Couple Can Keep Assets Separate
Q: I have an awful credit history. My wife-to-be has an impeccable one. When we marry, does my credit rating become hers, or may she keep her own credit cards and credit history? What becomes of the home loan that is already in her name? --C.W.
A: Just because you decide to share your life with another person doesn’t necessarily mean you have to mingle your credit cards. Even in community property states such as California, two people are entitled to choose whether or not to combine their financial lives.
This choice is important for couples like you. Why? Because while it is theoretically possible that by marrying someone with an impeccable financial history you could improve your mediocre one, in most cases just the reverse happens, and the other spouse’s clean record is tarnished.
Robin Leonard, an attorney and author of “Money Troubles,” published by Nolo Press in Berkeley, recommends a simple strategy for avoiding this scenario. Before marrying, she says, a couple should sign an agreement pledging to keep their financial assets--including property, credit cards and any debts incurred by each--separate property.
Under this arrangement and assuming that your name is not added to the title of your wife’s home, she may continue to make payments on her home loan just as she did prior to your marriage. Beyond signing this statement--actually, it’s a type of prenuptial agreement--the two of you must be careful to notify any new creditors of your agreement after the marriage.
This is especially important in community property states. For example, in California, if a married person gets a new credit card of any sort, the debts accumulated on the card are presumed to be the obligation of both spouses regardless of whether both are listed on the card. The only way to avoid this assumption of financial obligation is to notify the card issuer of your separate property arrangement at the time you apply for the card.
The fine print on the application should explain the process; if you can’t find it, add a letter explaining your arrangement with your credit application.
This strategy applies to couples who are already married as well. At any time during a marriage, spouses in community property states may establish themselves as separate financial entities. But they may opt out of community property debts only in advance of incurring them. Obligations incurred prior to the financial separation remain the equal obligation of both spouses regardless of which one incurred them. Couples adopting this strategy should promptly notify their creditors of their decision.
You will probably be required to apply for new credit cards as individuals and to face an individual evaluation of your credit-worthiness based on your earnings and marital credit history.
Usury Laws Primarily Affect Personal Loans
Q: We recently made an $8,000 personal loan to an acquaintance. The terms called for 7% interest and repayment in 90 days. The borrower took an additional 90 days to repay us. We charged him 12% for this period. Is this “usury”? Is usury illegal? --B.P.
A: Not withstanding the somewhat careless abandon that often accompanies its use, usury is not a term of art. It is precisely defined by state statutes, which also set forth the penalties for their breach.
In California, usury is defined as interest greater than 5% above the Federal Reserve Bank’s discount rate to its members or 10%, whichever is greater. With rates at their current low levels, the limit in California is 10%--2 percentage points less than what you charged.
You may be wondering how this can be true. After all, banks, credit card operators, department stores, real estate brokers, pawnbrokers and a host of other individuals and businesses routinely charge more than the official usury rate, with absolute impunity.
The answer is that usury laws contain many, many exemptions. As a result, they end up applying to a relatively small number of loans.
In fact, the laws apply primarily to personal notes made by ordinary individuals not engaged in a business or profession--in other words, loans just like the one you made.
The consequences of charging usury are not small. In California, a usurious contract can be declared null and void, allowing the borrower to repay only the principal. In the worst-case scenario, the lender can be penalized three times the amount of interest above the legal limit.
Rollover Rules on After-Tax Interest
Q: I belong to the savings and retirement plan offered by my employer. The plan allows us to invest after-tax earnings; interest earned on this money is tax-deferred. When I leave this job and move my account, may I roll over the accumulated interest on the after-tax savings into an individual retirement account? -- R.V.
A: Assuming your account is part of a “qualified retirement plan,” you may transfer the interest accumulated on your after-tax contributions to another tax-deferred investment. However, as you apparently know already, when you close your account with your employer, you may not roll over your after-tax contributions into a new tax-deferred account. These funds must be withdrawn; how you invest or spend them next is your decision.
Before doing anything, though, check to make sure your account is part of a plan covered by Sec. 401(a) of the Internal Revenue Code.
Two Withdrawals From IRA Account
Q: Regarding your item (on Aug. 22) on mandatory IRA withdrawals after age 70 1/2, please explain why a taxpayer must make two payments in one year. --R.T.
A: As I explained, the beneficiary of an individual retirement account has until April 1 of the calendar year following the year he turns 70 1/2 in which to make the first withdrawal. Thus a beneficiary who comes of age in 1994 can choose to delay the first withdrawal until April of 1995. However, Sec. 408-8 of the Internal Revenue Code also requires a withdrawal in every year subsequent to that in which the beneficiary reaches 70 1/2. Thus, in our example, two withdrawals would be required in 1995, but only per year thereafter.
