Millions of Americans are no longer wed to the institution of marriage. As of 2016, about 18 million US adults were in cohabiting relationships, up 29% since 2007. That includes 4 million age 50 or older, a sharp 75% increase.
Not getting married might seem like a way to avoid financial and legal complications, but in some ways, it actually creates new problems. The legal system, financial accounts, insurance policies and more tend to be designed with married couples in mind. Unmarried couples often need to take extra steps to gain the same advantages—if they can access these advantages at all. And it is crucial for any unmarried couple to have certain specific money conversations before these challenges threaten the relationship or the well-being of each partner.
Here’s what unmarried couples who decide to live together need to do…
1. Know what your insurance won’t cover. If one partner owns the home that both share, the homeowner’s insurance is unlikely to cover the other partner’s possessions. This partner should obtain a renter’s policy to cover these.
If you drive a car owned by a partner to whom you are not married, that partner’s insurance policy likely will cover you (the policyholder should contact the insurer to confirm this and to list the partner on the policy if necessary), but it might not cover the non–car owner’s possessions if they are stolen from the car. And the non–car owner will not be covered when driving a rental car even if the policy features rental-car coverage.
Also, unmarried couples generally must obtain separate health insurance coverage, though there are exceptions. Ask your insurer or your employer’s benefits coordinator if your policy can cover your domestic partner.
2. Decide whether you want your partner to make financial and/or health-care decisions for you if you cannot make them for yourself. This decision-making right is not automatically conferred on your unmarried partner as it often is on a spouse. If this partner is the person you want making these crucial decisions for you, name him/her as your proxy on a financial power of attorney and/or a health-care directive. Speak with an estate-planning attorney, or look for the forms online by entering the names of the forms into a search engine.
3. Understand the tax consequences of remaining unmarried. Married couples typically choose between “married filing jointly” and “married filing separately” status when they file their income tax returns. Unmarried people file separate returns, typically with the tax filing status “single.” This is one area where the system is not slanted in favor of the married—tax bills tend to be lower with “single” status, though this can vary.
While a married person can share money with his partner without any tax consequences, an unmarried person must file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, if he/she gives the other partner gifts with a value totaling more than $14,000 during a year—and that includes not only cash but also gifts of almost any sort with the potential exception of help with medical or tuition expenses if these are made directly to the medical provider or educational institution. Gifts to a nonspouse partner will count against the giver’s lifetime gift tax exemption and estate tax exclusion. This exclusion is currently $5.49 million, however, so the gifts will result in federal estate tax only for very large estates. (They could lead to state estate taxes for more modest estates, however.)
In some states, an unmarried partner can face real estate transfer taxes if he inherits a home from his partner (or inherits his partner’s share of a home that the couple co-owned).
4. Decide whether any assets will change hands if you eventually split up or one partner dies. If you’re married, there are laws that ensure a surviving spouse will inherit much or all of the estate…and divorce settlements tend to ensure that assets will be divided. But if you’re not married, your partner will not automatically inherit anything at all if you die…and the situation is not as clear-cut as you might expect if you split up. Unmarried people often assume that each will automatically keep his own assets in a split, but in most states, it is possible for an unmarried person to take a former partner to court and make a financial claim, perhaps arguing that there were verbal promises of financial support.
To avoid this uncertainty, both partners should sign a document waiving any claim on each other’s assets…or a document spelling out exactly what each partner will receive from the other if the relationship ends. This not only protects the assets of the partner with greater assets but also gives the other partner a way to ensure that he is not left destitute. Rather than depend on a lawsuit that could very possibly fail, this partner could secure an agreement that the wealthier partner will provide a specific amount of financial assistance if the relationship ends after many years.
There’s no need to pay a lawyer to draft this document unless the agreement you have in mind is complex. Use the forms in my book or search online for “living together agreement” or “cohabitation agreement.”
Each partner should have a will drafted and fill out beneficiary designation forms for various financial accounts to detail precisely what assets go to the other partner. Unlike surviving spouses, a surviving unmarried partner will not necessarily receive anything at all if the other partner dies without having these documents in place.
5. Decide how you will divide expenses. Will you and your partner share all expenses or share only expenses that are clearly joint living expenses that benefit both of you—things such as groceries, utilities and vacations? And how will these expenses be divided? The obvious 50/50 split might not be appropriate if one partner has much higher earnings or savings.
One common sticking point is how to handle expenses that are legally specific to one partner but that benefit both, such as the mortgage bill, property taxes, home maintenance and home repairs when the home is not jointly owned. The home-owning partner might think that these expenses should be shared because both partners are benefiting from the home…while the non–home owner might not agree because only the home owner will later benefit from the sale of the property.
Example: A man moves into his retired girlfriend’s home. The pair have roughly similar savings, so the commonsense division of expenses would be for them to split expenses 50/50. But the boyfriend’s arrival means that the girlfriend can no longer rent out a room to a boarder, so the boyfriend agrees to pay rent equal to what the boarder had been paying in addition to splitting other living expenses.
What’s crucial is not necessarily the decisions a couple makes but that the topic is discussed at all. Problems arise when couples make assumptions about expenses rather than talk this through.
6. Decide how to own jointly owned property. If you and your unmarried partner purchase real estate (or certain other valuable assets such as a car, boat or RV) together, you will have to decide whether to title your ownership as “joint tenancy” or “tenancy in common.” Joint tenancy, which means two or more people co-own property, is the best option if you and your partner will own an equal share of the property and you want the surviving partner to receive the property outright when the other one dies. (Note that in the case of an unmarried couple, inheriting this property could generate a tax bill.) Tenancy in common, which means two or more people each own separate and distinct shares of property, is the better choice if you will not each own a 50% share and/or you want each partner to be able to leave his share to whomever he likes.
7. Agree to save separately. Unmarried couples should maintain separate investment and savings accounts even if they expect to spend the rest of their lives together. There is little upside to combining these accounts, and doing so would put both partners’ savings at risk if either partner were sued, pursued by creditors or required an extended stay in a long-term-care facility.
Exception: It is reasonable to maintain a joint checking account of modest size to pay the couple’s joint expenses.
8. Sign an agreement stating that you don’t intend to create a “common-law marriage” if you live in a state that recognizes these. In certain states, if you live with a partner for years and “present yourselves as a married couple” during that time—a phrase that’s open to interpretation—you could be considered to have a common-law marriage and be legally wed even if you never got a marriage license or had a marriage ceremony.
Common-law marriage rules create ambiguity that isn’t beneficial for anyone—even the partner who has less income and assets. Are you married or not? If you split up, are you entitled to a share of your partner’s assets and income or not? Can you leave your entire estate to your children from a prior marriage or not? State laws do not even spell out how many years you must be together for common-law marriage to be a possibility.
If you live in one of the states that recognizes common-law marriage, the sensible move is to eliminate this possibility so that you and your partner can be sure about your legal status. If you want to be married, get a marriage license and get married…and if you don’t, sign an agreement stating that you do not intend to form a common-law marriage.
Where: Common-law marriage is recognized in Alabama, Colorado, the District of Columbia, Iowa, Kansas, Montana, Oklahoma, Rhode Island, South Carolina, Texas and Utah. It is also recognized in several other states if it began earlier than a specified date.