Cohabitation Can Be Costly

As Valentine's Day looms, people across the country are considering popping the big question: "Will you live with me?"

The number of Americans trading in marriage for cohabitation continues to rise. As of 2006, there were more than 6 million unmarried-partner households compared with 3.2 million in 1990, based on U.S. Census Bureau estimates.


So, assuming the cohabitation implies commitment and longevity, couples need make sure you have an estate plan in place to avoid some very unwelcome surprises down the road.

"There are many things in the law that protect married couples," says said Mari Adam, a certified financial planner and founder of Adam Financial Associates. "There is absolutely nothing in our legal system that protects unmarried couples. If you forget that you can create a lot of problems," she says.

Home Alone

Let's start with the home. Whether you are buying a first home together or already own one jointly, it's important to consider how the property is titled. Adam recommends that a couple that co-own a home title it as "Joint Tenants with Rights of Survivorship." This way, if one of the partners dies that allows the house to go to the surviving partner.

Often couples make the mistake of titling their home as "Tenants in Common." In this case when one partner dies, their half of the property goes to their heirs. That means you could end up sharing a home with your partner's children, parents, or friend.

Another common arrangement is for one partner to own the home and the other partner to contribute to the mortgage payments. While this situation may make sense if the partners are on unequal financial footing, it also begs all sorts of questions, such as if one of the partners dies who will own the home and can the remaining partner afford the mortgage payments.

It is also important for unmarried couples to have the necessary estate planning documents in order. Donald Ray Haas, a certified financial planner and president of Haas Financial Services, who happens to have lived with his partner for 30 years before they wed three years ago says, "The typical legal documents are important for everyone but there is more weight for unmarried couples."

Legal Arsenal

These documents include wills and trusts to determine what property will go to your partner because, unlike spouses, they do not have any legal rights to property. According to Daniel B. Moisand, a certified financial planner and principle of Spraker Fitzgerald Tamayo & Moisand, if you don't have anything in place, your estate is subject to the laws of your state and nowhere in there does it consider someone cohabiting with you. "If you have nothing in place your partner is not going to be a beneficiary of your estate."

Love and Money -- A CNBC Special Report
Love and Money -- A CNBC Special Report

In addition, financial advisers recommend a durable power of attorney, which determines who will have power over your finances if you should become incapacitated and a medical power of attorney, which determines who can make decisions about your medical care if you are unable to should also be created.

"The first thing you have to realize is that no matter how close the two of you are in terms of how you view each other, the law does not recognize that relationship in the same way," said Moisand. "You simply do not have the same rights that a legal spouse would have and your documents need to reflect that reality."

According to Adam of Adam Financial, usually these documents can be all prepared at the same time. Depending on their complexity, the documents can be done at a pretty reasonable price, from $250 to $500. Adam says it is a "necessary expense and if you are an unmarried couple it is vital."

Partners For Life

You also need to consider adding your partner as a beneficiary on such items as retirement, savings and brokerage accounts. With 401(k) retirement accounts there's more incentive than ever.


It used to be that companies could require non-spouse beneficiaries of a 401(k) plan to withdraw the money within a certain time frame, which could mean major tax consequences, while spouses were able to roll the money into an IRA and spread out the withdrawals over their lifetime.

After a recent change, however, all beneficiaries, married or not, are able to roll the funds into their IRA.

It's also important to consult an estate planning attorney about various tax issues including gift taxes, estate taxes and income taxes, all of which are much larger hurdles for unmarried couples than married couples.

"The tax laws are where things get sticky," says Moisand, who notes that you are permitted to transfer assets between husband and wife freely with no tax but you aren't permitted to do that with anyone else.

That's why when meeting with an estate attorney, Haas says, "Make sure you know which tax you are talking about and cover them all."

(Editor's note: This story was originally published in 2008.)