Jul 3, 2014
Marriage: to be or not to be? That is the question
Only a few generations ago, the idea of living together was considered unacceptable by society as a whole. What a difference a few decades makes. Today more people choose to cohabitate with the intent to delay or even forgo marriage altogether, in part, due to an ever increasing divorce rate, women’s expanded role in the workforce and a more relaxed overall attitude towards unwedded couples. The statistics support this trend as 47% of the adult population is unmarried with 14 million living together. A cultural phenomena that has experienced an increase of over 88% between 1990 and 2007 and impacts all adults regardless of age, sexual preference or economic status.
For Same-sex couples in the United States, living together used to be the only choice. However, recent changes in federal laws have afforded gay and lesbian couples the same federal marriage rights as opposite sex couples. Unfortunately, not all states are on board with the new Same-sex federal marriage laws. As time goes by, individual states are adopting their laws to match the standard set by the federal government. In those states that have adopted Same-sex marriage, living together is no longer the only option.
On the surface, cohabitating as unwed couple may not seem like that big of a deal until you buy a house together, open a joint bank account, plan for retirement, transfer wealth, attempt to have input on your partners medical care, raise children together, drive your loved ones car and get in an accident or find out your possessions were not covered on the home owners policy. Worst of all, try dealing with a break up which is not protected by federal or state laws.
Financial planning for an unmarried lifestyle can be extremely complicated especially in states where Same-sex marriage is not legal. Depending on the situation and your specific circumstance, there are advantages and disadvantages to remaining unmarried. Below are just a few basic concepts to consider:
Because most states consider unmarried couples legal strangers, meeting with an attorney is an important consideration in order to avoid state laws dictating who cares for you personally and financially, who receives your estate or how a break-up is managed. For example, without a health care directive (also known as a healthcare power of attorney), HIPPA laws can prevent unmarried couples from participating in a loved one’s medical care or deny access to information. Also, a properly written Trust or at least a Will can keep disgruntled family members from challenging a deceased partners wishes. In a legal marriage, a surviving spouse has state laws to protect them from disinheritance when no Will exists. When it comes to children, a properly written Trust or Will can also protect a surviving partner’s right to guardianship or custody of a child. Without it, the surviving partner has no legal standing.
Most unmarried couples ignore the one legal document which is probably the most important and difficult to implement due to the sensitivity and lack of knowledge surrounding it: a Domestic Partnership Agreement (also known as cohabitation agreement). It’s the equivalent of a prenuptial for newlyweds but much more relevant. Since unmarried couples have no state alimony or custodial parent rights, a Domestic Partnership Agreement can help define the resources a lower income partner would receive in a separation and predetermine potential visitation rights for children. What if one partner moves in with another and contributes to the home expenses? Will the non- owning partner build equity in the house? Should the payments be treated as rent? If so, does a tenant landlord relationship develop with legal rights accorded to both? When disputes arise with no domestic partnership agreement in place, it creates an environment where settling a couple’s differences becomes very difficult.
When it comes to income taxes, finding a proactive CPA or financial planner will more than pay for itself since understanding and correctly applying the tax code can be very advantageous to the unmarried couple. Current tax laws are designed in such a way that married couples end up paying a penalty versus those who share a home, but not a last name. For instance, two unmarried people living together can each make $230,000 (or $460,000 total) and pay almost 2.5% less in federal income taxes than a married couple making the same total amount. On a $460,000 adjustable gross income, it equates to over $9,000 in tax savings. Add on the new Medicare income tax on high earners and the aforementioned savings inflate by an additional $1,900. The tax differences are not as great on lessor incomes, but they do exist. A married couple making a total of $178,000 pays almost $900 more in federal income taxes than two cohabitants making $89,000 each ($178,000 total).
For married taxpayers who itemize their deductions, the above difference can become even more pronounced as there is a decrease in a married couples itemized deductions beginning at $305,000 of adjustable gross income. Conversely, two single filers who cohabitate can each make up to $254,000 of adjustable gross income or a total of $508,000 before seeing their itemized deductions reduced. That’s a lot of extra income before losing valuable deductions.
Life is a little more complicated for the unmarried as they need to keep better records for bill paying so both can take a deduction for mortgage interest payments and real estate taxes. Ideally, it’s best to pay bills from a joint account to which each partner contributes money. Assuming the money in the account is used solely for joint expenses, taxes related to gifting can be avoided.
With the Supreme Courts recent ruling regarding the Defense of Marriage Act (DOMA), Same-sex couples who are legally married have a window of opportunity to amend past returns in the hopes of getting a refund. Because the decision to amend and file jointly is complicated, seeking the help of a professional specializing in Same-sex tax planning is strongly recommended. This type of tax planning is beyond the scope of this article.
Saving for retirement via an Individual Retirement Account (IRA) is also easier for cohabitants. Two single people can each make $60,000 a year and still have the ability to make a full tax deductible IRA contribution (assuming they also contribute to a work sponsored retirement plan). A married couple receives no deduction for an IRA contribution at $117,000.
Income tax savings aside, it’s much more difficult for cohabitants to legally transfer money to each other and avoid federal gift or inheritance taxes. To complicate matters, each state has its own rules. In Pennsylvania, for instance, a surviving loved one of an unmarried couple can pay 15% tax on an inheritance. For this reason, better planning is necessary to ensure minimal gift or inheritance tax consequences. In many cases, life insurance is an excellent way to leave income and inheritance tax free money to a surviving partner.
One of the more difficult planning areas for the unmarried relates to the generation of retirement income. Married couples definitely have the upper hand in this arena. For example, Social Security is designed to maximize a currently legal spouse or ex-spouse benefit which greatly enhances the varied planning opportunities built into Social Security.
Unfortunately, unwed partners have limited options when it comes to Social Security. For this reason, proactive planning is important especially when one partner forgoes work to say home and raise children. If a married couple approaches family planning this way, the lower earning spouse has the opportunity to base their Social Security benefit on the higher earning spouses benefit. This is not so for the unmarried. Even with the 2013 DOMA ruling, legally married Same-sex couples who move to a state which does not recognize marriage may not be entitled to the same social security benefits as an opposite sex married couple. Therefore, the Social Security Administration recommends that legally married Same-sex couples who intent to move to a non-legal state submit an application in the legal state before leaving.
To further complicate matters, Social Security survivor benefits do not extend to the unmarried. Cohabitants who want to provide a future guaranteed income stream to a surviving partner who has little or no social security benefits should look towards an annuity or alternative planning strategy.
With an individual retirement account (IRA), you can name anyone you want as the beneficiary. For a married couple naming their spouse as beneficiary, the IRA account passes to the survivor inheritance and estate tax free with no requirement to make withdraws until the surviving spouse turns 70.5. Not so for the unmarried couple. A surviving partner named as the beneficiary must begin income taxable IRA distributions right away based on their own life expectancy. In addition, the surviving spouse of the deceased estate may pay inheritance or estate taxes on the full value of the account depending on state of residence or net worth of the deceased.
Property casualty insurance (also known as home owner, auto, and excess liability insurance) is probably the most overlooked area for unmarried couples, yet easiest to resolve.
Most home owner policies only cover household members that are married, blood relatives or adopted children. When couples choose to cohabitate with only one person listed on the deed, it’s advisable for the non-owner to purchase renters insurance. This step will help protect against loss of property caused by a fire, flood or other disaster and provide the non -owner a form of liability coverage. In addition, it’s advisable for the homeowner to notify their insurance company about the living arrangements to help protect against liability issues. If two unmarried individuals co-purchase a home, some home owner insurance companies offer policy rates similar to a married couple’s rates.
Individual auto insurance coverage is not difficult assuming each partner owns their own car. However, it’s important to make sure both policies have similar limits to help avoid coverage gaps and to check with the carrier about coverage limits when one partner drives another partner’s car. Owning a car jointly is not a great idea as it subjects the non -driver’s assets to creditors in case of an accident. If an unmarried couple chooses to own a car jointly, it requires an insurance carrier that will cover both partners on one policy.
Depending on the state, workers compensation insurance can offer certain benefits to an unmarried dependent especially when children are involved and care giving is necessary.
With unemployment insurance, some states will provide compensation benefits to unmarried couples if one partner leaves a job for good cause. For instance, one partner moves their business and the other partner leaves their job to go with him/her.
Health insurance is another area which requires careful planning. Although the Affordable Health Care Act has made obtaining individual health care coverage less onerous, obtaining health insurance through a group plan may prove more affordable. Group plans available through employment are usually less expensive and may contain better coverage than individual plans. If an employer doesn’t offer domestic partner health benefits and your partner doesn’t get benefits through a job (or doesn’t work), an employer may agree to cover the partner on its health plan if the employee pays the premiums. Even if an employer does provide domestic partner health benefits, the premium paid to cover the domestic partner is considered taxable income unlike the premium for a married spouse. Finally, the Federal COBRA (Consolidated Omnibus Budget Reconciliation Act) health insurance rules don’t apply to an unmarried partner in a job loss.
Assuming the marriage and divorce trends continue as they have over the last few decades, the unmarried minority may someday become the majority. If this happens, perhaps the government and market place will adjust their policies to accommodate this growing demographic. Don’t think this possibility is out of the question. The greatest growth in unmarried couples is in senior adults. With baby boomers just beginning to turn 65 and knowing how this generations lifestyle decisions have impacted our culture since the 60’s, its not hard to imagine the ramifications their future voting power will have on our society.
In the meantime, before you decide to make an extra set of house keys, consider some of the above issues raised and how they may impact your specific situation.
For additional information, please visit www.unmarriedamerica.org or contact Russ Weiss, a CFP® and Accredited Domestic Partner Advisor who specializes in helping unmarried couples; gay, lesbian or straight, to maintain or achieve financial independence and to understand the benefits and risks associated with cohabitating.
You can reach Russ at firstname.lastname@example.org or by calling 215-348-9393.