The Challenges Of Financially Cohabitating Couples
January 31, 2023Are you among the growing number of unmarried Americans living with a partner? When financially cohabitating, you get a lot of the savings that a married couple typically would enjoy. You don’t have to maintain separate homes or pay redundant bills and purchases, like internet and other household items. Not having some financial benefits of marriage can present some real challenges. Here are some things to consider:
Money Management
You can open joint bank and credit card accounts, simplifying household expenses and making you feel like a couple. If one partner has poor credit, the other can add them to their credit cards to improve their score. The money in the bank accounts is also immediately available to each of you should something happen to you and vice versa. (Of course, having joint accounts can be messy if you split up, making you create your own “divorce” process.)
However, putting too much money in a joint account can trigger having to file a gift tax return. That’s because the IRS considers half of all deposits gifts to the other person. If the gifts exceed $17,000 this year, you need to report it to the IRS. Any excess over $17,000 reduces the recipient’s total lifetime gift and estate tax exemption.
Estate Planning
This is one of the most important areas for non-married couples. You likely won’t be each other’s default beneficiary and won’t be considered family for medical purposes. So, you’ll want updated wills, durable powers of attorney, and health care directives. Having beneficiary designations on any retirement accounts, health savings accounts, life insurance policies, and trusts is also crucial. You can get free basic documents from Free Will, DoYourOwnWill.com, and MyDirectives. However, MyDirectives only allows you to draft advance health care directives but provides free online storage. If you’re considering hiring an estate planning attorney, see if your employer offers a prepaid legal plan you can sign up for during your open enrollment or discounted legal help through an employee assistance program.
Unfortunately, you won’t be able to roll each other’s inherited retirement accounts into your own retirement account to defer taxes. Anything passed between you at death won’t get the unlimited estate tax exemption married US citizens get. You also won’t be able to pass on your remaining estate tax exemption to each other. Fortunately, the current $12.92 million estate tax exemption means this is unlikely to affect most people. (If you’re worried about estate taxes, consult an estate planning attorney.)
Employee Benefits
You and your partner likely won’t be eligible for employee benefits such as being on each other’s employer-provided health insurance unless you’re domestic partners. Even in that case, the federal government levies a tax on the value of the benefits to the partner. Some employers will cover that cost. If yours doesn’t, you may have to decide if it’s worth paying the tax or getting insurance someplace else.
Government Benefits
You won’t have the option to file taxes jointly, which saves most married couples money, especially if one spouse earns a lot more than the other or if they have children. Speaking of children, you can’t adopt a child together unless you’re domestic partners in some states. The federal government doesn’t recognize domestic partnerships. So, you can’t petition to keep a non-citizen partner in the US or collect spousal or survivor Social Security benefits. Not being eligible for survivor Social Security benefits may make life insurance more valuable even when you’re retired.
Should you get hitched?
As you can see, there are a lot of financial benefits you give up by not being married, so you may want to factor these into your decision of whether or not to say “I do.” Of course, marriage also has its financial drawbacks, especially if you eventually get divorced. That’s one reason why deciding to get married shouldn’t just be financial.