Welcome to The Wealthy Mom MD Podcast—a podcast for women physicians who want to learn how to live a wealthy life. In this podcast, you will learn how to make money work for you, how you can have more of it, and learn the tools to empower you to live a life on purpose. Get ready to uplevel your money and your life. I'm your host, Dr. Bonnie Koo.
Welcome back to another episode. So today I want to talk about the legal aspects of marriage. Now, some people think I'm against marriage, but I'm not at all. Many of you know that Matt and I are not married. We are engaged. We just don't have a wedding planned at this time, and I'll get into why a little bit later.
In case you're not aware, the number of unmarried couples who live together is on the rise, whether you know it or not. In fact, I'm willing to bet that some of your married friends are actually domestic partners. You may have attended their wedding, but that does not mean they signed the legal document. It's possible that only their accountant or a financial planner may know the actual truth. But I digress.
The goal of today's episode is to talk about what you're signing up for legally when you get married. Sounds fun. Right? Alright, well let's first start with a brief history of marriage because I think a lot of us kind of forget that marriage used to be purely transactional in the past and still is in some families.
So like I said, marriage was basically a business transaction between families. And we kind of know this from the history books. We know that Royal weddings were almost purely transactional to keep the peace. The concept of an I-love-you marriage is actually pretty modern. I think we can all agree that this is a good thing.
However, current marriage and divorce laws in the United States were put in place mainly to protect the wife, as traditionally women were often homemakers and didn't bring an income. So if they got divorced, they were potentially financially devastated.
The problem is that as more women have joined the workforce and become the breadwinning partner--which we know is often the case for us women physicians--these laws can seem antiquated and often work against us. So while marriage is a legal contract and offers benefits, there's also consequences when you break that legal contract, AKA divorce.
Now, I'm not suggesting that you never get married, but it may make sense for a lot of you to delay marriage for some time. Many of us know that the divorce rate isn't zero. This isn't a newsflash. But so many people seem to think they're immune to divorce. Now, I wish the divorce rate was zero, but it's far from it. Now as physicians, our divorce rates are lower than the general public. Our divorce rate is around 30% for married physicians, and it's a little higher for certain women physicians. But overall we have a lower divorce rate.
Let me ask you: Would you send a job contract with these terms? If things don't work out in this job (which there is at least a 30% chance of this happening), we're going to take half of your assets and possibly a percent of your future income. None of us would sign a job contract like that.
But for some reason, all logical reasoning goes out the window when it comes to the marriage contract or we think we're the exception to the rule. But that's exactly what a marriage contract is. It's a legal contract.
So here's the thing. When you signed the marriage contract, you're also agreeing to your state's default prenuptial agreement. You heard me. You have one, whether you know it or not, and you probably won't like what the state’s the fault prenup agreement says. So you might as well make your own. And believe me, it's way cheaper than agreeing to your state's default prenup. Trust me.
Let me just say a few things about how divorce generally works. Now divorce is state specific and there are sort of two general camps: community property and equitable distribution. So community property states are states like California where basically anything that's accumulated during the marriage becomes the common property of both people equally, In an equitable distribution state, which is the more common type, anything acquired during the marriage is considered the property of the spouse that earned it. Now these are generalizations and so each state does things slightly different.
Let's talk about some financial pros and cons of getting married versus not getting married. So tax laws change frequently and they've changed a lot in the past few years. I'm making assumptions based on the Tax Cuts and Jobs Act of 2017. Before this major tax law change in 2017, many couples actually paid something called a marriage penalty tax. And that's because the married tax brackets were not double the single tax brackets.
The IRS kind of made some assumptions. Like if you're living with someone, you're sharing expenses. So you're saving money overall by living with someone else. Now this was more of an issue if both partners made similar amounts of money. But if one spouse made a lot and one spouse stayed at home and you actually got a marriage bonus, it kind of favored those with stay at home spouses.
Now the new tax law has largely eliminated this penalty, but it's introduced another sort of what I call a marriage penalty, specifically for couples living in high income tax states like New York and California. Now there's now a limit on what you can deduct in terms of your state and local tax deductions (also known as SALT).
So you may know that SALT is now limited to $10,000 total whether you're or married. So myself, I file a single, I can take the $10,000. Matt, who currently files as head of household, he can also take $10,000. If we were married, we could only take off $10,000 versus adding the two up and getting $20,000 off.
Another sort of financial consideration is since Matt files as head of household, that because we have a child together, only one of us could claim our child. We chose for Matt to claim it. That's mainly because the health insurance is under his name and so he actually gets a higher deduction as head of household versus just as a single person.
In 2019 for example, you know the head of household standard deduction was a little over $18,000 and the single deduction was a little over $12,000 for a total of just over $30,000. Now contrast that to a married filled jointly couple where the total standard deduction for a married couple is around $24,000.
Another pro of staying unmarried is that if you have access to a high deductible health plan that is HSA eligible, you can take advantage of having two HSAs. Just to give you the example that we have. Matt has the family HSA because he claims Jack on his tax return. He's able to fund a family HSA, which was just over $7,000 for 2019, and I was able to have my own HSA for around $3,500.
So we use our HSA as a stealth IRA, which means that we don't use the HSA to pay for healthcare costs. We just pay cash out of pocket and we actually invest the full amount in our HSA in the stock market.
Those were some of the cons of being married or the pros of being unmarried, but there are lots of financial benefits of getting married. So let me go over a few of them for you. One really cool benefit is that you can give unlimited amounts of money to each other. Now this only applies if your spouse is a U S citizen. As you know, the gift tax limit is around $15,000 but it is unlimited for your spouse. So that's pretty cool. You also have access to your spouse’s social security benefits in the event of their death.
Also, it has some estate planning built in when you're married. Now, of course, I highly recommend you have estate planning documents in place, but if you don't and you're married for the most part, I'm pretty sure every state has a spouse as the next-of-kin, in terms of having things go to you if there is no will, et cetera.
Speaking of estate planning, you can also share the estate tax limit, so whatever your partner doesn't use, if your partner dies first or vice versa. Then there are unused estate tax limits. Now I'm talking about the federal estate tax limit. You can actually take that too. Now the current federal estate tax limit is quite high. It's in the millions. So many of us, you know may not even have or need that amount, but it's good to know. And also the estate tax limit changes rapidly, just like tax loss.
Another part is that if one partner in the marriage isn't having earned income, but the other partner is, the one earning income can still fund a Roth IRA. They call this a spousal Roth IRA. Basically, you just create a Roth IRA and you have to check off that your spouse has enough earned income to fund the Roth IRA.
Now this is also another perk. Now, for the most part, unfortunately, our health care is tied to our employer. If you're married, for the most part, most employers require that you're married to get health benefits for the whole family. However, I will say that many companies are now allowing domestic partners to enroll and that's one of the reasons why we have health insurance is because for Matt's prior job--we're on COBRA right now--he was able to enroll me as this domestic partner.
One other financial benefit that I want to mention here since we've talked about real estate a few times on this podcast is something called real estate professional status. Now, real estate professional status is a tax status. It's not a job, although a lot of people think that's what it means. It doesn't mean you're a realtor. It just means that you spend the majority of your time managing your real estate. And so if you are married and one spouse is the breadwinner and working and the other spouse is part time or not working on paper at least, and they can claim this real estate professional tax status if they spend the majority of their career/business on real estate.
If you're married to the other working person, then both of you can reap the benefits of real estate professional tax status. I don't want to get into the weeds here, but basically it means that you can write off your real estate passive losses against your active income. And so this can provide some amazing tax benefits for the married couple. Not that it's impossible for you to get this without being married. It just means that it's just much harder to get because it has to be your primary work. And so if you are in a full-time position, you basically can't claim the status, at least not until you have enough real estate to justify cutting back on your clinical job.
So if you decide to delay marriage or just not get married, you want to make sure there are a few things in place. And so this is what Matt and I have. So it's more important that you have your estate planning documents in place because you don't have the same rights that spouses generally have. And so the first thing is you want to make sure that each of you have your own Last Will and Testament, or just will. As a reminder, a will is per person, it's not per couple. Even if you're married, you're each going to have your own wealth. And so the reason why this is important for most couples, especially if you have children, is this is a document that names your children or child's guardian.
And obviously if both of you are the biological parents, I can't imagine a state that wouldn't make the other partner, the biological parent. Also in the will, you're going to name the executor of your estate. Without an executor, the court's going to decide who handles your estate and controls distribution, and unfortunately, if you're not married, they might not pick you. You also want to make sure that each of you name a durable power of attorney in case one partner becomes incapacitated.
Now, if you don't have one, once again, the court will decide who has permission to make financial decisions on your behalf. In fact, this is actually a document that married couples need because, technically, without this document, you're not allowed to do a lot of sort of transactional financial things on your spouse’s behalf without this document. Of course, all of us know about healthcare proxies and you definitely should have one as well.
The good news is since you know things like insurance proceeds and retirement account proceeds, they don't have to go through probate. Just make sure that you update your beneficiaries. Otherwise, the court will decide who receives the proceeds, such as your partner's ex spouse.
So I wanted to also give a few reasons why you should delay marriage that we didn't cover so far. One of them is actually having student loans, especially if you're on an income-based repayment plan. Because if your partner makes a lot of money, then you're going to get penalized in terms of the income-based repayment. For those of you pursuing income-based repayment or some sort of forgiveness plan, like public service loan forgiveness, this might actually work in your favor and save you thousands and thousands of dollars.
Also, my friend Travis Hornsby of Student Loan Planner reminds me that if you are getting married, the timing of it matters too. He actually recommended not to get married in November or December due to the timing of recertifying payments. He said that January weddings are best because if one you need to recertify or certify the payments, which look back at prior tax returns. Now before you decide to delay marriage for this specific reason, I do recommend you get a consultation by seeking a professional. Of course, I highly recommend Travis Hornsby of Student Loan Planner.
Another big reason to also delay marriage is if you're part of a blended family. So let's just define what a blended family is. I am part of one. So they're defined as when one partner brings in children from a previous marriage or relationship. Now, this can obviously add a lot of complexity. If this is your situation, that doesn't mean marriage is off the table. It's just worth considering delaying marriage because of the complexity.
First, I want to say that you really should be aware of the financial obligations your partner has. You may also want to consult a family lawyer in the state of the custodial residence of the children. Meaning if you and your partner live in one state and the ex lives in another state and you have children go back and forth, you want to consult the state where the ex lives. Child support laws are state specific.
You may have heard that your income and assets won't matter since they are not your biological children. You should be aware of all the financial obligations your partner has, and you may actually want to consult a family lawyer in the state of custodial of the children.
What that means in plain English is where the children live, where the biological mother lives, in case you live in different states. Now you may have heard that since you’re not the biological parent, that your incumbent assets won't matter in terms of child support. But that's not always the case. Even if the state law says that it's not the case, because unfortunately, that may not deter the ex spouse from trying to get at your assets.
I personally have known this happening to women physicians. Even if the suit is frivolous and gets thrown out, that still means that you're going to need to hire a lawyer, AKA spend money and spend time on this matter. In my opinion, this is a huge reason to delay marriage until the children no longer require child support and college support. The FAFSA does not ask for your income, but the college can. Now, if you're willing to take this route, then obviously get that paperwork I mentioned above in terms of estate planning in place.
The last reason I want to go over why you should delay marriage is if you and your partner are not on the same page financially. Now, I don't know if this is true or not, but many people say that money is a top reason for divorce. It's definitely a large reason. I don't think it's the top reason, but so many challenges can happen when you and your partner are not on the same page when it comes to money. Getting married is not going to solve this problem.
I highly, highly recommend premarital financial counseling. Yes, such a thing exists. In a future episode, I'm going to go over some of the questions that you guys can ask each other. Many of us know friends who are married to people where they don't see eye-to-eye on finances. You know, people often joke, “Oh, I'm the spender. He's a saver” or vice versa.
If you're not on the same page financially, it's not going to get better just because you get married. In fact, the issues often get magnified. I can't highly recommend premarital financial counseling enough.
I hope I've given you all a lot to think about for those of you who aren't married. For those of you who are, no worries. Now you just have a better idea of what you signed up for. For those of you who are married, my best advice is for you to invest in your marriage. I don't mean just money,
although I do mean money. I also mean you need to spend time with your partner. I know this sounds really funny, but many of us couples who have children, we sometimes often neglect our spouses or we take them for granted. So it is money well spent to invest in your marriage.
To sum things up, be sure to understand that when you do get married, you are signing a legal contract with its own terms and conditions, including exit terms and the exit terms aren't that great. That's why everyone should get a prenuptial agreement. It's way cheaper than agreeing to your state's default prenuptial agreement.
Okay, have a great day. Bye for now.
Hey, if you're a woman physician who is ready to take control of your money, you've got to check out my program Money for Women Physicians. It's part course and part group coaching and a hundred percent guaranteed to put more money in your pocket. Go to wealthymommd.com/money to learn more.
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