Same-sex marriages mean joint debt issues

Consumer bureau expands complaint data
Consumer bureau expands complaint data

Now that same-sex partners across the U.S. have the right to marry, under the Supreme Court's ruling Friday, millions more Americans will see the financial consequences -- favorable and not so favorable -- of getting hitched.

The court's ruling that same-sex partners have a constitutional right to marry clarified what had been a conflicting patchwork of state and federal rights. Since the court struck down the Defense of Marriage Act in 2013, the unions of gay couples were legally recognized at the federal level and in most states, but not in 14 states that instituted gay marriage bans. Now all states must grant marriage licenses to same-sex couples, and recognize all marriages entered into in other states.

Being the legal spouse of your beloved conveys important rights when it comes to medical decisions, taxes, inheritance and other important legal issues. It also comes with financial consequences.

Unsecured debt
When it comes to unsecured debt such as credit card debt, joint accounts come with obligations that many users don't expect. You don't have to be married to have a joint credit card account or bank account, but joint accounts are often convenient for married couples as they coordinate their financial lives under a combined budget.

Credit card agreements generally make both signers of the account responsible for 100 percent of the debt. The entire debt will appear on both signers' credit reports, for better or for worse. And if the couple's finances go south, the card issuer may come after you for the entire balance, regardless of whether you used the card heavily -- or never touched it.

What will infuriate many joint account holders is to find out that divorce decrees don't eliminate joint debt. And even if a decree allocates part or all of the debt to an ex, it doesn't remove joint accounts from credit reports. And the divorce won't shield you from collection calls -- and even legal action -- by the creditor. The bank will tell you that the divorce papers don't affect the contract you signed with them earlier, and to recover the ex's portion of the debt through your own legal efforts.

Joint ownership issues
A similar pitfall faces taxpayers who file returns jointly, said Gail Cohen, vice president and general trust counsel at Fiduciary Trust Company International. Signing a joint return makes you potentially responsible for the entire amount -- even if you had no income.

The IRS can come after both of you, or each of you separately. So if your spouse leaves town, you could be on the hook for the whole debt.

-- Gail Cohen 
Fiduciary Trust Company International 

"The IRS can come after both of you, or each of you separately," Cohen said. "So if your spouse leaves town, you could be on the hook for the whole debt."

On the other hand, a legal status known as "tenancy by the entirety" -- which is only available to married couples -- protects your interest in joint property. Say your spouse is sued for damages resulting from a car accident, and the plaintiff comes after a joint bank account or brokerage account. Tenancy in the entirety means your interest in the account isn't subject to seizure.

"If a judgment gets entered against one of the spouses, that judgment cannot attach to the innocent spouse's interest," said Matt McClintock, vice president of education at WealthCounsel. Accounts can be set up as tenancy by the entirety, which is the default account status in some states, he said.

A similar legal status is community property, the treatment of all property in a marriage as jointly owned, regardless of each spouse's contribution. "The beautiful thing about community property is, both spouses are treated as owners of the whole," McClintock said.

End of life advantages
Often overlooked is the favorable tax treatment of community property when one spouse passes away. For example, if a couple owns a vacation home together in a community property state, and one spouse passes away, the gain in value that the property achieved during the marriage resets. When the surviving spouse sells the property, the gain he or she faces for tax purposes would date back only to the value at the time of the death of their partner. 

For tax purposes, the gain in value from the purchase of the property to the death of the spouse "disappears overnight," McClintock said.

Another end-of-life consideration is the administration of an estate, where surviving spouses have important rights, Cohen said. "There's a priority in state law who can take over and administer your estate, particularly if you don't have a will," she said. "Typically the first in line to do that is the spouse."

See related: Same-sex marriage means joint custody of debt

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Updated: 01-22-2018