Today's "modern family" is decidedly nontraditional. According to the latest Census data, fewer than 25% of American households currently consist of married couples with dependent children, while more than 40% of unmarried couples have children under the age of 18. Even the term "married" can be defined differently depending on where you live. Some states allow and recognize same-sex marriage, but the majority of states and the federal government do not. Therefore, it's important for domestic partners to ensure they have legal protections in place to protect their families and themselves.
Unmarried partners lack many of the legal protections granted to spouses in the event of divorce or death. Although most states will consider a claim by an unmarried partner, there is no specific legal precedent in the absence of a written contract. Domestic partners may wish to consider creating a domestic partnership agreement that details the sharing of expenses as well as the ownership and distribution of assets should the relationship end. Unmarried couples with children should consider signing a written agreement acknowledging parental rights and responsibilities and having each partner name the other as primary guardian in their respective wills.
Unmarried couples are not eligible for their partner's Social Security benefits and, in some cases, employer sponsored retirement plan distributions. The IRS allows a non-spousal beneficiary of an IRA to take required distributions over his or her lifetime rather than in a lump sum, allowing for potential tax-deferred growth over a longer period of time. Domestic partners who can afford to do so may want to contribute the annual maximum to an IRA to capitalize on this benefit.
Estate Planning Issues
If an unmarried individual dies without a will, the state may distribute assets to his or her closest blood relatives, leaving out the surviving domestic partner. To help rebut a challenge to a will, domestic partners may want to videotape their wishes in the presence of an attorney.
Federal tax law allows all assets to pass to a spouse tax free and no applicable estate taxes are due until the second spouse dies. Unmarried couples, however, do not enjoy this tax advantage. For those with significant taxable assets, it will be necessary to pursue other avenues to avoid estate tax. One strategy is to purchase life insurance to pay any potential federal and state estate taxes. The surviving partner must own the insurance to avoid it becoming part of the estate of the deceased. Therefore, each partner should own enough insurance to pay anticipated taxes on the assets of his or her partner.
Protecting your family’s financial future is important. If you are part of a “modern family”, it is important to understand the benefits and limitations of the laws and regulations in your state, as they could have long-term financial effects.
This communication is not intended to be legal and/or tax advice and should not be treated as such. Each individual's situation is different. You should contact your legal and/or tax professional to discuss your personal situation.
Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.
Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.
Not NCUA Insured
No Credit Union Guarantee
May Lose Value
Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.
© 2011 McGraw-Hill Financial Communications. All rights reserved.