Between the year 2000 and 2010, the number of couples who were living together instead of getting married rose by 25%, according to the United States Census. There are various reasons why a couple may choose not to marry, even though many go through their daily lives much like a married couple. Although some states will make a default assumption that those who live together long-term are married by “common law” and will treat them as such if this is the case in the event of one person’s death. California is not among these states.
A Cumbersome Freedom
Partners can still be given some of the rights of a spouse; however, it is up to the individual to decide what rights and inheritances they want to pass on to a surviving partner, and which they prefer to go to other persons or causes that they care about. For example, a person who has lived with their significant other long-term may want to make sure that the home they have shared goes to their partner, but they may want to name a sibling as a beneficiary on their life insurance policy. They can designate one another as health care power of attorney, but they may want someone else to handle financial decisions if they become incapacitated.
Some unmarried couples will want their partner to be given all or nearly all of the same rights as a spouse in the event that they die or become incapacitated. However, doing this in one fell swoop is not as easy as it is with married couples. An unmarried person will need to piecemeal together their estate plan in order to make sure their partner has what they need.
Making Manual Designations
When it comes to titling property and accounts, unmarried couples need to make manual designations to assure that these will pass to the right person if they die or become incapacitated. Depending on the person’s individual wishes, the designation of Tenants in Common or Joint Tenants with Rights of Survivorship may be more appropriate. Both designations allow for partners to co-own property. A Tenants in Common designation has each owning a percentage of property, and, if they pass, their share will go to the person designated in their will, or to a blood relative, such as a parent or adult child if a will does not exist.
If partners want their property to be inherited by the other much like it would be if they were married, a Joint Tenants in Common with Rights of Survivorship (JTWROS) designation is a better choice. With a JTWROS designation, property is split 50/50 and will transfer automatically to the other if one person dies. Tax considerations apply to JTWROS-income as well. Gains are reported under the Social Security number of the person listed as the primary owner. Couples should decide whether it is more advantageous to have the person with a higher or lower tax bracket to have the designation. For some, it is easier to put all their property in a trust, and name their partner as successor trustee.
Not every unmarried couple wants the money in their retirement accounts to go to their partner, but if that is their wish it needs to be stated with a formal beneficiary designation on IRAs, 401(k)s and other retirement accounts. It is easy to forget to update these designations, but it is important to do so since beneficiary designations will supersede whatever might be listed in a will. Often, IRAs transfer easier than other retirement accounts. It is important to prepare to roll over lump-sum payments promptly in order to avoid paying high tax penalties.
Life insurance offers good protections, but some policies are more user-friendly to unmarried couples than others. Be sure you fully understand terms. Having a partner named on a life insurance policy can help them transition financially if your income is no longer part of the household budget.
Sources: http://www.bankrate.com/finance/retirement/estate-planning-tips-unmarried-couples.aspx, http://www.investopedia.com/articles/retirement/08/unmarried-couple-documents.asp, http://www.bdibblelaw.com/blog/2016/04/estate-planning-concerns-for-unmarried-couples.shtml