Blog | 5 P’s of Life
Have you been with your significant other for years?
You may have decided to live together even though you are not married.
You may even refer to each other as “husband” or “wife” even though you are not legally married.
You’re committed to each other but don’t hold a marriage license.
It’s a decision increasing in popularity for both the younger and older generations. Some couples decide to live together before they marry to test out their compatibility.
Other couples have no interest in tying the knot. They may have been married before this relationship. Or they don’t see the value of it because they don’t intend to have children.
No matter your reason, be wise and talk to your significant other about finances, especially if you live together. If you are not legally married, you are not financially protected if your significant other becomes ill, leaves or dies.
However, it is important to note some states recognize “common law marriage.” Check your state laws to see if this status applies to your situation.
As you discuss your finances, work with a CFP®, tax advisor, and estate planning attorney for guidance. Each of these professionals will give you advice based on their expertise.
It’s up to you and your significant other to decide which advice is best for your relationship. Here are four key financial considerations for unmarried couples.
1- Major Purchases
During the relationship, most unmarried couples may make a major purchase together. Whether you intend to buy a house, car or vacation residence together it’s important to discuss what will happen if one ends the relationship, becomes ill or dies.
It may be uncomfortable at first to have this discussion, but it’s necessary to protect yourself in the future, especially if your earning potential is limited due to experience or age. It’s also important to discuss if there are children from previous marriages.
Here are a few questions to consider:
Will both of your names be on the title of the asset? If not, will the person not on the title be evicted if the relationship ends?
Is it wiser to create an LLC to purchase the asset (this option limits financing options but works for those with financial means)?
If you are financing the asset, will both of your names be on the mortgage/loan? If yes, could you afford the payments if your significant other decides to end the relationship?
2- Shared Expenses
If you live together, you may have already decided who pays for which household, child care, and pet expenses. If you both maintain separate bank accounts, consider a financial power of attorney.
This legal document will give you access to money in specified financial accounts in the event your significant other is incapable of making financial decisions due to an accident, illness or death. This power can be as limited as you want or broad enough to cover all financial matters.
If you decide not to have a financial power of attorney, then make sure you can afford all shared expenses if there was a need.
3- Tax Efficiency
Unmarried couples do not have the benefit of paying lower taxes with “married filing jointly” designation. Filing as “single” results with a higher tax payment.
For this reason, it’s important to discuss who claims charitable donations and other tax deductions. It’s also important to look at tax-efficient investments.
Schedule time with your tax advisor mid-year to estimate your upcoming tax payment. There may be changes you could make before year-end to reduce your payment.
4- Beneficiary Designations
Financial accounts and insurance policies have beneficiary designations. At the owner’s (or insured’s) death, this designation tells the financial institution or insurance company who will receive money and how much.
Typically, primary and secondary beneficiaries are identified. Amounts in financial institutions are usually designated by percentages.
As an unmarried couple, verify who is the beneficiary for each financial account and insurance policy. Checking this information is especially important if there is an ex-spouse or children from a previous marriage.
Also, check beneficiaries for retirement accounts held in an employer’s plan or in an IRA. You may or may not have access to your significant other’s pension depending on their employer’s plan policy.
As an unmarried couple, you will not have the option to use your significant other’s Social Security benefit amount later in life. Your CFP® can conduct a retirement analysis to give you an idea if there will be a shortfall.
If you are an unmarried couple, discussing finances is a priority. Because you are not protected by the benefits of being legally married, it’s important to discuss upfront your financial situation and what happens if one person becomes ill, leaves or dies.
Work with a CFP®, tax advisor and estate planning attorney when addressing these issues. All three professionals bring important knowledge as you develop a balanced approach for your relationship. It’s never too early to have these conversations.
ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA™, RICP®, CRPC®, is the Founder of Transition Planning & Guidance, LLC. Life is more than money. It’s about living the lifestyle you want and can afford. For that reason, Niv consults with clients on money, life, and work. Her approach capitalizes on techniques she learned throughout her career, including as a management consultant, executive recruiter, and financial advisor. Her services include developing spending plans, comprehensive financial plans, divorce financial reviews, retirement plans. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me.’”
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