Integrating Newlyweds' Finances into the Family Financial Plan

Your daughter is getting married. That brings much joy, along with hectic wedding planning.

The impending nuptials also should bring a consultation with your wealth advisor.

Along with embarking on a lifelong emotional partnership with his or her new spouse, your child is entering into a legal contract with another person. The area of property rights is of special concern. There are several property considerations the couple could encounter during their marriage.

Having your wealth advisor explain the potential property issues, as well as ways to protect your daughter's or son's interests and strategies for future tax and estate planning needs, is the best wedding gift you can give your child.

Determining property rights

It is essential your children understand what constitutes marital property and what is their own separate property. Generally, anything earned or acquired jointly during a marriage is considered marital property. Any inheritances, gifts, or irrevocable trusts are considered separate property.

Why does this matter? In the event of a divorce or lawsuit against the spouse, your child’s separate property may be protected. It also provides a safety net that your child knows will be there in the event she decides to make a life change. Finally, if the funds are in an irrevocable trust, the funds may already be exempt from estate tax, potentially preventing or mitigating a large estate tax bill.

Keeping property rights intact

Once the delineation between separate and marital property is clear, your child needs to understand how to keep separate property separate. Many people unintentionally commingle these two property types, potentially undoing the advantages provided by one versus the other.

In community property states like Texas, for example, funds received from a gift or inheritance are the recipient spouse's separate property. However, any income received from the asset is considered community (i.e., marital) property. If your child deposits your gift into an existing joint investment account and proceeds to buy and sell dividend paying stocks for the next 10 years, it may be impossible to prove what portion of the account is attributable to the gift and what is attributable to community earnings. This is called tracing the asset.

The easiest thing to do is encourage your children to set up accounts in their sole names and ask your brokerage firm to automatically move any income generated to a joint investment account with your child and spouse. The funds are easily traceable to the original gift and are kept pristine.

Your child also needs to understand that taking funds from a trust or other separate property to buy a home where she lives with her spouse poses special problems, even if the house is titled solely in her name. Consult an estate planning attorney to determine how this purchase should be structured.

Disposing of property

Drafting a will is probably the last thing on your child’s mind as he or she prepares for the big day, but it is important to understand the financial implications in the event of a premature death. State law usually takes over when someone passes away without a will, and that law may or may not coincide with the family’s property transfer plans. Absent a will, your child’s carefully preserved separate property might pass directly to a surviving spouse.

If your child is the beneficiary of a trust, sometimes the trust provisions give the child power of appointment, meaning that your child could direct the remainder of the trust assets to a certain person, group of people (blood relations), or to a charity. Without a will exercising this power of appointment, the trust’s original provisions would kick in if your child were to pass away, potentially disinheriting someone she or you want to protect.

Dealing with separate and marital property is complicated, and wealth advisors are here to help facilitate these conversations with our clients’ children or other relatives. We often sit in on estate plan drafting sessions to make sure our clients’ wishes are being addressed and that they understand how the provisions of their own wills or trusts will affect future generations. Please don’t hesitate to involve us in your estate planning meetings and family conversations.