Financial Planning for
Unmarried Couples
by Edi Alvarez, MSc, CFP®
December 2009
Why
might a couple remain unmarried? Obviously, for many same-sex couples it is not
a matter of choice, but a reality imposed upon them by the federal government’s
stance on marriage. For heterosexual couples the decision often boils down to a
need to maintain financial, family, political or religious independence while
still sharing a life with someone they care about.
There are two
often cited reasons for not getting hitched. If one partner is on Medicaid
eligibility could be lost. The other more commonly cited reason is that Social
Security earnings are based on that of a prior spouse and (a new) marriage would
eliminate this benefit.
Financial
planning for unmarried couples can be complicated. The complication arises from
federal and state government laws favoring ‘family members’ when there is a
death, disability or end to a relationship. A partner or best friend under most
state or federal law is NOT considered a family member and therefore will not
inherit or be treated as an automatic beneficiary under taxation laws, and can
even be denied access to a hospitalized partner or friend.
Many of these
challenges need to be addressed through wills, trusts and other estate planning
methods with attorneys once they have first been addressed with a financial
adviser. Unmarried couples need to be very clear as to what legal standing they
have; without it the law usually favors blood relatives – even if they are
estranged. Common law marriages in some states may also fall under question
since there are requirements that may need to be met before they will
qualify.
When
transferring money to a partner or friend, you are limited to $13,000 each year
and $1 million over your life. This becomes even more important when you own
property as “joint tenants with rights of survivorship,” since the entire value
of the property will likely be included in the “first to die” estate unless
you have sufficient documentation to demonstrate that you made equal
contributions from your own assets.
It is our
practice to review with our clients what they might or should include in a will,
power of attorney, healthcare directive or living will. Probate is the last
place that unmarried couples should land since it becomes contestable by any
family member. It is always a good idea to bypass probate by using beneficiary
designations for retirement accounts and life insurance, or to use
transfer-on-death (TOD) accounts. You may even create trusts to hold assets that
will designate the appropriate person or persons to receive them. BUT, before
you go and change all of your assets to include a partner or best friend PLEASE
NOTE that you may create a gift-tax liability since the limit is $13,000
per year and $1M for life.
For domestic
partners the best approach is to create a domestic partnership agreement that
defines the scope of the relationship and what happens should the relationship
fail. If children are involved, both partners need to be signatories to a
parent adoption agreement.
It is worth
noting that there can be a real advantage to keeping your finances separate as
an unmarried couple, since you can better control and allocate expenses and
taxes. It is always prudent to have a financial advisor review your trust and
other legal documents. It’s their task to look over the various documents with
an eye to ensuring that they truly provide for the outcome you expect.
© 2009 Edi Alvarez. All rights
reserved.