New Spouse with Prior Tax Liability

[JohnH]

A relative of a client has posed this question to me. - this is a real situation, not a hypothetical.  Person #1 has  assets and is financially very stable.  They are contemplating marriage to Person#2 who has an outstanding Federal tax liability of around $100K (no problems with state tax liabilities).  Long story, and somewhat understandable, as to how the tax liability of Person#2 came to be, but nevertheless it exists.  There a repayment plan under way with liens in place. The repayment plan is scheduled for about 6 years so this will be with them for quite a while.  Person#2 is current in tax filings for the current and previous year  (aside from the older tax liability). I''m not asking for opinions about the undesirability of Person#2 being in this position - that's clearly understood in this group.  

Question is, if they marry, does the prior tax liability pose any financial risk to  Person#1?  The only thing I can think of would be seizure of any refunds due on jointly-filed returns (possibly partially recoverable using 8379 Injured Spouse allocations, or careful management of withholdings at the outset).  The other option of course would be MFS, but that would be evaluated on a year-by-year basis. Due to incomes, EIC would not be a major issue with MFS.

The only other thing I can think of would be the inability to borrow money jointly due to the existence of the lien, which isn't likely to be a problem for them.  Aside from that, NC is not a community property state (although it is a "marital property" state, so ownership of any property acquired after the marriage would be affected by the lien, but not previously owned property, I think).

Would appreciate any additional thoughts or cautions on this.   

[Lee B]

A family law attorney practicing in NC would be a good resource for person # 1.

[BulldogTom]

I think you have a good grasp on this.   They need to do a couple things:

#1 DON'T MESS UP THE CURRENT PAYMENT AGREEMENT.  Stay on schedule at all costs.

#2 manage the withholding so that he pays more and she pays little or none.   Then you don't have to worry about innocent spouse

#3 make sure the property that has a lien on it stays out of the marital property.   Those liens can be vague and apply to "all bank accounts"   so a joint account might bring her assets in a joint account under the lien.  Make sure you client knows what the lien covers.

Tom
Longview, TX 

[Catherine]

I'd expand a bit on Tom's advice. This is an instance where I'd advise thinking long and hard about putting any assets into joint names. The operating checking account (for the electric bill and groceries and the like) should be fine, but I'd keep everything else separate.

Further, if the financially stable person has any health issues or is in a risky profession, the couple should talk to a trust attorney and consider if that person's assets be placed in a trust whose secondary beneficiary is the spouse-to-be, for their benefit but not for their ownership. This gets into legal areas and I'm not giving legal advice - just advice to talk to someone able to give legal advice! Trustee who is not the liened spouse would have to be chosen, perhaps a trigger for wrapping up the trust once the IRS issues are resolved (or not, if the spouse-to-be is still bad with money). It would not be simple or cheap, but possibly less expensive (and peace-of-mind-bringing) than the idea of leaving substantial assets in the hands of one with a track record of making poor choices and bad decisions.