Before marriage equality, LGBTQ planning lore was full of horror stories. There was the lifelong partner kicked out onto the street after his lover passed away. A woman who had to pretend to be her girlfriend’s sister to get into the hospital room. A father who lost the right to see his child after a messy break-up. These scenarios were so harsh and so frequent that they made planning essential. One of the main reasons I got into LGBTQ financial planning was to help prevent them. Through planning I could mitigate the risks LGBTQ couples took on because they didn’t have legally recognized marriage rights. Most of the time and in many important ways, the government didn’t recognize our relationships at all.
Now, with marriage equality, planning has become easier, but there are still distinct differences. These days, we at least now have a choice in how we plan. Interestingly, I’m finding more and more couples — LGBTQ or otherwise — are deciding not to get married.
If you choose to be in a long-term relationship and not get married, you’ll face a wide array of challenges and complexities. Today, I’ll discuss the ten most important issues you should address together.
Our society encourages marriage. Laws governing everything from living together to insurance to estate planning are written with married couples in mind. At last count, there were over 1000 federal laws that apply to married couples only. Marriage itself is a legal contract, setting out default rules for how the relationships work. For example, many states offer legal protections of assets involved in divorce, including guidelines for alimony and child support. There are also default rules protecting surviving spouses when their partners die without a will.
These rules don’t apply to unmarried couples. You need to create your own, clearly stating expectations, rights and obligations of each partner. And you can’t do that without communicating with each other. I recommend a long conversation, or series of conversations, about your values, goals, money needs and, fundamentally, your relationship. You may not like talking about money. It’s still taboo in many families. But if you don’t, especially if you’re in an unmarried partnership, you and your loved ones may take on a great deal of risk.
2. Domestic Partnership agreement
You can define expectations, rights and responsibilities through a domestic partnership agreement. The agreement sets out the legal and financial rights and responsibilities of each partner — how they will live together, how they will share assets, hold bank accounts, own property and pay for expenses. It can also set out what should happen if the relationship ends. As unromantic as this may sound, you’re protecting yourself and your partner for unknown contingencies. After all, you sign all sorts of agreements to purchase a phone, sign up for an app or purchase a home. Why not do it for something that you care the most about?
While you can find many templates online, it’s best to do this with a lawyer, preferably a one who specializes in unmarried couples. She can help you figure out a framework that will work for you both. It’s best to take this step while the two of you are in love rather than trying to figure it out when you’re in a place of tension and animosity.
3. Combining income and assets
Most unmarried couples come to me first with questions about sharing their financial lives. There’s no single right answer. You have to do what works best for you. For many couples that means maintaining separate bank accounts but also having a shared account — you can contribute to it equally or proportionally by income — for joint expenses. You may also want to purchase some assets, like your home, jointly with a provision that if something happens to one partner, full ownership automatically transfers to the other (joint tenancy with right of survivorship).
A few caveats about having a shared accounts and assets:
- If both names are on the account, both people have access to all of the money in the account. That means both of you can legally take it out and spend all of it at any time.
- You may incur gift tax if one person takes out a lot more from the joint account than that person added. So be very careful when adding a partner to an account or on the deed to your home.
- Owning a property jointly means that you are jointly liable for any damage done. So make sure you both understand and specify the obligations of each partner.
4. Estate planning
Domestic partner agreements spell out your financial obligations to each other during your lives. What happens if one of you dies? For married couples, it’s relatively straightforward. The surviving spouse inherits, even if there isn’t a will. But unmarried couples aren’t subject to the same estate planning default rules as married ones. You have to be extra cautious about protecting yourself.
Your estate planning documents should spell out what kind of end-of-life arrangements each partner would like. What happens to your belongings something happens to you? Who gets to make the health care and financial decisions for you should you become incapacitated? What steps should be taken to extend your life, and what should be avoided? To communicate your wishes you’ll need these basic documents:
- A Will
- A trust (if applicable)
- Living will
- Power of attorney for finances and health care
In addition to having a default estate plan, married couples get additional benefits like the unlimited marital deduction when giving gifts or leaving an estate and the ability to transfer unused estate planning exemptions to the other spouse. Unmarried partners do not, and you can’t leave this to chance. Talk to an estate planning lawyer about how you can protect yourselves from worst-case scenarios.
5. Raising children
Family law is another area where unmarried couples are at a disadvantage. This is especially true for same-sex couples where maternity or paternity isn’t assumed. Tools like a declaration of paternity, second parent adoption or co-parenting agreements can help you set expectations for each parent and protect you and your children. It’s essential to find lawyers who specialize in LGBTQ+ or unmarried couples. Also, think carefully about what you sign. You’re creating a legal obligation for yourself that will be enforceable if worst comes to worst.
6. Retirement planning
I love investment planning with married couples because we can mix and match retirement plans if need be. If one spouse has great retirement benefits but a so-so health plan, and the other has excellent medical coverage, we can invest in a way that allows both people to take advantage of their best accounts. If for some reason we need to split assets in the future, we can legally divide them without incurring early withdrawal or tax penalties. Unfortunately, unmarried couples do not get that benefit. So in most cases I suggest unmarried couples save separately but in a way that is fair to both partners.
You should also review your beneficiary designations periodically to make sure you name exactly who you want as the person that gets the asset. Beneficiary designations take precedence over the terms of your will, so make sure they are correct and current.
Good news. Unmarried couples often pay lower taxes than their married counterparts, depending on the disparity between partners’ incomes and the deductions you take. There’s a marriage penalty — meaning you pay more tax than you would as single individuals — when spouses have similar incomes and file a joint return. There’s also a marriage bonus when couples with disparate income file a joint return. However, if you’re married and filing separately, and one person in the couple itemizes, the other person has to itemize. This is not the case with unmarried couple.
If one of you claims the itemized deductions and the other is able to take the standard deduction, you may be able to save even more on your taxes. You’ll have to list the appropriate person first on different assets, have a good understanding of each person’s marginal and effective tax rates, and keep the proper documentation to prove your strategy should you get audit. The rules get tricky here, especially when it comes to claiming mortgage interest and real estate taxes, so make sure to consult your financial and/or tax advisor before you do anything drastic.
Unmarried couples can also save on taxes through Health Savings Accounts (HSAs). HSAs are the only vehicles that offer triple tax savings — you get a tax deduction when you put money in, your money can grow tax free and when you take it out and use the money for medical expense, you get to use it tax free.
Because HSAs follow federal tax rules, you can only reimburse medical expenses for you, your spouse and your dependents. Your unmarried partner can not use your account, even if they’re covered by the same insurance plan. Additionally, the premiums paid through an employer provided are also taxable.
You can get around this issue by having the domestic partner open his or her own HSA under that plan. The partner doesn’t need to be the subscriber of the plan, just covered under a high deductible plan. You can find a list of HSAs here. This may also allow you both to contribute to the family maximum in each HSA, although the law is still a bit grey here.
9. Government benefits
One last place you may benefit if you’re a domestic partner rather than a spouse is from government benefits. Your partner won’t affect your eligibility for government assistance like social security disability, in most cases.
However, when you’re married, you can qualify for dependent and spousal benefits that allow a spouse to receive as much as 50% of the other spouse’s benefit, which can be really helpful for a spouse that has worked. I’ve seen access to a partner’s social security be a game changer for some couples. I’ve also seen some couples not get married because that would eliminate access to a previous spouses’ benefit. So make sure to balance carefully the full value of having or not having access to a partner’s benefits.
10. Life insurance
Lastly, if you have combined assets and liabilities, make sure your partner is protected in case something happens to you. That’s where life insurance comes in. You need to ask questions around:
- How much would losing one source of income affect the surviving partner?
- Would that partner want or even be able to work if his or her partner dies?
- Will there be any estate or inheritance taxes?
Death of a loved one is hard enough without financial strain. So protect your family with proper insurance.
These are just ten of the ways you have to plan differently as an unmarried couple. If you’re looking a more detailed analysis, with amazing stories and guidance, check out my favorite book on this topic: Money without Matrimony by Sheryl Garrett, CFP® and Debra Neiman, CFP®, MBA.
I’d also love to hear what other situations you’ve run into as an unmarried couple. Feel free to contact me at the links below.