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Is marriage a dumb move?

Falling in love after years of building wealth can make life complicated. Tying the knot can sometimes make it worse.

By Jennifer Merritt, Money Magazine

(Money Magazine) -- Michele Mann was doing just fine on her own, thank you. She had launched a successful interior design business, which now earns her about $100,000 a year. She'd nearly paid off the two-bedroom Phoenix condo she had bought for $450,000 in 1992. And she'd amassed a handsome portfolio.

Then, two years ago, the never-married Mann, now 56, met Charles Wally, 67, a divorced retired rancher and insurance executive who lives in nearby Scottsdale, and love changed the game plan. "We were on the same page about so many things in life," says Mann. This month they'll wed.

Michele Mann and Charles Wally
Michele Mann and Charles Wally
Legally bound
Nothing kills romance like the words "my attorney." But you can't ignore what's at stake. The legal documents you'll need:
If you're getting married
Consider a prenuptial agreement, especially if you want to earmark assets for your children from a previous marriage. It will spell out how your money and property will be distributed when the marriage ends (either by divorce or death).
If you're not
You'll want to have what's called a "living-together agreement." Similar to a prenup, it specifies who owns what, which expenses and assets you'll share and what happens if you separate. Also, have a lawyer draft health-care proxies, HIPAA privacy waivers and medical powers of attorney, which will let you make health-care decisions on each other's behalf and give you rights such as hospital visitation.
No matter what
Update your wills, beneficiary designations on retirement and brokerage accounts, insurance policies and titles on your house and cars if you are fully merging your assets.

Mann and Wally are a conventional enough couple that not getting married never crossed their minds. But these days it occurs to plenty of other couples of a certain age and wealth who are put off by the risk and inconvenience of joining two financially mature households.

It's a matter of security and ease: Had Mann and Wally simply opted to live together, for example, they wouldn't have had to deal with sorting out the ownership of two homes, deciding on a succession plan for Mann's business or protecting the inheritance for Wally's four kids from his two previous marriages.

No wonder that over the past decade the number of unmarried partners over the age of 65 has increased by 70 percent. The decision to wed or not, of course, is between you, your intended and your conscience. But you should realize that from a coldhearted financial perspective, the U.S. tax code and Social Security rules don't necessarily come down in favor of marriage for people with a substantial amount of assets.

True, you'll automatically reap certain legal benefits from tying the knot, such as access to employee perks or a greater voice in health-care decisions. On the other hand, you may find yourself paying a significant price, from lost income to higher taxes. So whether you plan to say "I do," or "Let's not," be sure to ask yourself these questions first.

Will marrying lower your income?

You no doubt realize that if you're collecting alimony from your ex, you'll likely give that up when you remarry. But you may not have considered the effect on your retirement income. Remarry before age 60 and you'll lose any Social Security income you're entitled to from a previous marriage. Ditto for a pension. "If you're retired or one spouse is widowed, you're often better off just living together," says Kirk Kinder, a financial planner in Bel Air, Md.

But matrimony may triumph in this regard: It entitles you to a cut of your new wife or husband's pension and Social Security payment, and that sum may be larger than you otherwise would have collected. Get estimates for both scenarios from the Social Security Administration (use the "Detailed Benefit" calculator) and your company pension-plan administrator.

Marriage can also affect the taxes you'll pay on your Social Security benefits. As an individual you can earn $25,000 a year before your Social Security benefits are taxed. As a couple, your total income can't exceed $32,000 (for more on what counts against that threshold, see "Working in Retirement: The Real Story".)

Will marrying raise your taxes?

You may pay more income tax today if you file jointly, but much greater tax savings could come your way later. You can inherit all your spouse's assets tax-free, but an unmarried partner must pay federal estate taxes on any amount over $2 million through 2009. (In 2010 the estate tax disappears, and the exemption goes down to $1 million in 2011.)

If you plan to sell a home, you'll double how much of your profits are free from capital-gains taxes ($500,000, vs. $250,000 for a single person). Both own homes? Consider living in the place you want to sell and renting the other for two years to qualify for the $500,000 exemption, says Dallas financial planner Sean Monohan. After that, move to the home you plan to keep.

Will marriage increase your liabilities?

As a married couple, you'll usually pay lower auto insurance premiums. You may also do better by joining your new spouse's health insurance plan. As a self-employed person, Mann estimates she'll save $265 a month when she's added to Wally's retiree health insurance plan. On the flip side, being married can legally obligate you to shoulder some big expenses, such as your spouse's loan payments or credit-card debts.

Will it disinherit your kids?

If you have school-age kids, be aware that that your new spouse's income and assets will count in financial aid formulas, possibly lowering any help your children will receive. Adult children can pose a different problem: Because marriage would give your spouse first dibs on your estate, you'll need to draft a new will and possibly a trust with the help of an estate-planning attorney to keep your kids' inheritance intact.

For Mann and Wally, the hassles are a fair trade-off for building a financial future together. The couple have already made some changes to their wills - Wally is leaving Mann his house (worth just under $1 million) - and their life insurance policies. And the pair are seeking legal advice on how to handle their other assets and their estates. "On the way to the altar, there's yours, mine and ours," Mann says. "And there's trying to keep the romance alive during it all."

3 fast fixes for Mann and Wally

Choosing to marry has created some financial challenges for the couple. Monohan offers this advice for a lasting union of heart, mind and money.

  • Decide if the business is theirs or hers. Unless Mann and Wally sign a legal agreement specifying individual ownership, the couple would share the income as well as any liabilities from Mann's interior design business. And half would become part of Wally's estate should he die while the business is running.
  • Move to her house. Mann plans to sell her condo, estimated to be worth $1 million, eventually. As a single person, she can exclude only $250,000 of her $550,000 expected profit from capital-gains taxes. But if the couple live in the house for two years after they marry, they could keep $500,000 tax-free.
  • Use insurance for bequests. Wally wants to leave money to his four children, and Mann hopes to provide for her niece and donate to charities. They could do so by updating their wills, but a simpler method would be to make their heirs, instead of each other, the beneficiaries on each of their life insurance policies.
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