Family members usually share holidays, homes, gene pools, income–and debts.
But while assuming most family obligations is usually a matter of personal discretion, the law outlines exactly when family members are responsible for each other’s bills.
And, in fact, lawmakers sometimes adjust the rules regarding family financial responsibilities to reflect societal changes and what now seems fair. For example, Congress recently rewrote the rules concerning divorced couples who have income tax bills remaining from a joint return they signed when they were still married.
Here’s a look at some situations involving family and money:
– The “innocent spouse” bill was recently passed as part of a larger IRS reform bill. Specifically, the new provision makes it easier for individuals who owe back taxes that were incurred when they signed a joint return with their wife or husband to claim the status of “innocent spouse” and be relieved of paying back taxes that are really the responsibility of their ex-spouse. Previously, one could only attain innocent status by meeting strict criteria.
Also, if an individual has been living apart from his spouse for 12 months from the time he signed a joint return for which taxes are stilled owed, or if he is now divorced or legally separated, that individual can now elect to have his liability for the debt limited to items that are directly allocable to him. This provision, called the “separate liability election,” is not granted if both partners had actual knowledge of an understatement of tax, however, or if the IRS shows that the couple is engaged in a fraudulent scheme.
– Both partners in a marriage can expect to benefit from each other’s pension fund, but the law allows one spouse to raid his 401(k) and similar retirement plans without his partner’s permission.
Last year, notes David Certner, legislative expert with the American Association of Retired Persons in Washington, D.C., Congress toyed with adding a provision to the Taxpayer Relief Act that would require married employees to get a spouse’s permission before taking money out of a 401(k) type fund. “They discussed it, but it didn’t pass as part of the bill,” says Certner.
In 1984, he notes, Congress did enact the Marriage Equity Act, which requires married people to obtain their spouse’s approval if they elect to receive pension payments that don’t carry a survivor benefit. This marriage equity law concerns only “defined benefit” pension plans, says Certner, whereby a retired employee receives a set amount each month based on how long he worked for the company and the size of his salary. If an employee elected a payout without a survivor benefit, meaning that his spouse wouldn’t receive payments after his death, he would typically be entitled to larger monthly payouts during his lifetime. But because payments would stop after his death, such an arrangement would require a spouse’s consent.
Because retirement plans such as a 401(k), in which the worker makes contributions himself to his retirement fund, are now more popular than defined benefit plans, Congress considered extending protections for spouses to those plans, too, explains Certner. As it stands, however, no spousal consent is required if a worker wants to withdraw funds. Spousal consent isn’t necessary to an employee to take a loan out on the account, either.
One of the reasons that Congress considered requiring spousal permission for withdrawals or loans from a 401(k) is that in many rancorous marital splits, spouses have looted their accounts in advance of a divorce, in hopes of avoiding splitting the money with their soon-to-be ex-husband or wife, Certner notes.
– Credit card debts racked up on a joint account with a spouse–or anyone such as a business partner–can’t be wiped away for either party until they are paid in full.
Suppose, for example, illustrates Catherine Williams, president of Consumer Credit Counseling of Greater Chicago, that a husband and wife owe several thousand dollars on their joint Visa credit card. Even if in a divorce proceeding a judge declares that paying off the card is one particular spouse’s responsibility, the debt can still trail the other spouse if the responsible party doesn’t pay. If a judge orders a husband, for instance, to pay the credit card bills, and he doesn’t, the creditor can hound his former wife and report the missed payments on her credit record.
“The credit card issuer is not involved in the divorce decree,” explains Anne Fortney, a partner in the Chicago and Washington, D.C., law firm of Lovell White Durrant. “Nothing can change the original credit card agreement that the husband and wife once entered into. So, if you divorce, you have to make sure that the spouse who is told to pay does indeed pay.”
If a husband and wife are married, and each has separate credit card accounts that the other is not authorized to use, the debt amassed on those accounts is their separate responsibility. If the couple were to divorce, the debt on each of their cards would remain their individual responsibility.
The fact that a spouse’s credit payment record can trail you even after death or divorce is the reason many women’s rights advocates recommend that a women establish credit in her own name, completely separate from her husband’s, notes Williams.
– When parents die, it’s common for an adult child to be executor of the will, and see that all debts are paid from the estate. But if parents die with, say, $14,000 in credit card bills and they leave behind only $10,000 in savings, the child or children are not responsible for the remaining $4,000.
“If the parent dies insolvent, then the debt dies with him,” explains Fortney.
Similarly, if one spouse dies, all debts on his separate, individual accounts die with him. “I had a case in which an elderly lady’s husband died suddenly,” relates Fortney. “Fortunately for her, all of their credit cards had been in his name, and she was not an authorized user. I wrote letters to each of the creditors that there was no money left in the estate, and she was not responsible for the bills.”
– The law forbids a child under the age of 18 obtaining a credit card on his own. Different credit card issuers have different rules, explains a spokesperson for Visa U.S.A., but a minor can’t obtain his own account without an adult co-signing. Some credit card companies only allow a minor to obtain a separate card off his parent’s or other adult’s account. In either case, all charges made by the minor are the responsibility of the adult who co-signed or who has the account that the extra card was issued on.
A minor can’t obtain his own credit card or enter into a contract himself, notes Fortney. If a minor joins a book or CD club without a parent’s consent, the parents are not required to pay any costs for any products ordered.
