We go down the wedding aisle with a common plan to build a better world as a united couple. No one can deny the merits of the goal nor the ancient bromide that “two live more cheaply than one.”
It’s all true until it isn’t and today when a couple with separate incomes unites, it can become tricky especially if your trust in each other is wrongly placed. We like to think we all come into this world with equally capacities to manage money. Alas, that is not always the case and many people with serious financial problems are not especially happy to share their financial histories or their spending proclivities.
The two most common problems involve debt and taxes. If you have been following the news lately, during the COVID crisis the government sought to buttress available income by suspending collection of student debt. In all of its iterations Americans owe $1.7 trillion in such debt. The last administration continued to suspend collection and actually tried to discharge much of the debt via executive order. The current administration has indicated it will resume collection and invoke remedies like wage attachment to make it effective. A lot of Americans with this debt and a lot of family members who guaranteed their childrens’ debt are in for a rude awakening. Pennsylvania is a state which limits most forms of wage attachment but where debt has a federal component, the rules are different.
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The second issue is taxes. About 10% of American workers are self-employed. They don’t get a paycheck that deduct federal, state and self-employment (social security and Medicare) taxes. They are supposed to file quarterly statements with those tax authorities and remit payments based on their earnings from self-employment. Solo practitioner physicians and, yes, lawyers, are among those tasked with filing these “quarterly estimates.” Unfortunately, mortgage payments, car payments, boat payments and other “necessities” often leave them short-handed when these payments are due. So, there is an underpayment or worse: no payment at all. Like every other American taxpayers, these folks are supposed to file their annual returns on Form 1040 in April where the sum up the prior years’ taxable income is reported, and taxpayers reconcile that with a final payment of all taxes due. Sad to say, when these self-employed people see what they need to report and pay, the first inclination is to take an extension to October hoping things will improve. If they don’t, some will just ignore their tax problems and not file at all. So, we have encountered lovely and otherwise responsible self-employed individuals who have allowed years to slip by without filing tax returns. Despite this glaring omission, these people also fall in love and marry. Then, when their wage earning spouse approaches them the following April noting it’s tax time, the response is often: “Ahhhhhhh, let’s just file separately.” The kind spouse will confess the crisis, but we have seen couples like this form joint accounts where one day, the wage earning spouse tenders a debit card on a joint bank account to see the card rejected for insufficient funds. How? Well, Uncle Sam has the right to invade joint accounts to collect overdue taxes, child support and student debt of either spouse. Preposterous? Well realize that joint accounts allow either owner to take out the entire balance. Your Uncle Sam is appropriating the debtor party’s power to take all in order to meet his need to be repaid or to collect support due pursuant to a court order.
The other common crisis is unknown consumer debt. Your spouse develops an addiction to substances, gambling, crypto or whatever. Or, they fall victime to an extortion scheme. Just about all of us can find lenders to send us a credit card. Voila, there are seven cards with $5,000 each and all are now in default. You now have debt contracted during the marriage (i.e., marital debt) which is typically divided between spouses in divorce. You, of course, want to tell the judge this wasn’t your debt and it wasn’t debt incurred in support of the marriage. That argument may have some power. But be prepared for the court to ask: “If this debt was used to buy lottery tickets and one of them hit the jackpot, would you be contending that you have no interest in the mega-millions?” Everyone likes to assume that “secret debt” is contracted to pay for mistresses, drugs, Steelers season tickets or other unwholesome conduct. But many times, it is used to keep a failing business alive or because your spouse was fired six months ago and couldn’t summon the courage to tell you.
Retirement accounts are another place where there may be a hole you don’t know about. A spouse is the presumptive beneficiary of accounts established under Sections 401(K) and 403(B) of the Tax Code. But many such plans allow a spouse to either borrow or take a distribution from the balance on hand without the consent of husband and wife. The other features of these plans is that if you do take a loan and then lose your job, the debt to the plan is instantly due. Otherwise, the loan is treated as a distribution which is taxable. IRAs offer similar “cash out” opportunities where no consent of a spouse is required.
While writing for another blog in March 2024 I suggested that couples who have property when they marry might consider a disclosure agreement so each knows the financial condition of the other before the “I dos” are exchanged. But that doesn’t resolve the mischief that can come about when, during marriage, spouses take on separate (non joint) debt, fail to file returns or liquidate separate accounts. These are places where diligence needs to be exercised and if you see suspicious activity, it merits sitting down with a divorce lawyer, if for no other reason than to take stock in what could occur.