- Consider signing an agreement outlining who owns what and how expenses could best be divided.
- Plan for the unexpected.
- Consider life insurance for added protection.
Over the past 20 years, couples have been increasingly living together without getting married first.1 But skipping the vows and cohabiting forever does pose some potential financial complications. It could take a little more effort to make sure you’re covered financially and legally in a manner consistent with the protections afforded legally married couples. Here are 4 things to consider if you choose not to say “I do.”
Put a plan in writing—preferably with an attorney
While it’s not a very romantic gesture, detailing future plans and possessions in a written agreement—similar to a prenuptial agreement—may be a good move and may help prevent problems down the road. At the very least, it can spur a discussion about finances and expectations on everything from who pays what monthly bill to the division of property in case things don’t work out. To help ensure that both parties are protected and that any tax implications have been considered, it may be a good idea to check with an attorney during this process. Things to potentially include: who owns what, how to divide expenses, and what might happen to jointly owned stuff if the couple breaks up.2
Splitting expenses. If one partner earns a lot more than the other, it may not make sense to equally divide living expenses. Or, maybe it would—it’s really a personal decision up to the 2 people in the relationship. Whatever you decide, figure out a plan ahead of time that is fair for splitting costs and household chores.
Who owns what? Make a list of things each person brought to the relationship and would like to have in the event of a breakup. Consider including provisions for purchases made during the course of the relationship. Another consideration may be gifts or inheritances one partner receives. Some couples may want to pool their resources; others may prefer to keep money and property separate from romance.
Here’s another wrinkle to be aware of: Some states recognize common-law marriages and may impose community property law. That means that even if a couple doesn’t get “officially” married, after living together for a certain period of time, the state law may declare them married by common law. If community property laws were to apply, then, generally speaking, the couple's assets acquired during the "marriage" would be split jointly at the time of separation, regardless of the legal ownership at the time. An attorney can best explain the state laws that may apply.
What happens if one partner dies or gets sick? This is tricky. Generally, without appropriate legal documentation in place, partners who live together don’t have the same legal rights as spouses when one partner is hospitalized or dies. For instance, state laws dictate who can make medical decisions on behalf of someone who is incapacitated—typically spouse or family is at the top of the list. For all these reasons and more, some estate planning may make sense.
Plan for the unexpected
Here’s an example of a sticky situation: One partner moves into her partner's home and is not on the title, which means she has no legal claim to ownership. If her partner passes away, she could end up on the street—even if she has lived there for years.
While a spouse or related family members may be the default beneficiaries when someone dies without a will, an unmarried partner could be left out in the cold. It depends on the laws of the state of residence. In order to be protected in worst-case scenarios, an unmarried couple may need to make it official—with some estate planning documents as described below.
Titling property and accounts
Owning property and accounts together is one potential solution to consider. Jointly titled property, bank accounts, and investment accounts titled as “joint tenants with rights of survivorship” will generally pass to the surviving owner.
A will is a legal document that spells out who will inherit property and other assets. It also names the executor of the estate and provides instructions on how and when beneficiaries receive assets. A will also names guardians for minor children. When drafting a will, it’s usually a good idea to get an attorney to ensure that everything is in order.
Health care directive, health care proxy, and durable power of attorney3
Health care directives, also called living wills, outline a person’s wishes for treatment if incapacitated. They typically accompany a durable power of attorney for health care. In many states, doctors can communicate treatment plans and options only to spouses and relatives—but with a health care proxy or health care power of attorney, a person can choose a health care agent. In addition, a HIPAA (Health Insurance Portability and Accountability Act of 1996) release will let the designated agent view medical records and discuss them with doctors.
Durable power of attorney for finances
In the same vein as the durable power of attorney for health care, the durable power of attorney for finances will let someone choose an “agent” to make financial decisions and pay bills in a worst-case scenario.
- Read Viewpoints on Fidelity.com: 5 steps to create an estate plan
Without getting legally married, federally guaranteed benefits such as Social Security for widows or widowers are not available. Maintaining a life insurance policy with a partner and children, if applicable, listed as beneficiaries may help ensure that everyone is taken care of.
- Read Viewpoints on Fidelity.com: 4 important questions to ask about life insurance
Designating beneficiaries on investment accounts, retirement accounts like IRAs or 401(k)s, and life insurance policies is important. That’s because beneficiary designations on these accounts and policies will take precedence over wills or other instructions. It’s a good idea to review beneficiary designations every so often to make sure they are up to date.
Talk about your future and retirement
It’s important to ensure that both partners are on the same page about the future and how to get there. For instance, one partner may have a 401(k) at work, or a similar retirement plan, while the other person may not have the same kind of employment or maybe they don’t work, or only work sporadically. The permutations are endless.
Unmarried partners don’t typically benefit from all the same financial protections afforded married spouses so it may be important for each person in the relationship to ensure that they save for the future individually. For instance, when married couples divorce, part of the divorce settlement often involves splitting retirement accounts. Unmarried couples have no legal mechanism to help ensure an equitable split. Even without a workplace retirement plan, saving for retirement may still be possible through an individual retirement account (an IRA), provided the IRA owner receives some earned income.
As much as 100% of earned income up to $5,500—or $6,500 if you are 50 or older—can be put into an IRA for tax years 2017 and 2018. For example, with taxable earnings of $4,000, someone could contribute $4,000 to an IRA. But be aware that the IRS has a specific definition of earnings for the purposes of contributing to an IRA. It includes wages or salary from an employer, commissions, self-employment income, alimony, and nontaxable combat pay.
- Read Viewpoints on Fidelity.com: 7 things you may not know about IRAs
The gift tax may be a consideration
Under current federal law, spouses can give each other unlimited cash and property. But giving a nonspouse extravagant gifts could have significant tax implications. The IRS allows gifts of up to $15,000 per year in cash or property per recipient. After the $15,000 threshold is crossed, the gift tax may be triggered.
Plus, any amount an individual gives to another in excess of $15,000 annually is deducted from the giver's lifetime estate and gift tax exclusion amount allocated to each taxpayer—a total of $11.2 million in 2018. Amounts gifted in excess of the lifetime estate and gift tax exclusion amount may be subject to tax; the top federal gift and estate tax rate is currently 40%.
What, exactly, does the IRS consider a gift? “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return,” qualifies as a gift according to IRS.gov.4
If you are unsure or have questions about gifting regulations, consult a tax specialist or attorney.
Have a plan
Creating legal documents and specifying who owns this and who pays for that is not most people’s idea of romantic bliss. But planning ahead is important and may prove critical to preventing problems down the road.
Next steps to consider
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Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
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