By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, [email protected]
Personal Financial Management (PFM) program personnel often counsel military families about the financial implications of lifestyle transitions. This includes the decision by a service member to cohabitate with a civilian partner or for two unmarried service members to live together.
Unmarried couples do not qualify for joint income tax filing status, spousal Social Security benefits, or the estate tax spousal exemption. In areas such as these, unmarried partners are treated as single individuals. In other areas of personal finance, however, unmarried partners operate much like married couples. For example, there are economies of scale (e.g., one cable bill instead of two) and the need to jointly pay household expenses.
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Major areas of personal finance that unmarried partners need to consider are cash flow management, taxes, insurance, property ownership, retirement planning, and estate planning. The longer a couple lives together, the more likely they will need to jointly make important financial and legal decisions. Below are nine financial recommendations to share with service members who are cohabitating:
- Develop a Method for Bill-Paying- Consider holding separate credit cards and bank accounts and divide household expenses evenly or proportionate to each partner’s income. Keeping assets separate avoids the problem of becoming liable for a partner’s debts. If financial accounts are commingled, creditors can seize the assets of one partner to pay the debts of the other.
- Know the Law- Check with an attorney about the impact of cohabitation on alimony and child support from a previous marriage. State laws vary. In some states, payments may be affected. Social Security benefits are not affected, however, which is why some retirees choose to live together but not marry so they won’t suffer a reduction in income.
- Make Gifts Carefully- Be aware of the gift tax implications of retitling individual assets with a partner. While spouses can transfer assets to each other free of tax, unmarried partners, like all single individuals, can generally make gifts to others only up to the annual gift tax exclusion ($15,000 per person in 2018).
- Consider Purchasing Joint Property Coverage- Find out if this is an option. Insurance companies may allow this if both partners have an ownership interest in property being insured. Many insurance companies also allow someone with renters insurance to add a partner for less than it costs for two separate policies. Consider increasing the coverage, however, to reflect the increased value of both partners’ possessions.
- Make it Legal- Prepare a binding legal contract called a cohabitation agreement which, similar to a prenuptial agreement for married couples, is designed to resolve potential problems before they occur. The contract should specify how assets will be divided in the event that the relationship ends, who owns what percentage of joint assets, and plans to handle events such as the death or disability of a partner.
- Understand the Fine Print– Be aware that, if both partners sign loan documents, an apartment lease, or a contract with a utility company, both are legally responsible for payments, even if one partner moves out.
- Consider Beneficiary Designations– Consider naming an unmarried partner as a beneficiary on self-directed retirement plans (e.g., IRAs) and/or a life insurance policy in the case of long-term relationships.
- Keep Good Records– Keep a file with receipts to document which partner paid for large purchases. With unmarried couples, the IRS presumes that whoever dies first owned the property unless the surviving partner can prove otherwise with receipts, cancelled checks, credit card statements, etc.
- Draft a Will and Keep it Current– Unlike surviving spouses in a married couple, unmarried partners will not inherit anything automatically through state intestacy laws if a partner dies without a will. Instead, surviving blood relatives will receive the deceased partner’s property, even if relationships are strained.
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