Marriage is life changing. Since a marriage is completely merging two lives, it affects every area of life, including finances. To be clear, I’m not advocating marrying for the money, but you may want to consider how marriage might affect your finances. To paraphrase Kanye West, I ain’t sayin you’re a gold digger, you just ain’t marryin with no broke honeys.
In an ideal world, both spouses would bring a positive net worth with no major obligations to the table. However, often one or both parties bring debt and other obligations to the table. As long as the two of you stay living and married, this doesn’t get too complicated. Just know that the debt will weigh on the family finances, but as long as payments continue to be made on the debt, everything’s good. And since I generally suggest pursuing debt free living, I’d suggest paying down the debt as quickly as possible.
However, things can get messy in the unlikely event that one spouse dies. Depending on the situation, the spouse may still be saddled with the other spouse’s debt. This can become an especially heavy burden since the deceased spouse’s income is now gone. If debt repayments were the largest item in the family budget, this can deal a severe blow to the surviving spouse’s finances. How debt affects a surviving spouse depends on what kind of debt it was.
Federal Student Loans
Across the board, regardless of state, federal student loans are automatically discharged in case of death. This is especially good news since for many younger couples federal student loans account for the largest portion of their debt. Of course, remember that only the deceased’s loans are discharged. You’ll still be responsible for your own loans.
Community Property States
The treatment of all other debt, including private student loans, depends a lot on your state’s laws. A handful of states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) are known as ‘community property states.’ In these states, by default, all property, including debt is considered joint property in marriage and the surviving spouse is likely responsible for all of the deceased spouse’s debt. In other states, debt accrued before marriage is usually considered separate, potentially leaving the surviving spouse off the hook.
Strategies to Protect Yourself
Notice my heavy use of ‘likely’ and ‘potentially’ in the above section. Even in community property states, there are ways for each spouse to protect themselves from the other spouse’s debt. But regardless of where you live, creditors will do everything in their power to recover some or all the money owed to them. Depending on how you treat your debt and strategies you put in place, you can end up owing creditors more or less in the case of your spouse’s death.
Consult A Lawyer
Every situation is different. Every state has a different set of laws. You can use this post and other articles as guidelines for a ‘DIY’ protection strategy. However, for the most waterproof protection against creditors, you’d need to consult someone trained in your particular state’s laws who could evaluate your particular situation. Of course, consulting a professional will likely cost a pretty penny and probably only makes sense if one of you is carrying a particularly large load of debt. If your debt load is more manageable, perhaps paying expert fees for an unlikely situation is not really worth it. You might decide that you’re better off taking the ‘DIY’ route, doing the best you can, knowing that you’re running the risk that you might still be on the hook for some of your spouse’s debt in the unlikely event of their death. In this case, read on.
Separate Your Finances With Prenups
Not romantic and typically just associated with divorce, prenuptial agreements can also protect a spouse in the case of death. A prenup helps define to the courts what debt is his and what’s hers, giving you extra grounds to disown your deceased spouse’s debt when creditors come knocking. To maximize this strategy, it is wise for each spouse to keep separate bank accounts and pay their own loans from their own bank accounts. Appearances matter, so if the courts can see that the couple had been keeping their finances completely separate, they are less likely to hold a spouse responsible for the deceased spouse’s debt.
In case all other strategies fail, consider taking out life insurance policies on each other for the total value of debt between the two of you. This way, you are guaranteed to be able to pay off all your debt if one of you dies. In the worst case scenario, where the surviving spouse is left responsible for all debt, he or she would be able to completely pay it off with the life insurance benefit, significantly reducing the strain of dropping to a single income.
Although the possibility of one spouse dying an untimely death is real, it is also unlikely. One habit to get into that will help both in life and in death is communication. Make sure each of you are open with each other about the debt that you’re bringing to the marriage. Develop strategies together to pay it off. Be on the same page regarding taking on new debt as a couple. This will make your finances much more pleasant to deal with in life, while also avoiding any nasty surprises in death.
While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.