About to take the next step and move in with your partner? Here's some advice on how to merge your money - ignore it at your peril.
Here are some sobering statistics…
- There are 7.5 million opposite-sex couples who are living together – 13 percent more than this time last year, according to the U.S. Census Bureau.
- Nearly half (47 percent) of adults in their 30s and 40s have have lived together in a sexual relationship, according to a Pew Research Center survey.
- That same survey says 41 percent of couples living together don’t really care about getting married.
I call these statistics “sobering” not because I’m passing any moral judgments but because I suspect that many unmarried couples haven’t properly considered the financial ramifications of living together. A mistake, since they’re not afforded the same protections and advantages of marrieds.
Books, magazines, and the Internet are full of financial advice for the newly engaged. Money Talks News has provided advice for everything from Wedding Insurance and Divorce Insurance to Money & Marriage and, well, even more Money & Marriage.
So here’s some financial advice for the unmarried.
Every young couple that’s broken up has faced the issue of “this is yours, that is mine” – from books and CDs to pets and furniture. But living together as you get older (and hopefully wealthier) can pose problems you need to be aware of and plan around.
The key thing for singles to remember, whether gay or straight: when it comes to money, the law doesn’t recognize any relationship unless it’s documented with paper. Consider the following…
How to buy half a house
With home prices and mortgage rates at their lowest in years, unmarried couples may decide to not only move in together, but buy their own place. This could be a great move, but be aware of potential problems.
First and foremost, keep in mind what I said above – the law only cares about paperwork. The house belongs to the person whose name appears on the legally recorded deed. The law could care less who paid how much, or what verbal agreements were made.
So lesson one if you’re buying a house together: both parties on the deed. The two basic ways of taking title with other people are joint tenancy with right of survivorship and tenancy in common. The difference is that with rights of survivorship, your interest in the property automatically transfers to the other owner if you die. With tenancy in common, it doesn’t. So if you’re going in on a house together and want your partner to have your share if you die, use joint tenancy with rights of survivorship. That’s the way most married people would do it, but then they also promised to be a pair till death did they part. So if you’d rather leave your home equity to your parents, your siblings or somebody else, take title as tenants in common.
And then there’s the mortgage. Remember that if you both apply for the mortgage, you’re both responsible for paying it – even after you break up. Also keep in mind that if both parties are on the deed as owners, but only one is on the mortgage, the one responsible for the mortgage remains responsible, even if they’ve moved out.
Another common scenario: John already owns a house, then Jane moves in and, because she makes more than John, proceeds to make the monthly mortgage payments. Is Jane then entitled to any of the equity she’s creating by paying down John’s mortgage? If you were paying attention to what I just told you regarding the law and paperwork, you know the answer – no. Absent a legal document to the contrary, it’s John’s house and his equity.
So if you’re thinking of buying a house together – or taking on the responsibilities of someone who already owns a house – go into the transaction with your eyes open. Nobody likes to talk about their relationship failing, and talking about money is decidedly unromantic. But trust someone who’s been there – it’s better to consider the potential ramifications now than be bitterly bummed later. So remember these steps:
- Think it through
- Talk it out
- Draw it up
(Note: when it comes to property, there’s another step: have a lawyer approve it, then have it notarized.)
Where there’s a will, there’s a way
It’s bad enough when married couples don’t have a will, especially when it’s so easy to do. (See 3 Ways to Get a Will.) But even without a will, the law won’t leave a surviving spouse high and dry, because the law has a piece of paper – a marriage certificate – that says they’re special. If you’re unmarried? If there’s no paper, as far as the law is concerned, you’re strangers….even if you’ve shared a bed for 20 years.
If you’re married and die without a will, your estate will eventually go to your spouse, because according to the law, your spouse is your next of kin. If you’re unmarried and die without a will, your estate will still go to your next of kin – which will be your parents, siblings, aunts, uncles, cousins, etc. – but definitely not your partner.
So imagine that you die in your sleep tonight, then consider the consequences. If you don’t relish the idea of your distant Uncle Jake evicting your partner of 20 years from the house you forgot to put in his or her name, you’d best get a will.
And something else to consider: if you’re rich – say with assets over $1 million – you could have estate tax issues that married people don’t have to deal with. So talking to an estate attorney is a good idea.
A taxing healthcare plan
These days, many big companies and government agencies extend health insurance coverage to unmarried couples – unromantically labeled as domestic partners. To your employer, it doesn’t matter if you’re hitched or not. But it matters to the IRS.
If you’re married, the IRS doesn’t doesn’t tax your health benefits, nor does it tax the benefits your spouse receives under your health insurance plan. But here’s something not many people know: if you’re providing your partner with healthcare benefits, those benefits could be taxable to you. In other words, if John covers Jane as a domestic partner under his employer-sponsored health plan, John could be taxed by Uncle Sam for any benefit extended to Jane.
How can this be? Federal tax law specifically excludes employee benefits received by spouses from taxation. Uncle Sam doesn’t recognize domestic partners – no marriage certificate, no exemption. As far as the IRS is concerned, John got extra money from his employer and gave it to Jane. Now he’s going to be taxed on it.
So if John and Jane’s employers both pay for their health coverage, they’re better off keeping them separate. If John has coverage and Jane doesn’t, they have to make a calculation: do John’s extra taxes exceed what it would cost Jane to get a private health insurance policy? The correct path will depend on John’s tax bracket and Jane’s cost of health insurance.
But there’s something else Jane should consider: suppose she develops a health condition that renders her uninsurable while covered under John’s policy. She can’t be kicked off of John’s policy, but what if they break up? Now she’s sick, doesn’t have insurance, and can’t get any. Starting in 2014, this won’t be an issue – thanks to health care reform, Jane can’t be turned down for insurance due to a pre-existing condition. But until then, she’d better be sure that John isn’t going to leave her in what could be a precarious position.
Another health-related issue: If one partner has a medical emergency, absent paper to the contrary, the other has no visitation rights and may not even get details about what’s going on.
The solution is a piece of paper called an advance health care directive, which allows each of you to legally make decisions if the other is incapacitated. It also allows hospitals to share information usually reserved for spouses. Like a will, these directives aren’t hard to get. Your hospital or county health department can give you the form, or you can download one online.
Marriage without paper
There is one situation where a heterosexual couple living together can enjoy the rights of marriage without getting hitched the traditional way: They can claim a common law marriage — which is recognized by law in 15 states.
But if you think a common law marriage is created simply by living together, you’re wrong. According to Nolo.com, these couples must:
- Live together for a significant period of time (not defined in any state).
- Hold themselves out as a married couple — i.e., share a last name, refer to each other as husband and wife, and file a joint tax return.
- Intend to be married.
Keep in mind that the burden of proving you’re a common law married couple will fall to you — it’s not automatic. Once you’ve proved it, you’ll then have the privileges of married couples — including the privilege of going through a legal divorce if you break up.
Who said it was going to be easy?
Now you can see that living together isn’t as simple as it may at first seem – and the longer you stay together without tying the knot – especially if your money is also living together – the more complicated it can become. The solution? Why, paper of course! Once again: 1. think it through 2. Talk it out 3. Draw it up.
Is it fair to make people who choose not to marry jump through extra hoops? Don’t blame the law – it needs paper to know what to do. Instead, blame all those married people who made the laws.