Financial Planning for Unmarried Couples: A Tricky Challenge

December 22, 2016 at 07:00 PM

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Amid the brouhaha about same-sex marriage over the past several years, a more widespread phenomenon has slipped past the attention of most Americans: cohabitation of unmarried couples, which the U.S. Census Bureau says increased tenfold between 1960 and 2000.

Nearly 7% of households were headed by unmarried opposite-sex couples in 2015, according to the Census. When same-sex couples are included, that adds up to more than 12 million unmarried partners.

This may not seem like a huge group compared to the estimated 120 million married spouses. But cohabiting is also the first step toward marriage for many couples, which makes unmarried partners a market segment for financial advisors to consider cultivating. However, the standard financial planning for married couples doesn't always work for their unmarried peers.

Why They Don't Marry; Why They're Good Prospects

"There's a lot of good reasons not to get married," pointed out Sheryl Garrett, founder of the Garrett Planning Network. "Especially among younger couples, living together is very common and rapidly growing."

Some couples say they can't afford to get married. For some couples, tying the knot can mean losing valuable benefits. Or a couple may simply want to use the money that a wedding would cost to pay off debt or help buy a house.

For most, however, living together is a way to test-drive a relationship to see if it works. The couple wants to feel emotionally and financially secure before making a more permanent commitment.

In particular, as men's education levels and earnings decline while women's rise, women are feeling less financial pressure to marry. According to the Centers for Disease Control and Prevention, nearly two-thirds of 15- to 44-year-old women have cohabited at some point, up from 41% as recently as 2002.

The increase in cohabiting has been "most pronounced for those having some college experience," said Wendy Manning, a sociologist at Bowling Green State University, in a Nov. 17, 2016, Wall Street Journal article. College-educated couples are historically more likely to marry than those with less education, but Manning found that 58% of women with at least four years of college have lived with a domestic partner at some point.

These better-educated couples aren't just eking out a living. When adjusted for size of household, cohabiting college graduates aged 30 to 44 have higher median household income than their peers who are married, according to a 2011 Pew Research analysis of U.S. Census data.

But there are many complicating factors with these couples, including their offspring.

Some 39% of cohabiting opposite-sex households include children under age 18, according to the Census Bureau. In fact, about one-quarter of births to women aged 15–44 occur in a domestic partnership, double the rate from the early 2000s and higher than the rate for single mothers.

If these couples split up and subsequently have children in new relationships, the legal and financial complications can be mind-bending. Child custody and support payments, along with estate planning for stepchildren and half-siblings, may lead serial cohabiters — like serial spouses — to seek an advisor's help.

Pioneers in Serving Unmarried Couples

Before same-sex marriage equality was upheld by the Supreme Court in 2014, several advisors had begun looking for ways to help these couples in committed relationships. "There were nuances that opposite-sex couples didn't face," said Debra Neiman, a CFP and principal at Neiman & Associates in Arlington, Massachusets, who dealt with a number of unmarried couples in her practice. "For example, a lesbian client refused to name her partner as the beneficiary of her life insurance and retirement plan at her employer because she didn't want the folks at work to know her business."

In addition, the lack of flexibility in financial planning programs bothered her. "I saw discrepancies in software programs that made assumptions as if all couples were married," she said. "But these assumptions didn't hold true [for unmarried couples]."

In 2005, Neiman collaborated with Garrett to publish "Money Without Matrimony: The Unmarried Couple's Guide to Financial Security."

The two authors wrote the book with full awareness of the legal and social differences faced by domestic partners. "If you're a couple, whether same-sex or not, it can make a huge difference if you're unmarried," Garrett said. "You might be estranged from your family for 'living together in sin.'"
She strongly suggests that advisors discuss three domains in depth with unmarried client couples: expense sharing, individual insurance for household effects, and a domestic partnership agreement.

Then there's the question of who pays for what.

"Young couples living together unmarried have issues with whether or not to merge any of their money," Garrett said. As they're sorting out their feelings about sharing intimacy versus maintaining autonomy, unexpected differences of opinion can lead to grueling conflict.

In Olivia's experience as a couples therapist, a good solution is often for each partner to contribute to shared household expenses while maintaining some separate funds. However, each couple needs to find an arrangement that's comfortable for them both.

The Unique Insurance, Legal and Financial Issues

Unless an unmarried couple jointly own their home, homeowners insurance doesn't automatically cover them both. "Some homeowner policies allow you to include a long-term guest," Garrett noted. But if one person owns the residence, the other generally needs to get rental insurance to protect his or her belongings.

This has the potential to be a touchy issue if, say, the woman owns the property and the man finds himself legally viewed as a renter. "Psychologically, this can affect the status of the relationship," she commented. One solution would be to re-title the home (if the owner is amenable) and add both names on the insurance policy.

When a couple decides to form a long-term committed relationship, a domestic partnership agreement should set out the legal and financial rights and responsibilities of each partner: how they will live together, share income, share assets, hold bank accounts, own property and pay for expenses. Prepared with the help of an attorney or a do-it-yourself legal guide, the agreement also assures some of the same legal protections provided when a marriage is terminated.

Otherwise, there are no rules to encourage a fair and equitable division of assets when a domestic partnership breaks up. "Either the more forceful personality or the one who feels most guilty may have a greater influence on how the settlement goes financially and logistically," Garrett explained.

"Deb [Neiman] and I strongly recommend a domestic partnership agreement for anyone in a committed relationship," she added. "One of the reasons is that it helps clarify whether the couple are compatible enough to have a long-term future."

Garrett gave the example of a couple who decided to terminate their relationship because they couldn't agree on separation terms in their agreement. "It was a conflict between one person's desire for sharing and merging as equals versus the other person's understanding of the financial differences in what they each would contribute to the relationship." Garrett said she tried to help them work through those details, but eventually "they realized they were not compatible."

Deeds and Death

Garrett told us about an unmarried couple, together for more than 10 years, who lived in a house owned by one of them. The non-owner was helping to rehab the house with an option to buy in. "When the owner died, the bank repossessed the house and kicked out the lover," she said.

The bereaved partner was devastated — and the experience made an indelible mark on Garrett. "I'd taken it for granted that they owned the house together; that the survivor would inherit it," she lamented. "If they had refinanced it and put it in both their names, this would have been avoided."

Adding to the survivor's grief, his partner's parents took the body and arranged the funeral. "They viewed his death as a punishment from God because he was gay," Garrett said.

Estate planning attorneys don't always suggest a final wishes document spelling out what kind of end-of-life arrangements unmarried partners want, but Garrett and Neiman both think it's important. Recalling the story of the parents who were able to co-opt their son's funeral arrangements, Garrett confessed, "I was [the unmarried couple's] friend. I didn't want to butt in. But when I saw the outcome, I deeply regretted not speaking up and volunteering to help them with this."

"There are so many nuances" in estate planning for unmarried couples, Neiman pointed out. "Should they take out life insurance on one another? What about a health care proxy? In Massachusetts, [where Neiman practices,] the partner doesn't automatically get to make health care decisions if they aren't married."

She added, "With a married couple, there's an implied estate plan if one dies. With unmarried couples, everything needs to be documented in legal form: health care proxy, will, durable power of attorney, beneficiaries. You need to check carefully to make sure you named the right person — your unmarried partner, if that's what you want."

Garrett noted that a husband or wife can leave any amount to the surviving spouse without estate tax, while a domestic partner can leave only the current exemption amount. (See sidebar, "Uncle Sam and Unmarried Couples.")

In some states, inheritance tax can add to the pain. "Money Without Matrimony" includes a story about an unmarried gay couple in Maryland, where inheritances are taxed at 18% unless they're going to a legal spouse. Since the surviving partner couldn't afford to pay the tax, he had to sell the couple's longtime home at a fire-sale price.

Surprise, Grandma and Her Boyfriend Are Living Together

"People assume that if you're older and you're living together long-term, you're married," Garrett observed. "But there's an awful lot of seniors living together out of wedlock."

Older Americans' rate of cohabitation has increased faster than that of most younger people. In fact, one of Garrett and Neiman's interesting discoveries in researching "Money Without Matrimony" was that many retirement-home residents are cohabiting in heterosexual relationships.

Unlike their younger counterparts (see sidebar, "Forty Percent of Cohabiters Will Marry"), older partners often have no plans to get married. Garrett cited one couple who were "kind of like hippies, who believed that legal constraints would affect their relationship. But they wanted to make sure everything was titled correctly. We talked about how to own things" to avoid probate and make sure assets went where they wanted them to go.

Another couple, together for 30 years with three grown children, consulted her when the man developed a serious health problem. His partner was going to need reliable income because of this, but since they weren't married, she wasn't eligible to receive spousal Social Security or pension benefits. The only way to resolve the issue was either to buy tons of life insurance or head for the altar. "He was embarrassed about getting married," Garrett said. "I reminded him they didn't have to tell anyone."

For seniors who have been married before, remarriage isn't necessarily desirable. What about the nest egg they planned to leave their children? Alimony that may stop if they remarry? Pension benefits they can't receive if they're not married? Would anyone lose health insurance? And perhaps the knottiest question of all: What would the kids think?

"Adult children have a terrible time coping with an older parent's new romantic relationship," Garrett said. Fearing that the new person will rip off what would have been their inheritance, or that their parent could be taken advantage of and left heartbroken, they try to interject themselves and slow things down.

Adult children often don't ask about their parents' emotional and financial lives, and parents don't tell. "Planners can help adult children have these conversations," she urged.

One of Neiman's core beliefs is that while all unmarried partners should create a domestic partnership agreement, it's especially important for older couples. She has spoken about financial aspects of cohabiting on Retirement TV, a news show created for retirees living in Erickson Retirement Communities.

"If they're not interested in remarriage, they need to have some cohabitation agreement spelling out their rights and responsibilities," she told us. "Do they commingle any assets? Do they share debts? What about housing? For instance, if one of them is moving into the other's condo and the owner dies, will the other get kicked out? Or should [the non-owner] be given a life estate so they can live in it for their lifetime, and then the children of the original owner can sell the property? What happens in the event of a dissolution? All of this needs to be spelled out in a legal agreement."

In speaking engagements, Neiman has also focused on helping adult children "educate themselves about what they can or can't advise their parents to do, such as telling them to remarry or not remarry or insisting that they not change their will. Parents may not listen to [these demands]."

"People are more willing to talk about almost anything other than their finances," Neiman said wryly. As a neutral facilitator, an advisor may be able to cut through psychological resistance and help the two generations communicate about these issues.

The Advisor's Role

Neiman suggested that advisors need to be sensitive to the needs of unmarried couples, knowing which assumptions hold and which don't. "Be aware that there's probably a reason why these couples are choosing not to marry," she urged. "They might be feeling uncomfortable with what they view as an antiquated institution. Or a simple calculation may be all it takes for them to make a different decision."

Many times, she said, the decision has nothing to do with facts and figures. "If financial logic ruled, no one would carry credit card debt costing 18% when they had money to pay it off." Emotions often outweigh logic on the decision-making scales.

For all these reasons, it makes sense to help educate and assist domestic partners to become financially secure. A solid approach would begin by treating them as a third socioeconomic category: neither single nor married. Not getting married, after all, is also a decision.

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