Recognize, Minimize Financial Risks of Living Together

If you are living with someone as an unmarried couple, you're part of a growing segment of the population. According to the U.S. Census Bureau, there were around 11 million unmarried Americans living together as couples in 2000, an increase of 72% from 1990, and a tenfold increase since 1960.

Though the popularity--and social acceptance--of cohabitation may be growing, the arrangement is not without disadvantages. For example, unmarried partners do not automatically inherit each other's assets, as married couples do, nor can they rely on the divorce process to determine a fair division of assets if they break up. So, while the relationship with your partner may provide all the social and emotional benefits of matrimony, the lack of a marriage license can bar cohabitating partners from many of the automatic legal and financial protections married couples enjoy. Couples who are willing to do some planning and paperwork, however, actually can overcome many of the financial risks of cohabitation.

Put plans and intentions in writing

While couples will benefit from early discussions about such practical matters as who will pay the bills and balance the checkbook, they should put decisions about more weighty financial issues on paper.

Frederick Hertz, an Oakland, Calif., attorney and co-author of "Living Together: A Legal Guide for Unmarried Couples," recommends that unmarried couples draft a "living together agreement" that spells out the partners' financial responsibilities as a couple as well as what would happen in the event of a breakup.

Just a few of the many questions Hertz says are important to answer in the contract are: How will we share household expenses (50/50, or according to each partner's financial ability)? How will assets and debts be divided in a breakup? What happens to assets that have both names on the title (such as a home or car)? If we break up, which partner has the option to remain in a shared home?

Since divorce laws won't apply, this agreement may provide protection and guidance if the relationship ends.

Debra Neiman, founder of Neiman & Associates Financial Services in Arlington, Mass., and co-author of "Money Without Matrimony: The Unmarried Couple's Guide to Financial Security," is another proponent of putting your plans and intentions in writing.

"You have few or no [automatic] legal protections when cohabiting," says Neiman. "So you have to build in your own protections." She says the time to do that is "while you're still loving toward each other," not after the relationship has become rocky.

Couples that wish to put such an agreement in place should consult an attorney as the requirements and enforceability varies from state to state.

Credit, lease commitments

Getting and using credit as a couple can be risky. Statistically, unmarried couples are more likely to break up, and that can leave one person financially responsible for joint debts. In a worst-case scenario, a disgruntled partner stops paying his or her share of a large credit card bill. As joint cardholder, you must make the payments or allow your credit to be damaged by an unpaid debt.

"I'm not a fan of joint credit cards, personally, especially early on in a relationship," says Neiman. She recommends getting to know something about your partner's credit history and habits before taking on financial liabilities together.

Todd Mark, spokesperson for Consumer Credit Counseling Service in Atlanta, says his organization counsels many people who find themselves solely responsible for a joint debt when their relationship ends. To avoid finding yourself in the same situation, Mark suggests pulling your credit reports together before applying for joint credit. It's not very romantic, but he says it's a good way to protect yourself. If you see from the report that your partner has unpaid debts or is a chronic slow payer, you might decide to keep your credit and debt separate.

Mark also advises unmarried couples to get everything into individual names as soon as there's a breakup. (In a divorce settlement, debts typically are divided and each one transferred into the responsible spouse's individual name.) Of course, at that point it may be too late to convince your disgruntled partner to cooperate.

Credit cards aren't the only joint debts that raise issues. For example, if you and your partner purchase or lease a car together but only his name is on the title, you have no ownership claim even if you're making half the payments. On the other hand, if both names are on the title, and he or she drives off into the sunset one day, you still are liable for those car payments. If your partner doesn't make them, you must, or your credit will be damaged.

Renting a home brings its own risks. For example, if only one partner's name is on the apartment lease, that person is the legal tenant. As such, he or she is fully liable to the landlord, and also legally is entitled to stay in the property after a breakup. If both partners' names are on the lease, there is the risk of the remaining partner failing to pay the rent and damaging the credit of the partner who moved out.

Utilities�gas and electricity, phone, television, and Internet service�usually request just one name for billing. If the utilities are in your name, be sure the bills are paid up and the services are either shut off or transferred into your partner's name if you move out.

Home ownership

When buying a house together, unmarried partners must be particularly careful in choosing how to hold title to the property. For example, if the property is held by both partners as "tenants in common," then when one partner dies his or her share of the home will pass to the next of kin unless there is a will directing otherwise. Holding the property as "joint tenants with right of survivorship" allows for automatic and probate-free transfer to the surviving partner. That transfer of ownership can, however, trigger a tax bill for the surviving partner. (Surviving spouses can inherit property tax-free.) Establishing a trust may help to avoid a large tax bill.

Real estate is governed by state, not federal, law, so rules and requirements vary. Consider consulting an attorney before making any decision that could have major legal and tax implications.

Hertz says there are many real estate-related issues besides inheritance that can come up during a relationship or when it's ending. He recommends drawing up a co-ownership agreement that answers such questions as: Who will contribute how much to the mortgage, taxes, insurance, and upkeep? Who will get what portion of the deductions for mortgage interest and property taxes (unmarried couples can't file joint federal tax returns)? What will happen in the event of a breakup? Will the house be sold? Will the profits be divided evenly, or will one partner get more? Does one partner have "first dibs" to buy the other partner out?

If only one person holds title to the property, perhaps because he or she owned it before the relationship began, the agreement should address specifics such as how much the nonowner is expected to contribute to the mortgage and expenses, if and when the nonowner partner will be added to the title, and what would happen in a breakup.

Retirement and estate planning

If you are living together, you presumably see long-term potential for the relationship. All couples who plan to be together for the long haul need to develop retirement and estate plans. But for unmarried couples, which have no legal rights to each other's property, planning is crucial.

Hertz says it's wise for unmarried couples to approach retirement planning as individuals, with the hope that you'll be sharing your golden years. Whereas divorcing spouses can lay claim to each other's retirement savings, unmarried partners cannot. If you rely on your partner to provide for your retirement and the relationship ends, you could be caught short.

Also, since federal law does not recognize unmarried couples, Social Security will not pay survivors benefits to a surviving partner. And, in many cases, an unmarried surviving partner will not be eligible for benefits from a defined benefit pension plan. (Find out from your pension plan administrator what its particular rules and requirements are.)

An unmarried partner can inherit a 401(k), IRA (individual retirement account), or other retirement account if the paperwork designating him or her as beneficiary of the account has been completed.

Estate planning is especially important for unmarried couples because inheritance laws that apply to married couples do not apply to them. You may intend for your partner to inherit all your worldly possessions, but without the proper documentation and legal protections in place, your estate typically would go directly to your next of kin.

If you want your partner to inherit your assets, you could consider: Writing a will naming your partner as an heir to whatever property you would like him or her to have. Naming your partner as beneficiary on all retirement accounts and life insurance policies that you want to pass to him or her. (Remember to change beneficiary designation documents, including those you had in place before the relationship began, as needed.)

Hertz acknowledges that there is a great deal of legal complexity surrounding cohabitation. He says the most important thing to remember as you wade through information, laws, and documents is that "what's on paper should match what's in your heart."

"I think the biggest eye-opener for folks is ... there are so many unique financial planning issues that unmarried couples have," adds Neiman. She urges partners to educate themselves, and then decide what to do from a position of knowledge.

"It's a fine line you have to walk," says Neiman, "from love to logic."

Published August 6, 2007