In the past, financial planning for unmarried couples has largely focused on LGBT couples. The decision in Obergefell v. Hodges allowed same-sex couples to marry and have their marriages recognized by the states, but advisors may find that some of their clients, gay or straight, prefer to stay unmarried for various reasons.
Obergefell is important because it "highlights the differences between married couples and unmarried couples" in financial planning, according to Wendy Goffe, a partner at law firm Stoel Rives in Seattle.
Goffe spoke on a webinar presented by the Investment Management Consultants Association on Tuesday about the many challenges that unmarried couples face in financial planning, including taxation, inheritance and property rights, employee benefits and ERISA plans, and Social Security.
"Planning for unmarried couples is only a special application of the general estate planning principles," she said, however, they "often require a more individualized and resourceful approach to their estate planning."
Why Not Marry
"Even though same-sex couples can marry, they may choose not to marry, as may opposite-sex couples," Goffe said.
Clients may decide to stay unmarried to avoid income tax burdens, or liability for back taxes and penalties on one partner, Goffe noted.
Married people filing jointly can use capital losses to offset ordinary income only up to $3,000, or $1,500 if they're filing separately, while single people can offset $6,000.
Unmarried couples may also be able to get a smaller combined income tax by having one partner file as head of household, and the other file as an unmarried taxpayer, Goffe suggested.
For couples who want to marry but can't, there are some ways to get some of the benefits available to legally married couples. Some states provide limited rights and responsibilities under civil union, domestic partnership or common law marriages, Goffe said, while others provide "everything but marriage statute."
There are less common ways for unmarried clients to form partnerships, too. Hawaii allows couples to register as "reciprocal beneficiaries" with limited rights similar to marriage, while Colorado extends similar rights to "designated beneficiaries."
Common law marriage statutes may apply to clients even if they don't realize it, Goffe said. She said that standards for establishing a common law marriage include an "intent and express mutual agreement" between both partners; the capacity to make such an agreement; cohabitation, although in some states that may only require an exclusive relationship; and "the parties must hold themselves out as married."
Goffe said that even though "some states still refuse to give full faith and credit to common law marriages," if the common law marriage is formed in a state that recognizes it, it is recognized for federal purposes as well.
There's no common law divorce. Couples need to go through a legal dissolution to end the partnership, Goffe said.
Terminating a civil union or domestic partnership may be difficult. Unmarried couples who part ways may not be eligible for federal tax exemptions when dividing property. There's also no deduction for alimony or separate maintenance payments for unmarried couples.
"The Internal Revenue Code essentially treats unmarried couples as legal strangers," Goffe said.
Even in cases where couples have a legal partnership, they may not be eligible for certain benefits. For example, transfers between unmarried spouses may be treated as taxable gifts, but a domestic partnership or civil union gives the partners a legal obligation to support each other, Goffe said.
"We have a conflict between the gift and estate tax laws and the obligation of support," Goffe explained. "Technically, we assume that if there is a legal obligation of support, that it's only the amounts that are transferred over the amount necessary to [provide] support that would be treated as a taxable gift."
However, if clients share assets and one earns more than the other, they could inadvertently trigger the transfer of wealth tax, she said.
Although spouses will be considered as part of the same generation, in unmarried couples with a significant age gap between partners – 37.5 years – they may also trigger the generation skipping tax, Goffe said.
"This only becomes a problem if the transfer is greater than their generation skipping transfer tax exemption," she added.
