According to the U.S. Census Bureau, more and more couples are choosing to live together without getting married (1). There are several reasons for this shift: some individuals are widowed and do not want to lose the benefits (e.g., military benefits) derived from their deceased spouses. Others have Social Security and/or pension benefits that would be reduced upon marriage. Others simply don’t want to enter into a contract that obligates them both legally and financially.
While living together may have its advantages, there are disadvantages too. Property ownership, health insurance coverage, and medical/legal decisions are more difficult to undertake when the partners are unmarried. Likewise, not all states recognize Common Law Marriage, which is equivalent of being considered legally married after having cohabitated for seven years while sharing expenses and making purchases in common. In fact, only 10 states and the District of Columbia currently recognize Common Law Marriage: Alabama, Colorado, Iowa, Kansas, Montana, Oklahoma, Rhode Island, South Carolina, Texas, and Utah.
Given that unmarried couples will typically face more financial hurdles compared with their married peers, the following tips are provided to help them better secure their financial status:
1. Establish legal property co-ownership. For unmarried couples, there are three forms of property co-ownership: joint tenants with right of survivorship (JTWROS), tenancy in common, and trust.
A. JTWROS allows both partners in the relationship to own property in common. If one partner dies, that property is automatically transferred to the surviving partner, thus avoiding probate (legal process of administering the estate of a deceased individual after resolving all claims). However, the process does not avoid estate tax, and it may also trigger a gift tax if the remaining partner did not purchase the property in common with the deceased partner, but rather was added to it at a later point in time.
B. Tenancy in common allows both partners to own unequal parts of a property and to transfer those parts to beneficiaries named in a will. Tenancy in common is subject to probate, however. It may also be subject to the gift tax if the surviving partner was added to the ownership of a piece of property without providing something in return (i.e., fair exchange of value).
C. A trust can be established and both partners designated as co-owners of the property in question. Upon either partner’s death, the trust itself assumes ownership of the property and distributes it to the surviving partner.
2. Obtain life insurance. Unmarried couples do not enjoy the same financial benefits as married couples in terms of Social Security survivor benefits and corporate pension payments. Life insurance can help fill this gap by providing much needed income to the surviving partner in the event of the other partner’s death. There are three options when purchasing individual life insurance plans: purchasing an individual policy and naming the other partner as beneficiary, cross-owning policies, and establishing an irrevocable life insurance trust (ILIT).
A. When purchasing an individual life insurance policy and naming the other partner as beneficiary, be aware that the policy does become part of the deceased estate upon his or her death.
B. Both partners can also purchase individual life insurance policies and name the other party as beneficiary. Such cross-ownership can work if the partners own property or accounts in common.
C. With an ILIT, a legal trust is owned and managed by a designated trustee. The partner pays premiums into this policy and does not technically own it. This is advantageous because, in the event of the policy owner’s death, the policy does not become a part of his or her estate. However, because the policy is considered irrevocable, it cannot be cashed out or changed in the event that the relationship is dissolved.
3. Obtain work-sponsored health insurance. Most corporations offer domestic partners benefits, including health insurance. In order to obtain such benefits, the partners are usually asked to sign legal paperwork stating that they live together. Some companies also require that the couple live together for a given amount of time before filing for domestic partner benefits. Keep in mind that the additional health coverage may be considered taxable income. Also, most companies have yearly enrollment periods and it is only during that time when the domestic partner can be included on his or her partner’s health insurance plan.
4. Create a will. Unmarried couples do not usually have the benefit of estate-related laws that ensure that a surviving spouse automatically inherits an estate or other assets upon the death of his or her spouse. However, there are three documents that can help legally recognize the unmarried partner: a will, a living will, and a durable power of attorney.
A. A will can be created that designates the live-in partner as the sole or partial beneficiary of the estate. A will is especially critical if an unmarried couple have children, because the will also designates who is to be the legal guardian of those children.
B. A living will can designate that the live-in partner be the one who makes all medical decisions regarding his or her partner who is now mentally and/or physically incapacitated and unable to make medical decisions. Without a living will stipulating that the live-in partner make such decision, that duty will go to the next-of-kin.
C. There are two types of power of attorney: medical and financial. Both types may be obtained by the same partner. With medical power of attorney, a partner can make decisions for his or her partner in matters of medical treatment and termination of life in the case of a coma. With financial power of attorney, a partner can initiate account and property transfers for the other partner, as well as dispose of his or her estate.
Census reports more unmarried couples living together. http://www.usatoday.com/news/nation/census/2008-07-28-cohabitation-census_N.htm