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Written by: Talia Pierluissi | Aspiriant
For the past few decades, an increasing number of romantic partners have chosen to put off, or completely avoid, tying the knot.
About 18 million people were living with an unmarried partner in 2016, up 29% since 2007, according to the Pew Research Center. While about half of them are under 35, cohabitation is rising for Americans 50 and older too. Pew also estimates that if current trends continue, a record 25% of today’s young adults will never marry.
Married or not, financial matters are an unavoidable topic that partners must navigate. While there are several financial benefits to marriage, there are also some disadvantages or complications depending on your individual situation. For example, income and taxes, student loans, and children from a prior relationship might make it more beneficial to remain single.
Women have their own considerations. For example, they typically live five years longer than men, yet make less money over their lifetime. Women need to think about how a cohabiting relationship will work over the years as incomes grow, assets accumulate and, perhaps, children enter the picture.
As wealth managers, we typically recommend couples sign a prenuptial agreement to protect their individual interests when they marry. If they don’t make an agreement, the state has one for them in the form of community property laws. But for unmarried couples, there are no such laws. So having an agreement before you move in together is important for setting rules and expectations. Then the wealth you built together would be divided as you both intend. Think of it as a “no-nup.”
Before you move in with your romantic partner, or even if you already have, consider these questions to formulate some sort of written cohabitation agreement to help avoid confusion, miscommunication, and perhaps even lawsuits, down the line.
Paying the bills
There are a few ways of thinking about how you spend money together while in a relationship. The most straightforward method of managing expenses is to split costs evenly or identify certain things that are to be paid by each partner on a regular basis. This is usually an endeavor to maintain financial equality. But equality is not always possible, nor should it always be the objective. Perhaps rather than even-splitting, fairness should be the top consideration. If one partner can afford a level of spending that would be unobtainable for the other, a proportional method may be more useful. Of course, that requires a level of transparency in income and expense management that both partners would have to be comfortable with.
If financial disclosure is not a problem, sharing your budgets with each other can be insightful. Budgets show where each partner holds their spending priorities. If one of the partners has a financial advisor, this might be a good time to make introductions. Conversations of net worth and financial planning can sometimes best be done in front of a neutral third party.
Once partners begin dividing expenses, it may make sense to open a joint bank account in addition to the bank accounts that are receiving the respective paychecks. Overall, we don’t recommend having each partner’s paycheck deposited directly into a joint bank account for reasons of gifting that we’ll get to later. The bank account can be funded on whatever schedule the couple deems fair and may be used to pay for or reimburse expenses.
Some frequently asked questions about paying the bills:
Bill splitting is stressful and can feel like a full-time job. Do you have tips to make this easier?
There are apps for that! One is Splitwise. It can help you divvy up expenses, and you can see who owes what at the moment.
My partner makes a lot more than me. I don’t want to hold them back from the lifestyle they can afford, but splitting down the middle isn’t financially feasible for me. How can we navigate this disparity without feeling like we’re giving something up?
This is where a pro-rata strategy may come in handy. Try to split a joint expense, like rent or car payments, to the proportion each of you brings to the household. For a simple example, if your partner brings home $6,000 a month, and you net $2,000, then your partner would pay 75% of the bill; you 25%. While the person who makes more pays a bit more, you both feel the impact of the expense equally.
Okay, I’m on board with these solutions, but how can I make them enforceable?
This is where the cohabitation agreement (aka no-nuptial agreement) comes in.
You may consider these agreements for parenting, property and support. Putting down expectations and responsibilities in words can help define specific boundaries for your relationship and avoid miscommunication.
Here are a few other things your no-nup agreement can cover:
Owning property
Property ownership can be tricky. More than a few couples move in together with the understanding that one of them will buy the house and the other will help with paying expenses, such as groceries or utilities.
While this may seem like a fair solution, both partners need to understand that a home is an asset that usually appreciates in value, while groceries and utilities are not. If the relationship were to end, the purchaser of the home would maintain their asset, and the other partner would be left with no rights to the property, assuming they are not on the title.
It may make sense, over the course of time, for the other partner to start to purchase a portion of the home or the asset they share in order to maintain a legitimate percentage of ownership.
Estate planning
In certain long-term relationships, broader estate planning may be in order. Being unmarried means there’s a lot of gray space when it comes to how assets transfer. Estate planning can help provide for the financial security of each partner, specify distribution of property to children and other family members, and create end-of-life directives.
Assets that are not retirement or insurance assets have to go through probate if their value is greater than $150,000. This is a time-consuming and expensive process. However, if the assets are held in the name of a trust, it’s possible to bypass probate so your beneficiaries will receive the assets much quicker.
For peace of mind, it makes sense to hire an attorney to help you lay out in writing your intentions should you not be around. Further, it’s a comfort and help to family members who will have to navigate the complex legal system.
Before hiring an attorney consider:
- Who do you want to make decisions for you regarding finances if you are unable? How about for health care?
- Who do you want to look after your children?
- What are the terms for distribution of assets to your partner? To your children?
Being ready with answers to these common questions will cut down on billable hours.
Also, unmarried partners should be aware that if they inherit retirement accounts, they cannot simply roll the money into their own retirement accounts as a married couple could. A new law requires most beneficiaries to withdraw the funds, and possibly pay taxes on it, within 10 years. Learn more by reading 6 Groups Impacted by the SECURE Act.
Taxes
From a tax standpoint, one reason some couples remain unmarried is the so-called “marriage penalty.” What does this mean? Our tax system operates in brackets; once two spouses reach the top brackets making at least $325,000 each, they’re not taxed as two individuals. Rather, they reach the top tax bracket after earning more than $610,000 in joint income. In other words, married couples pay taxes on an additional $40,000 in combined income that single people do not.
Yet single people need to consider several tax issues as they accumulate assets and investments:
Do you each own a home?
Another tax benefit to remaining single is in the declaration of home-ownership on tax returns. As of 2018, property tax deductions are limited to $10,000. If unmarried partners each own a home, they could deduct $10,000 on their own tax return for a total of $20,000 in deduction for the couple.
Do you have children together?
Once children are in the picture, it gets much more complicated. While at first it might make sense for the person with the higher income to claim the child or children as deductions, people with lower adjusted gross income (AGI) get more benefits for child and child-care tax credits and deductions. Couples in high income brackets usually don’t get a benefit from these credits. There are a lot of nuances here, so it’s best to get professional tax advise on how to claim children.
Gifting
When it comes to gifting, married partners have it much easier than unmarried partners in that they can give each other as much money and assets as they have without needing to report it as a gift to the IRS.
But if you’re single, as far as the IRS is concerned, you’ll need to adhere to the gift limits. Annually, an individual can give $15,000 to another person without having to file a gift tax return and eating into their lifetime gift tax limit. This means it pays to be conscientious about how money is split up within the relationship.
The lifetime gift limit as of 2020 is $11.8 million for a single person. Any gifts given over the lifetime exclusion are subject to 40% tax rates on your estate (meaning 40% less to your inheritors, who could be your partner or your children). The limits may change several times during your life together, so the less of the gift exclusion you use, the more prepared you will be for a legislation change.
One method of financial housekeeping is to each hold your own bank account for your own income. Then have a joint bank account for shared expenses. If there is a shared home where ownership is not 50/50, mortgage payments should be made pro-rata for the ownership; same for property tax. All of this should be spelled out in your no-nup.
Communication
There is no correct way to approach joint finances as an unmarried couple. However, there are penalties and challenges that everyone should know as they embark on sharing financial responsibilities. Specialized long-term planning strategies should be considered.
Having discussions about money and what your financial future together will look like is key to a strong relationship. It’s important that your arrangement is determined equitably and fairly so both partners feel they have control over their own financial well-being. A wealth manager can help navigate the conversation and coordinate with an attorney to draw up a no-nup agreement to support your non-marital bliss.
Learn more about women and wealth by reading Aspiriant’s white paper, “Women Taking Charge: Six steps to feel more financially secure.”
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