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The financial and legal consequences of marriage are enormous, as Maria discovered when John was critically injured by an intoxicated driver.

In spite of their more than twenty-year relationship as an unmarried couple, Maria had no legal right to medical information on John’s condition and no right to make important medical decisions while he was incapacitated. She could not manage his financial matters during his hospitalization and, in the event of his death, she would not inherit his assets.

While married couples automatically enjoy a number of legal and financial protections, these protections are not available to unmarried couples — or are only available as a result of careful and proactive planning. Unfortunately, Maria and John never planned for these eventualities.

If you’re one of the roughly 18 million Americans who live with an unmarried partner, your decision not to marry can have significant consequences. For example, it has been estimated that there are more than a thousand federal laws that apply to married couples but not to unmarried couples — and even more at the state and local levels. As a result, you must plan more carefully and more proactively than your married counterparts in many areas of your life, including the following:

Income Taxes

When Congress eliminated the “marriage penalty” it became relatively more expensive, in terms of federal income tax rates, for a couple to remain unmarried. Married couples are also afforded a number of other federal tax benefits that don’t accrue to unmarried couples.

As an unmarried couple, you cannot file a joint tax return and you cannot declare your partner as a dependent on your tax return.

Gift Taxes

Transfers of assets between spouses are not subject to gift tax. However, if you are not married and you transfer assets to your partner, you may very well have a taxable gift.

Depending upon your specific situation, there may be other gift tax consequences as a result of your financial arrangements. For example, if you are an unmarried couple and you pool your incomes, you will have to allocate mortgage interest and a variety of other deductible expenses. When incomes differ significantly between unmarried partners that pool their incomes in joint accounts, one partner may actually have taxable gifts.

Inheritance and Estate Taxes

If you’re married, your spouse will automatically inherit a share of your estate if you die without a will.

This automatic inheritance is not applicable to unmarried couples. You need a will and/or some form of common ownership for your assets or your partner inherits nothing.

Married couples also benefit from an unlimited marital deduction — their estates are generally not taxed until after the second spouse dies. This marital deduction is not available to unmarried couples.

As a result of these differences, it is even more critical that unmarried couples develop and maintain a comprehensive estate plan that establishes inheritance, protects assets and minimizes the impact of estate taxes.

You’ll also want to name an executor who you trust with the more personal aspects of your life.

Retirement

Social Security’s spousal benefits are not applicable to unmarried partners. There are also beneficial provisions for surviving married spouses who inherit 401(k) accounts and IRAs that are not available to unmarried couples.

As a result, if you are unmarried, planning for a comfortable retirement requires a more aggressive approach and perhaps a higher savings rate.

Home Buying

To qualify for a home loan, your mortgage company will treat you as two totally unrelated persons rather than a couple with shared assets.

If you do buy a home with your partner and intend to share ownership, you’ll need to ensure that both of your names are on the title and carefully consider options for structuring ownership — joint tenancy with rights of survivorship versus tenants in common, for example. Under the former, if one of you dies, the other person inherits the home. Under the latter, the provisions of the will govern the inheritance. The tax consequences can differ significantly, as well.

Financial Management

If you (or your partner) become incapacitated, and therefore unable to manage your finances, a durable power of attorney for financial management conveys the power to make financial decisions on your behalf. You can designate your partner or another person to act for you.

A domestic partner agreement allows you to establish, among other things, how you will manage your finances while living together. How are expenses allocated, for example? Will you have joint credit cards or share other forms of debt? What about assets acquired before or during your time together? And what happens if your relationship ends?

Traditional divorce laws aren’t applicable, so a formal agreement can provide essential guidance.

Health Care

More than a quarter of all Americans work for an employer that offers domestic partner benefits to unmarried couples. However, if the domestic partner does not qualify as a spouse or a dependent for tax purposes, the value of the health coverage must be included in income for tax calculations. As a result, the coverage is more expensive for unmarried couples than for married couples.

There are a number of related legal issues governing the rights and responsibilities of unmarried couples in the event of illness or disability, many of which can be addressed with a durable power of attorney for health care matters. This legal document gives a designated person (your partner or another person you choose) the authority to make health care decisions in the event you are unable to do so.

Obviously unmarried couples require more comprehensive, detailed and proactive planning to achieve their goals than do their married counterparts. While these plans must address a number of financial and tax issues, the best plans adopt an integrated approach that also addresses related legal matters.

 

 

Still not sure how being an unmarried couple affects your
financial plans and estate plans?

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MARIANNA WILLEY
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