The Financial Impacts of Marriage

As we head further into spring, wedding season is in full bloom. It’s beautiful to witness a happy union, so it can be easy to forget that marriage is also a legal contract. Spousal partnership carries multiple rights, privileges, and obligations that are important to recognize. Here, we outline some of the critical financial implications of saying “I do.”

Managing Your Finances

Account Maintenance & Management

After marriage, it’s important to update your accounts to reflect your new legal and personal status, as well as determine a plan for day-to-day account uses. This includes:

• changing your name (if applicable)
• updating beneficiaries on insurance policies and retirement plans
• ensuring joint ownership or access to key financial and legal documents
• creating a plan for joint bill pay and spending

Keeping your accounts current helps prevent confusion, ensures your spouse has proper access, and protects your shared financial future. It’s also crucial for smooth communication with banks, government agencies, and service providers.

Depending on your state, commingling assets by making them “joint” or “community property” have different legal implications. For example, Washington is a community property state, in which wages and retirement contributions after the date of marriage are considered “marital property,” no matter which spouse generated the income. Once set as “marital property,” spouses typically have equal claim on the asset in the case of a future divorce. Inheritance (or assets from before the marriage) can generally be kept distinct by leaving them in a separate account and avoiding future commingling of community property assets to this account.

Make sure your partner and you understand the implications of any titling switches for your state and how to navigate your day-to-day financial management.

Pre-Nuptial Agreements

Spouses-to-be with significant financial assets—or in situations in which there is a large disparity between their net worths—may want to consider a pre-nuptial agreement, which spells out terms should the marriage end in divorce. Common provisions include terms for division of specific assets or property, spousal support, and child custody. Pre-nuptial agreements can protect the interests of both parties and provide clarity on assets in the marriage.

Debt & Credit

Spouses can be held responsible for debts incurred by each other during their marriage. Both partners are responsible for the payment of any debt incurred jointly or that they co-sign for. Credit reports remain separate; however, both will be impacted by any jointly incurred debt.

In community property states, including Washington and California, spouses may be responsible for debts incurred by their partner during the marriage. In non-community property states (or common law states), married couples don’t automatically share personal property legally and aren’t responsible for the debts of the other unless they co-signed or took it out jointly.

Taxes

Marriage Tax Penalty & Marriage Tax Bonus

In some cases, income taxes may actually be lower for two single filers than for a married couple—often called the “marriage tax penalty.” This penalty occurs more often with state taxes, but can appear in federal income tax as well when both individuals are high earners. At the highest tax bracket, the income level is not simply doubled for “Married Filing Jointly” filers. However, “Married Filing Separate” for your return is usually not a solution—as it nearly always results in a higher tax bill overall—but you can look for ways to offset the higher tax with itemized deductions.

There is a flip side to the marriage penalty—a “marriage tax bonus” occurs when a couple lands in a lower tax bracket when filing jointly. This typically occurs when one spouse earns the lion’s share of the couple’s income.

Joint filers may also find that they benefit more from certain tax credits, like the Child Tax Credit and Savers Credit.

Home Sales

Married couples also benefit from a higher capital gains exclusion if they sell their primary residence: the amount of tax-free gain you can receive from the sale doubles from $250,000 to $500,000. This may also be the case for unmarried couples if both names are on the deed and both partners have lived in the house for at least two of the last five years.

Estate Planning

Unlimited Marital Deduction

In life or at death, married individuals may gift any amount of assets to their spouses with no tax implications (also called the “Unlimited Marital Deduction”). Even Registered Domestic Partners are not treated as spouses for federal tax law, so the 100% marital deduction for gift taxes does not apply to them. Any gifts in excess of the annual gift tax exclusion will require that a Gift Tax Form be filed with your CPA and could have tax implications.

Estate Taxes

Getting married opens the door to more flexible estate planning options and protects couples from estate taxes when one spouse dies (due to the “Unlimited Marital Deduction”).

Transferring Accounts

Spouses are often granted immediate access to assets and accounts at death and are automatically authorized to make healthcare and financial decisions, whereas unmarried couples would need to have documentation in place in advance to ensure that partners have access and authorization.

Step Up in Cost Basis for Capital Gains

Inherited assets passing from one spouse to another may be eligible for a step up in basis, which can save significantly on capital gains taxes. Rather than being valued at the original fair market value (FMV) at which the asset was acquired, the asset is re-valued at its current FMV on the date of death, eliminating the capital gains between the time of acquisition and the time of inheritance.

Generally, only the deceased spouse’s share of the asset receives this basis step-up (50% of joint assets), but in community property states, such as Washington, assets held as community property receive a 100% basis step-up at the first spouse’s death.

Retirement accounts such as IRAs and 401(k)s are not eligible for this basis step-up, since they are taxed as ordinary income. However, for investment accounts and home sales, this rule will help lower taxes paid for any sale of these inherited assets.

Company Benefits

Health Insurance

Employer-provided health insurance often includes an option for spousal coverage, and some employers may even cover part of the cost. Couples should compare the costs and benefits of different options for healthcare coverage, as one employer’s group plan can differ greatly from another.

IRAs & 401(k) Accounts

Your spouse is the only IRA or 401(k) beneficiary who can inherit the account and maintain it by either rolling it over into their own IRA/401(k) or retaining it as an inherited IRA/401(k). Be aware that this means they can also change the beneficiary of those assets going forward, so if you want those accounts to pass to a particular beneficiary after your spouse, you may need to establish a trust.

Additionally, spousal consent is generally required for 401(k) rollovers (in community property states) or to update the beneficiary on file to someone besides the spouse. This protection is designed to prevent a spouse from unknowingly being disinherited or losing their potential inheritance of the asset.

Pension Plans

Many pension plans provide survivor benefits for a surviving spouse; how those benefits are distributed depends on the plan. Many plans only provide survivor benefits for a spouse, but in some cases it may be possible to name a different beneficiary.

Retirement Considerations

Long-Term Care

Married couples are responsible for each other’s medical bills. If either spouse needs assisted living, skilled nursing, memory care, or other rehabilitation support, eligibility for Medicaid is determined using combined marital assets. Medicaid eligibility is determined differently in different states and depends on a wide variety of factors including income, need, type of care needed, and marital status.

Long-term care (LTC) insurance policies may offer discounts to married couples who purchase joint policies. Some LTC policies allow riders that provide for one partner to access and utilize the LTC benefits of the other partner.

Social Security Benefits

Married people can choose between filing for their own Social Security or claiming benefits based on their spouse’s (or ex-spouse’s if the marriage lasted ten years or more) income history. Higher income translates into a higher monthly benefit up to the Social Security wage cap. Spousal benefits may be up to 50% of the spouse’s Full Retirement Age (FRA) benefits, depending upon when you apply. There are eligibility restrictions—for example, in most cases, your spouse must already be receiving benefits, so check your eligibility before applying.

Spouses (and ex-spouses if the marriage lasted at least ten years and the spouse does not remarry before age 60) are also eligible for Social Security Survivor Benefits. You must be at least age 60 to apply (or 50 if disabled), and the amount depends on a number of factors, including the deceased spouse’s income and the applying spouse’s age at retirement.

Understanding Your Situation

Marriages—whether first or subsequent—have a significant impact on your long-term financial picture. We recommend working with your financial advisor and tax planning team to understand the estate, gift, and income tax implications to your situation. As always, your Coldstream team is here to help.

*Certified Financial Planner Board of Standards Inc. owns the certification marks CFP^®. CERTIFIED FINANCIAL PLANNER™ and CFP^® in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.