Over the past 20 years, couples have been increasingly living together without getting married first.1 But skipping the vows and cohabiting forever may complicate things a little. 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 four things to consider before saying “I don’t.”
|1.||The gift tax is a consideration.|
Under current federal law, spouses can give each other unlimited cash and property. But giving a nonspouse extravagant gifts could lead to a bigger tax bill. The IRS allows gifts of up to $14,000 per year in cash or property per recipient.. After the $14,000 threshold is crossed, the gift tax may be triggered.
Plus, any amount an individual gives to another in excess of $14,000 annually is deducted from the giver's lifetime estate and gift tax exclusion each person gets--$5.45 million in 2016. The top 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.2
|2.||Put a plan in writing—maybe with an attorney.|
Detailing future plans and possessions in a written agreement—similar to a prenuptial agreement—may be a good move. 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.3
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 up to the two people in the relationship to figure out a plan that is fair for splitting costs and taking care of the home.
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; some other people 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 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 all these reasons and more, some estate planning may make sense.
|3.||Plan for the unexpected.|
Here’s an example of a sticky situation: One partner moves into her partner's and is not on the title. 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 may not be considered. It depends on the laws of the state. In order to be protected in worst-case scenarios, a couple may need to make it official—with some legal documents.
Titling property and accounts
Owning property and accounts together is one potential solution to the worst-case scenario above. Jointly owned property, bank accounts, and investment accounts titled as “joint tenants with rights of survivorship” will 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. The will also names guardians for minor children. It’s usually a good idea to get an attorney to ensure that everything is in order. Some attorneys may have a flat fee to put together a basic will.
Health care directive and durable power of attorney4
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. A HIPPA release will let the 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 chose an “agent” to make financial decisions and pay bills in a worst-case scenario.
- Read Viewpoints: “Five steps to create an estate plan.”
Without getting legally married, federally guaranteed benefits such as Social Security benefits 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: “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.
- Read Viewpoints: “If you are a nonspouse IRA beneficiary.”
|4.||Talk about your future, aka 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 he/she doesn’t work, or works sporadically. The permutations are endless.
Unmarried partners don’t get 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. 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—$6,500 over age 50—can be put into an IRA in 2016. For example, if someone has taxable earnings of $4,000, he or she can contribute $4,000 to an IRA. 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: “IRAs: 8 things you might not know.”
Have a plan.
Being in a partnership, whether you’re married or not, can help both people increase their economic potential—particularly when you work together to start planning for the future. It can also put you ahead of the game if you ever do decide to make it official.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917