each contribute half of the 20+% down payment and we could pretty comfortably afford the carrying costs with a 15 year fixed rate mortgage.
Both of our parents are still married, 30+ years later, and have had the one-pot approach from the beginning of their marriages. We certainly didn’t get this example from our parents on either side! Our parents, however, got married when they didn’t have much in the way of assets or incomes and I agree that it is pretty silly to have a prenup or keep things separate in that case. We didn’t screen for each other based on our financial status, though we did originally meet in undergrad, which probably was somewhat of screening for financial status, and we knew that we had similar financial values, which matters far more than if our assets were at similar levels.
Preparation for Marriage
I’ve talked to a few people who are healthy savers in their twenties and worry about what their prenup will look like when they do eventually get married. I worried about this plenty back before it was pretty clear to me that my husband and I would get married. I wish I’d worried about it a bit less and just concentrated on building my wealth as a single woman because that’s really all I could do.
One of my reasons for aggressively paying down the mortgage on my condo was to pay it off before getting married so that I would own it 100% as my separate property. In hindsight, that is really against the spirit of being married and living in a place together! If my husband had significantly less income and assets than me OR we planned to rent out the condo and buy a different place together, only then would leaving the condo as my separate property make sense. While we’re both living in the condo, having it just be my separate property is binding. It leaves the questions of how to handle paying for replacing appliances, painting, buying new furniture, any remodeling, etc. that we’ve been managing for the last two years without a strong solution.
The particulars of the nuptial agreement that we ended up settling on are really quite specific to the asset levels and locations that my husband and I both have, as well as our recent incomes and income potential. If the person with fewer assets also had very little income or if most of the wealth had been generated while the two of you were a couple, it’s much harder to see a way to come to a fair nuptial agreement at all. We ended up at the point of marriage in the case where both of us had healthy assets (in the multiple hundred thousand dollar range on both sides) that were not equal and both of us had six figure earning potential, which made a nuptial agreement a pretty reasonable plan.
Marriage and money is such a complicated topic! How we manage our money is pretty specific to our situation and won’t necessarily apply to other couples. I really do believe that the one-pot style is the best for the vast majority of people simply because most people don’t come into marriage already as millionaires.