Financial planning for an unwed, cohabitating couple means anticipating a number of unforeseen entanglements. And there are almost as many answers to the problems as there are couples facing them.
For example, could one partner be thrown out of the house if the other passes away? Are both partners covered by the home insurance? Could one lose access to the bank account if something happened to the other? Is the automobile insurance coverage equal?
All of these questions and many more can be financial minefields.
Advisor Joshua T. Hatfield Charles has faced many of these problems with his own clients. Hatfield Charles, an expert in unwed couples' financial planning and the vice president of SPC Financial Inc. in Rockville, Md., recalls one couple that came to him. A younger woman was about to sell her house and move in with her somewhat older partner.
They took out renter's insurance on her furniture and belongings. But more important, Hatfield Charles says, they set up a domestic partnership agreement combined with a trust so that she could stay in the house for 10 years if he passed away first.
An alternative was provided that she could have the right to purchase the house at 80% of market value immediately upon her partner's death. "In this case, the man's children did not like the partner and she would have ended up on the street if he died and provisions had not been made for her," Hatfield Charles says.
The financial advisor who is able to sort out the issues, identify the potential challenges and help clients find appropriate solutions is opening up a new avenue of business for himself, says Hatfield Charles, who is also the ambassador for the Certified Financial Planner Board of Standards.
Cohabitation is not only for young couples trying out a relationship. Baby boomers, for a number of reasons, may also decide they want to live together without getting married. Some of those reasons may revolve around finances, says Hatfield Charles.
For instance, couples who remarry can lose Social Security benefits derived from a previous marriage, or one partner may lose alimony, depending on the provisions of his or her divorce settlement. There also may be estate issues or children involved who might influence whether a parent remarries.
But forgoing marriage requires extra steps in the financial planning process, and the circumstances for every couple are different, says Hatfield Charles, who conducts seminars for financial planners, tax professionals and attorneys on how to help unwed couples protect themselves and their assets. He says the first step is to start a dialogue with the couple to determine what their goals are and their intentions toward each other.
"Then, never hesitate to bring in the tax professional or the legal expert to help with the planning," he says. "If something happens to one partner, the IRS is going to want to take as much as they can, which you want to avoid. Due to potential challenges and the lack of 'spousal rights,' we also try to avoid probate whenever possible."
There are a number of ways to provide planning for life's uncertainties, but they have to be structured in advance. "Financial professionals come away from my seminars saying they thought they had all the bases covered for their clients, but there was so much they had not thought about," he adds.
Hatfield Charles gives the simple example of car ownership. If one person in a relationship owns a car and puts the partner on the insurance policy as a listed driver, he is covered for that car but the coverage will not extend to rental cars. This could spell disaster for the partner if he or she is involved in an accident in a rental car.
The planning needs to be coordinated to ensure that all aspects of the financial plan are working in concert, he says. A domestic partnership agreement can help avoid many problems because it can set out what the individuals want for each other if something happens to one of them. With many similarities to a "prenup," this document can be used to better protect assets and potentially safeguard an estate from unnecessary estate taxes at death.
But the couple should follow that up with a power of attorney for general items and health care, or the partner could be shut out of important decisions by family members who do not recognize the legitimacy of the partnership.
For retirement benefits and life insurance, a person can name his or her live-in partner as beneficiary. But for many assets, a beneficiary cannot be designated directly. In that case, somebody can create an agreement setting up "payable on death" rights for an asset that can accomplish the same thing as naming a beneficiary, Hatfield Charles says.
Couples cohabitating also have to take assets such as homes or other property into consideration. "If the house is only in one person's name, the other person is viewed as nothing more than a 'legal stranger,'" he says. "If something happens to the partner who owns the property, his or her family will most likely be able to dictate if the surviving partner has continued access to the home or its contents."
The owner could better protect the surviving partner by changing the title to joint ownership, he says. But if this is not done correctly, the survivor might incur gift taxes, face creditors or unintentionally disinherit family members.
Putting both names on assets, particularly if one partner brought more assets to the table than the other, has its own pitfalls. If one person has limited resources or needs state assistance in the form of Medicaid coverage, the government will take all joint assets into account before starting benefits.
Another method of protecting a couple's assets is to set up a revocable trust. "Think of the trust as a separate estate planning document that adds a wrapper around investment accounts and other assets," says Hatfield Charles. "While assets in individual names without beneficiary designations can become frozen if one partner is incapacitated, items in a revocable trust are handled separately by the preset trustees."
He says that the trust sets out how the assets will be handled and by whom if one of the partners becomes incapacitated. "It also provides the guidelines for where you want your assets to go if something happens to you," he explains. "Since the trust is revocable, it can be updated or changed at any time. People can be added or taken out and the disposition of assets can be changed.
"A buy-sell agreement or domestic partnership agreement is needed to provide clear instructions on how to handle the protections for both people in this event," he says.
A typical strategy couples might use is to buy life insurance on each other in an effort to have funds to pay the deceased person's estate with the expectation that the title will be given to the surviving person.
The point is, there are any number of ways to attack each problem with the disposition of assets.
"Every option has a cost, and the pros and cons of each have to be considered," Hatfield Charles says. "That's why every financial advisor dealing with unwed partners needs a dialogue with the clients about their goals and their options. Advisors who understand this can tap into this market. Everyone should work with a CFP because they have the rigorous training to deal with the complex issues."