Common Advice May Be Dangerous

Should “I Love You” Mean Pooled Finances?

There was a recent column in the financial press with financial advisers commenting on whether couples should pool their finances. The advice given might have been appropriate for the particular couple involved in the story. But the couple being addressed had very specific facts that are not an appropriate touchstone for many others. The couple had been together 15 years before getting advice to merge assets, and they had no children from prior relationships or their current relationship. Their wealth level appeared to be about $500,000, well below the threshold of any estate tax considerations. Both spouses also had jobs that were low or no risk so liability concerns were limited (although out of precaution everyone should likely do some asset protection planning). Because of that, the advice given to them would be too simplistic and often at odds with good estate planning that many other people should consider. No doubt, many readers will inappropriately extrapolate from that unique fact pattern to themselves. That could be quite dangerous. This article will take a broader, and more comprehensive look at this common presumption that couples should merge or pool their assets.

Apparently almost 50% of couples have only joint assets. For those with modest wealth, limited liability exposure, and a simplistic planning situation, which might be OK. But for many couples pooling all their finances may just be a bad move. While the advisers weighed in on several planning implications of pooling assets, some of which we’ll explore, the decision to pool assets can have significant implications to asset protection planning, the viability of your irrevocable trusts, and more. A more sophisticated analysis of whether or not assets should be pooled may be advisable for you. You should not use generic advice, or worse, specific advice designed for a fact pattern different than yours, ignores nuances that could be vital to your situation.

Document Your Pooling Goals and the Consequences

If you’re going to pool your finances in one, a few or all aspects, consider documenting what you are doing, why you are doing it, and what your goals are. That can be done in many different ways. First off, have your financial adviser put together a plan and forecast so that there is an explanation of what you are trying to do. Work out a written investment policy statement so that there is a framework for agreement as to the investment philosophy that you both will adhere to. If after those basics you both still believe pooling makes sense, get an attorney to advise you as to the pros and cons of pooling. If you still proceed document both of your objectives, and perhaps just as important, how that pooling will be unwound if there is an issue (e.g. your relationship ending).

It might be easy to pool your assets, but a costly nightmare to “un-pool” them if stuff happens. It’s kind of like the old riddle “What is easy to get into, and hard to get out of? Trouble.” So, if you engage your financial adviser in a discussion about their recommendation about pooling for psychological or other reasons, spend just as much time discussing unwinding those arrangements.

Many people will be enticed by the simplicity of pooling finances, and perhaps the social presumption that couples should pool their finances. And the suggestion of handling this in a more comprehensive and safer way won’t be appreciated by many. But that could be a mistake. If you’re going to pool your finances the thought of meeting with matrimonial counsel, or even more likely two matrimonial attorneys as you will each require your own attorney, to work out what some might view as a costly and an unpleasant agreement, won’t be appealing. While you might not love that idea, if you are going to pool, address it in a comprehensive and realistic way as appropriate for you.

What Do You Really Want To Do?

If you’re in a second or later marriage, and especially if one or both of you have children from a prior relationship, might you want to keep certain assets separate so that they can pass on your death to your children? Sometimes yes, sometimes no, and there are lots of options. But the couple in the story we are expounding on had no children from prior relationships so that their fact pattern on that point was much simpler than that of many families.

Separate versus Marital Property

Before you pool any of your finances find out the implications of what that might mean to the characterization of the assets involved for matrimonial purposes. If you have an asset that was premarital and maintained separately with no commingling of marital resources, that asset might be characterized as separate property that could be yours in the event of a divorce. If you pool that by merging your account with one of your spouses into one new joint account, that may forever change the character and implications of those assets. Speak to an attorney before you change title to accounts to understand what the implications are. You might still proceed, but isn’t it better to know what you are getting into? None of the advisers in the article even mentioned the matrimonial implications to pooling.

What Asset Is Involved?

In the story the couple owned a second home. If that second home is in a state other than in which you live, on death you could face probate of that asset in that second state (called “ancillary probate”). Part of the discussion should be not only about what to pool or not but also about the other implications of each asset involved. If you change the title of a vacation home in another state to join, the survivor will inherit it on the first spouse to die passing. But on the second death heirs might still face a second probate proceeding. Using a revocable trust to own the house, or each of your trusts to own half of the house might be an option worth discussing. Another consideration is if that second home is rented. If so, you might want to have a limited liability company (“LLC”) formed to own the property to provide some protection for your other assets if a tenant might sue. Again, consider all the implications to how an asset is owned, not only whether you would like to own it jointly as a couple.

Pooling Finances By Filing Joint Income Tax Returns: Good or Bad?

Pooling income taxes by filing a joint return is recommended as a means to reduce income taxes for many but not all people. While that may be true, that is only part of the story. From an asset protection perspective, you might want to file separate income tax returns. If you are sued, and you have been filing joint income tax returns, your adversary may request copies of your income tax returns. For example, disclosures on your income tax return may be relevant to the actual claim in issue, or relevant to settlement negotiations. If you file joint tax returns then your spouse’s financial data might also be exposed. While your attorney might be able to object to the disclosure of your spouse’s financial data as inappropriate, there may have to be negotiations over what items are redacted and which should not be. That process, and any indications of your spouse’s assets, might be avoided if there were married filing separate returns. Then only your return with your financial data will be disclosed. That might be beneficial from a confidentiality, privacy and asset protection perspective.

Let’s say you are just not willing to forgo the tax savings of filing joint. There may be another more sophisticated approach. Here’s an idea to discuss with your attorney and CPA. You and your spouse may enter into an agreement, perhaps as part of a prenuptial agreement (and if not a post-nuptial but as part of a prenuptial from inception of the marriage may be better). That agreement may require that you each keep separate financial records. (That by the way is relevant to the rest overall discussion of pooling finances). The agreement mandates separate records and assets, that your CPA will first prepare married filing separate returns each prepared from your separate data. Then from those married filing separate returns your CPA will aggregate data and prepare the married filing joint return. This process can be mandated in the engagement letter you sign with your CPA each year. Should either of you ever be tagged in a lawsuit, or even a business deal or disclosure obligation that requires disclosure of your income tax return, you will provide only the married filing separate return. The process documented in your agreement and CPA engagement documents what was done and that the information in that not-filed married filing separate return is demonstrably accurate. Shazam! You get your married filing joint income tax break but safeguard your financial information.

If you and your spouse are both in high risk professions, e.g., surgeons, the above approach might be worth exploring.

The bottom line, whether or not you file income tax returns jointly may be about a lot more important stuff than just the income tax savings. A broader, deeper, more personalized and sophisticated discussion of this often routine step is exactly the approach you might take on ally your estate planning decisions. Simple is great when simple works. But sometimes, like joint income tax returns, the simple and standard approach may not be best.

Don’t Forget More Advanced Trust Planning: Un-pooling May be Best

Many wealthy people have or will create irrevocable trusts to grow assets outside their estate. There will likely be many more of these plans created before 2026 when the estate tax exemption will be cut in half. If you’re a couple and you are going to put assets into the future into any of the various types of trusts that are used in these types of plans (spousal lifetime access trusts or SLATs, domestic asset protection trusts or DAPTs, special power of appointment trusts or SPATs, or hybrid DAPTs, even irrevocable life insurance trusts or ILITs) merging assets is the last thing you should be doing. You don’t want joint assets. You should not contribute joint assets to a trust for your spouse, you should only contribute assets that are not only in your name, but which have been in your name for quite some time. In fact if you’re a couple and planning to do more advanced planning, you should discuss with your estate planner the benefits of un-merging or separating joint assets to separate spousal names as far in advance of the planning as possible.

Let’s take this concept of more advanced planning a step further. Let’s say you and your spouse have created spousal lifetime access trusts (SLATs) for each other. A SLAT is a trust that say husband creates for the wife and that wife, and often all descendants are beneficiaries of. The husband who creates this trust is not a beneficiary of it (although there are lots of spins on this). If the couple has a joint checking account, i.e., they pooled at least that asset for purposes of paying joint bills, is that a positive or negative for their planning? It could be a really detrimental fact and perhaps should be avoided. Why? Because in the above example husband put money into a trust, he is not a beneficiary of. If the wife gets a distribution from the trust, since she is a beneficiary, where does she deposit that money? If she puts the distribution received into a joint checking account and husband uses it to pay his personal bills, doesn’t it appear as if he has received a benefit from the trust which he is not a beneficiary of? Perhaps. But why not avoid that issue and have separate checking accounts only. That latter approach may be beneficial to support the integrity of the estate and asset protection plan.

Should We Have a Joint Plan?

One of the themes of the answers the various financial advisers interviewed for the column mentioned above was that the couple should discuss their finances, understand what each of their goals are, and develop a joint plan. That is often valid advice for all (perhaps other than the SLATs planning discussed above when there can be advantages to not developing the plan jointly to avoid the reciprocal trust doctrine). So, even though many of the comments below will suggest that contrary to the common advice that couples should pool assets, in most cases, collaborative joint planning will remain a good idea.

Conclusion

If your wealth, issues, goals, complexities, family structure, or other factors are greater than the average couple, be really careful taking general planning advice from online articles and applying it to your situation without careful thought. And the best way to plan is always, whatever your circumstances, to plan for you. Trying to fit into a generic plan is unlikely to accomplish your goal.