May 28, 2019

No one would argue that marriage is complicated. From a financial planning standpoint, though, so is not being married. Yet, there are more cohabitating couples than ever. In 2016, there were 18 million people living with a domestic partner—a 29% increase from 2007, according to the Pew Research Center. The trend is increasing most rapidly among those who are 50 and older.

Despite the growing trend, unmarried couples can encounter complications as they seek to do their financial and estate planning. Domestic partners shouldn’t take it for granted that they may be eligible for all of the legal protections and advantages that legally married couples have. 

To ensure that your finances are organized in the way you want, use these tips.

1.Start with a will
A will is the backbone of any estate plan—but it’s just the beginning. 

A will spells out how your assets are to be divided and who will be the guardians of your minor children if you were to die. But if you die intestate, that is without a will, you won’t get a say in these important decisions. Instead, they will be made for you according to the laws of your state—and there’s no guarantee that will line up with your wishes.

For example, without a will, your property would pass to parents, then siblings, then nieces or nephews, as laid out in the inheritance laws of most states—not your domestic partner. Domestic partners aren’t recognized as natural heirs. A will takes care of that and makes sure you protect the people you care about and love.

2. Protect your children
Whenever children enter the picture, the considerations rise exponentially. You might need to take extra steps to ensure full parental rights with a few key documents, including a joint parenting agreement. 

“Make sure joint parenting arrangements are discussed with teachers, medical care workers, recreation leaders and others in the child’s daily life,” says Kathleen Howe-Hrach, senior wealth planning consultant with BMO Wealth Management 

If both partners are a child’s biological parents or were in a relationship at the time of the birth in the case of same-sex couples, it’s still worth taking some precautions.

“If you want to ensure that both partners are considered the legal parents, both names should be on the child’s birth certificate,” Howe-Hrach explains.

3. Know the tax consequences
One knock against tying the knot is the marriage penalty. Married couples usually pay higher income taxes than if they earned the same amount as two single people.

But that’s not the case with other types of taxes. Take gifting, for example. Married couples have the ability to make unlimited gifts to each other with no tax consequences. Not so for unmarried couples. Their annual gift tax exclusion is $15,000 a year in 2019. Any gifts over that amount are taxable. 

Estate planning is another example where married couples can take advantage of tax saving strategies. They can utilize portability to maximize tax savings because each person is allowed to shelter $11.4 million of their estate from federal estate tax (thresholds tend to be lower at the state level). Sometimes, though, partners have different estate values, with one partner having the lion’s share of the assets, perhaps exceeding the $11.4 million amount. Utilizing the full, combined $22.8 million threshold allows the married couple to shelter both estates as the first spouse’s unused exemption can be transfer over to the surviving spouse.

If a couple is unmarried, the partner whose estate is more than $11.4 million would have tax due. 

“That’s a disadvantage if there ever was one,” says Richard Kollauf, vice president and director, Business Advisory and Estate Planning with BMO Wealth Management. 

4. Approach home buying and home ownership carefully
At some point in your relationship, the issue of home ownership may come up. In fact, more unmarried couples are buying homes together, according to data from real estate database Zillow. Tread carefully, Kollauf cautions. 

When you buy a home, there is the question of who will own it. Putting the home in one person’s name is rarely a good idea. Even a home that was owned before and is owned solely by one partner could pose trouble. “It is likely that both would be contributing to the mortgage and the upkeep in some way,” says Kollauf. “Without proper joint titling, the named person on the title will walk away with the whole property (in the case of a break up).” Where would that leave the other partner?

In the event of death, your partner could leave the home to someone else. Or if your partner doesn’t have a will, the home could pass along bloodlines as discussed earlier.

Joint titling helps you avoid that. 

“It doesn’t have to be a 50/50 joint title,” Kollauf notes. “If one person contributed more towards the purchase, you can pro-rate co-ownership on the deed. In addition, joint titling with some right of survivorship is also important.”

Another option is a cohabitation agreement. 

“This would document the terms of the arrangement including ownership and what happens after a break-up,” Kollauf says.

You might also consider using life insurance to help protect your ability to stay in the home in the event that one partner dies. 

“You need to prove an insurable interest, where one of you would sustain a financial hardship in the event of the loss of the other, like being able to pay the mortgage,” Kollauf says.

5. Plan retirement together
Retirement is another area where unmarried couples may need to do some extra planning. First, know that neither spouse is eligible for survivor benefits for either Social Security or pensions. That could mean a significant loss of income when the first partner dies.

“As a result, there is a greater need to plan for other financial resources for retirement,” says Howe-Hrach.

To maximize your retirement income throughout retirement, consider these options:

  • Use the death benefit from a life insurance policy to replace the loss of income from Social Security or pension.
  • Make sure your 401(k)s and individual retirement accounts (IRAs) are titled properly if you want your partner to inherit those accounts after your death. 
  • Consider waiting until age 70 to start collecting Social Security so you can maximize your monthly check.

Though there are more unmarried couples than ever, financial planning is still centered around traditional marriage. That means that you can’t take it for granted that you and your family will be taken care of in the same way. Do the extra work now to protect yourself and those you love.  

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