Marriages and families take many forms, and as a result, how married couples manage their finances as a household also takes many forms. A single income household typically has different financial considerations than a blended family with step and half-siblings. Regardless of your situation, a couple’s finances affect one another, so it’s important that your financial decisions are made deliberately. Understanding the practicalities of managing your finances can help make your approach a proactive one, as partners, rather than something to avoid.
Because no two couples’ situation looks the exact same, your combined financial strategy will be unique to you. To know where to focus your energy, it’s good to first understand the distinction between what is considered community property versus separate property.
What Community Property Is and Isn’t
Community property refers to assets that are owned by both spouses. Property laws vary by state, but for purposes of this discussion, we’re focusing on California.
In California, income earned during marriage is considered community property, along with assets acquired together during your marriage, such as investments, a home, and cars. In contrast, assets acquired prior to marriage, as well as gifts and inheritance (whether received during your marriage or not), are considered separate property. Unlike community property, the spouse who owns separate property has complete control of the assets, including how to use them and who inherits them.
Importantly, if you have separate property, you can decide whether to keep it separate or make it part of your community property. It’s crucial to be communicative, transparent, and deliberate as you make these decisions.
In our work with clients, we see many approaches to the way couples handle community and separate property, even among couples who are in similar positions. For example, consider two couples with children from prior marriages who now have blended families. One couple may choose to view their household finances as one pool of money, with all children receiving equal inheritance, and all assets considered community property. The other couple may choose to consider what is earned during the marriage community property while keeping separate property as-is, so that their respective children inherit their respective separate property.
Considerations for Each Aspect of Your Financial Life
Combining your finances into one household touches every aspect of your financial life. How to parse this in a way that feels comfortable to you will require many conversations and will need to be revisited as your lives evolve.
- Banking and Day-to-Day Expenses
Banking considerations include whether to have separate or joint checking, savings, and credit card accounts, or a blended “yours, mine, ours” model, in which a couple shares some accounts to pay for joint expenses, while keeping other accounts separate.
A common consideration is how to make your banking framework feel fair when one partner in the couple earns more money or has significantly more wealth overall..
- Investments and Real Estate
This aspect of your finances includes brokerage accounts, retirement accounts, real estate, and business interests. It’s important to discuss and decide how each of your assets are characterized, whether it is as separate or community property.
For example, if one spouse founded a business before marriage, it would be important to understand that their business ownership interest would be considered separate property, while their salary earned from the business would be community property.
- Taxes and Joining Your Finances
When you’re married filing jointly, the IRS sees your owed taxes as one lump sum regardless of whether the taxes are owed on your separate or community property. Where the money comes from to pay for taxes is a decision you’ll want to make together. For example, if one spouse has separate property stock investments, they can use that account to pay any taxes owed on those investments.
Another important tax consideration in California is that community property assets receive a double step-up in cost basis, which can result in significant tax savings.
All of the above decisions are central to any sound financial plan, and should be documented with your estate attorney, financial advisor, and tax professional.
Designing Your Household Financial Framework
Once you understand your state’s rules around community and separate property, the next step is the conversation itself. We encourage all couples to be open and honest about money so that they are on the same page. Vulnerability is hard, but financial surprises are often harder.
Grab your comfort drink, your favorite chair, and approach it as a planning session. Start off by understanding each other’s money stories. Talk about what role money played in your upbringing, for example, and have the conversation in a private, safe space so both parties feel free to be honest about their spending and savings habits. Some couples avoid these conversations because they feel ashamed of past financial decisions, or they want to make a change but don’t know how. Listening without judgment is key, and placing a time limit on each money conversation is a good tactic to keep it focused without being draining and endless.
Keep in mind, while it may feel like there’s a right and wrong way to approach joint finances, there is only what’s right for your household. What matters is creating a personal money strategy that both parties trust.
