Forgoing marriage? Estate planning for unmarried couples

While many couples choose to live together as a precursor to marriage these days, more and more are choosing to skip marriage altogether, even while raising children and owning property together. This makes estate planning more urgent than it typically might be for married couples. Forgoing the legal entanglement of marriage can lead to troubling outcomes should one member of the couple face incapacity or an untimely death.

Why unmarried couples need protection

Brenda (all names have been changed for privacy), a college professor, learned this the hard way when her partner, Randy, was diagnosed with cancer in his 30s and quickly lost the ability to make medical decisions for himself. Randy’s parents, who disapproved of his relationship with Brenda, completely shut her out of Randy’s medical treatment, even barring her from visiting him in the hospital in his final days.

Upon Randy’s death, Brenda found herself without a place to live when his parents evicted her from the home she shared with Randy, which he had solely owned. She also had very little money to her name, as the couple had treated a bank account in Randy’s name as a shared account.

Had Brenda and Randy considered the fact that this might happen, they could have taken steps to ensure Brenda was not only involved in the decisions about his health care and funeral planning but also could stay in the home they had shared.

There are many reasons that couples are choosing not to marry in modern times. Some are quite practical, as in the case of Debbie and Greg, who have two kids and own a home together but remain legally single for health insurance purposes. Debbie and the kids qualify for Medicaid, while Greg’s union-based insurance premium would skyrocket to unaffordable levels should they marry and have him add the family to his coverage.

Mia and Jon, a California couple, also have a home and one child together, while Jon has a son from a prior relationship. They held a wedding ceremony and refer to each other as husband and wife but never made it legal due to the significant annual federal tax increase they would experience by combining incomes. In addition, Jon’s son qualifies for need-based student financial aid based on Jon’s income, but if he and Mia were to file jointly for federal purposes, that aid would go away. “As soon as the tax hit goes away or the kids are done with school, we’ll probably head to City Hall,” Mia notes.

But what would happen to Debbie and her children if Greg had an accident at work and slipped into a coma? Or if Mia, the high earner in her family, were to become ill?

Key elements: Estate planning for unmarried, cohabiting couples

There’s a saying that marriage is the cheapest estate plan, and, in many cases, that’s true. Couples who choose to remain unmarried must take extra steps if they wish to replicate the estate planning benefits of marriage.

Here are the key documents and considerations that CPAs can bring up with their cohabiting clients to help them avoid what Brenda experienced when Randy got sick.

Asset titling: The simplest way to direct property to someone, regardless of relationship, is to title the asset as joint tenancy/ownership with right of survivorship. This way, both partners can manage the asset and, should one partner die, full title automatically shifts to the survivor, without the need for court documents or other legal paperwork. There may be tax implications to consider here, but for shared assets like a home, vehicle, or checking account, this is a fast and easy way to ensure either partner is taken care of should something happen to the other.

Beneficiary designations: It’s a best practice for all individuals to review the beneficiary designations of all accounts annually to ensure all are completed and remain updated with the individuals whom they wish to inherit each asset. This includes bank accounts. If adding a partner as a joint owner on a checking or savings account isn’t desirable, most banks allow a beneficiary to be added in case of death, which can ease financial strains for partners who are financially interdependent but wish to keep assets separate.

Cohabitation agreement: While the enforceability of such agreements may be questioned in some instances (e.g., a trust or will is likely to overrule the contents of a cohabitation agreement), many couples are choosing to implement these legal documents as a way to clarify everything from financial responsibilities during and after the relationship to pet guardianship to the distribution of jointly owned property in the case of a breakup. Sometimes called a prenup for unmarried people, this document serves a similar purpose and can be helpful for clients who wish to lay all financial responsibilities out in writing to allay future ambiguity if the relationship changes or sours.

Power of attorney: This allows either partner to step in and manage all financial affairs of the other partner should they become incapacitated or, in some practical cases, when one person travels for work and may need the other partner to handle day-to-day financial obligations.

Advance health care directive: Sometimes called a living will, this document not only states the individual’s wishes concerning medical care if they are unable to communicate them themselves, but it should also include a health care power of attorney, giving the power to make medical decisions to one’s partner as opposed to the default of children, parents, and/or siblings. This can be critical in times of emergency care, when health care providers must follow HIPAA laws that may inhibit the sharing of personal health information without written permission.

Wills: This legal document outlines what happens to any property or assets that are not co-owned, while also stating wishes for funeral and burial arrangements. This is also where any considerations for shared children (as well as pets) are noted by clarifying guardianship preferences as well as financial arrangements for their care. Absent a will, assets are distributed according to state intestacy laws, which typically favor surviving children, parents, siblings, and other blood relatives.

Living trusts: If privacy or expedition of distribution is important, a living trust can serve a similar purpose to a will with those added layers by naming a successor trustee to manage assets that are titled to the trust. Couples with minor children, shared real estate investments, or assets in multiple states may especially favor living trusts to ensure that assets are handled in specific ways upon their death rather than through the probate court process.

Prepare and feel secure

Estate planning for cohabiting unmarried couples is a crucial and often overlooked aspect of financial planning. While CPAs are neither expected nor allowed to provide legal documents for their clients, they are often positioned to point out the risks of not having the right documents in place before they are needed.

Clients with employers offering employee-assistance programs or a legal benefit may be able to find help implementing basic estate planning documents for free or at a reduced rate through work when their situation is relatively simple. Otherwise, a referral to a qualified estate planning attorney can help couples ensure their wishes are fulfilled and their partners provided for in the case of death or incapacity, providing peace of mind and asset protection.

— Kelley C. Long, CPA/PFS, CFP, is a personal financial coach and consultant in Arizona. To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.