As more U.S. adults are delaying marriage (or forgoing it altogether) the share who are living with an unmarried partner has been on the rise. When it comes to financial planning, being married offers significant advantages. However, unmarried couples can achieve many of the same financial and estate planning objectives as married couples. But ensuring that your wishes are carried out requires careful planning — with the assistance of financial and legal professionals — and thorough documentation.
Married couples generally file joint income tax returns, which can be an advantage or disadvantage. Single-income families and families in which one spouse earns significantly more than the other generally pay less tax by filing jointly. But spouses with similar incomes — especially high earners — may pay higher taxes than similarly situated unmarried couples.
Unmarried couples also may have some tax-planning opportunities that are unavailable to married couples. For example, if there's a substantial disparity in partners' incomes, having the higher earning partner pay deductible expenses (such as mortgage payments or charitable contributions) may be preferable. That's because those deductions usually are more valuable on the higher earner's tax return. It may also be possible to reduce taxes by titling investments or other income-producing assets in the lower earner's name. But beware: Gifts between unmarried individuals are reportable and use up gift tax exemptions.
Without the protection of divorce laws, you should consider signing a cohabitation or domestic partnership agreement to provide for the division of assets in the event you split up. This is especially important if assets are titled in the name of one partner or the other for tax-planning purposes.
Joint ownership may also be an option for certain assets, such as real estate and bank or brokerage accounts. However, keep in mind that this type of ownership may raise gift or income tax issues. In such circumstances, talk to your tax advisor.
When planning for retirement, keep in mind that unmarried couples often are at a disadvantage when it comes to government and employee benefits. Spouses who've been married for at least 10 years, for example, can collect Social Security benefits based on their spouse's (or ex-spouse's) work history. This can be a big advantage for spouses who leave the workforce for a time to raise children. And if one spouse dies, the surviving spouse and other family members may be entitled to Social Security survivor benefits.
Unmarried partners aren't entitled to these benefits. However, some employers provide pension plan survivor's benefits to unmarried partners of deceased employees. Therefore, it's important to do your research and learn which retirement benefits will and won't be available. You may need to provide other savings or life insurance to make up for any shortfalls.
When married couples neglect to prepare an estate plan, state law provides one for them. Unmarried couples have no such backup plan. So unless each of you carefully spell out how you wish to distribute assets, the surviving partner could be left with none of the assets in the other's name. Take advantage of tools such as wills and trusts, strategic titling of property (for example, joint ownership), and proper beneficiary designations in retirement accounts and life insurance policies.
You also need to prepare advance health care directives and financial powers of attorney if you want your partner to have the authority to make health care decisions or manage your finances if you become incapacitated. Legally, unmarried partners are considered unrelated, so absent these documents they have little or no right to participate in health care and end-of-life decisions.
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