Couples Who Don't Marry May Face Unintended Consequences

For whatever reason, it seems that more couples today are foregoing the formality of marriage, even when children are involved.

What many of them fail to realize are the often serious financial consequences surrounding their decision, not that money should be your primary motive for marriage. It simply makes things a lot less complicated, especially around tax time.

Financial planners say unmarried couples are simply not eligible for many of the same legal protections or advantages as married couples and this can become extremely complicated when they start to think about retirement planning, buying property, taxes and estate planning. According to the Wall Street Journal, they even have a name for it, the "unmarried penalty."

Wendy Hartmann, a Los Angeles-based tax and estate-planning attorney, in an interview with the Journal, says she's seen several situations where the surviving partner was left homeless and destitute because the couple didn't do the proper planning.

Financial planners should probably start to study up on how to deal with these situations because the Census Bureau says the number of opposite-sex unmarried couples living together rose 13% this year over last to about 7.5 million. Census Bureau also estimates the number of same-sex couples living together rose roughly 30% to about 620,000 this year from about 476,000 in 2009. And both those totals are expected to continue growing, as some younger couples delay marriage, older couples choose not to remarry and most states continue not to allow gay couples to wed.

For many unmarried couples, the most immediate concern is how to share expenses, especially if their incomes differ significantly. Financial planners often help couples determine a fair way to share monthly housing costs and other regular expenses.

Devin Pope, a certified financial planner based in Salt Lake City, says that when an unmarried couple splits, there typically is no third party involved, such as a lawyer, as there would be in a divorce to make sure assets are fairly split and debts are retitled.

Estate planning

Tax and estate planning also become more complex for unmarried couples. Planners say it is important to make sure the couples are working with a certified public accountant and estate-planning attorney who understand each couple's unique situation.

Barrett Porter, a certified financial planner based in Los Angeles, says working with a good accountant can help unmarried couples avoid any tax surprises such as inadvertently triggering a gift tax because of the way they title their assets. He adds that a smart CPA can also help an unmarried couple make sure they are claiming their deductions in the most tax-efficient way.

For example, if a couple that shares the title to a house has a large disparity in incomes, the higher-income earner, who would benefit more from tax deductions, may be able to deduct a larger share of the mortgage interest.

Debra Neiman, an Arlington, Massachusetts certified financial planner says she also explains the importance of proper asset titling when working with unmarried couples.

She points out the story of one couple, where only one of them was listed as the sole owner of the house they lived in. And when the person who owned the home died the surviving partner was left homeless. She says that could have been avoided if the couple had held the home in joint tenancy with rights of survivorship. She adds that it's important to make sure investment accounts and other assets are properly titled as well.

Health-care directive

Another area that can be complicated for unmarried couples is a health-care directive. These are documents that give a designated person the right to make medical decisions for someone. They can be even more important for unmarried couples than they are for married people.

Without proper documentation, individuals have no legal right to make health-care decisions for their unmarried. There have been a number of situations where one partner wasn't allowed to carry out a sick partner's medical wishes because the ailing partner didn't have a health-care directive.

In some cases, the unmarried partner may find that they're not even allowed to visit their ailing lover in the hospital, especially if the significant other is in the intensive care unit.

It's also especially important for unmarried couples to make sure they document their wishes for their estates. Financial planners say that if those wishes aren't documented, the laws of the state in which the couple lives will determine who their beneficiaries will be, and that is unlikely to be the surviving partner. Another problem for some unmarried couples is that some family members may not approve of the couple's relationship and will do what they can to prevent a surviving partner from inheriting anything.

At the very least, unmarried couples should draft wills. Although some financial planners also recommend unmarried couples set up trusts as well. In general, trusts help individuals or couples dispose of their assets in the manner they choose, without the need for probate court proceedings that can tie up assets for long periods.

Also, couples who have children need to consider drawing up proper adoption papers to make sure there's no confusion about each partner's parenting rights.