Money Issues That Concern Unmarried Couples

Handling personal finances—separately or as a couple
As unmarried partners, you need to decide whether to handle your finances separately, together, or in some combination. If you decide to combine finances, you should proceed with caution. You should realize that your relationship lacks many of the legal safeguards of marriage. If the relationship ends, no divorce courts or uniform guidelines exist to separate your shared assets. If you incur joint debt, you are each fully responsible for the entire amount (as is true of a married couple). Also, it's possible that your partner could drain the funds from a joint account.

Have a frank discussion of goals
Have a frank discussion of your financial values, priorities, and goals before deciding whether to handle your finances separately or as a couple. Estimate your net worth separately, and also as a couple, if you plan on pooling your financial resources. Decide whether you'll handle household finances through joint or separate bank accounts. Prepare a budget, identifying which expenses you'll pay separately and which expenses you'll share. Weigh the pros and cons before obtaining joint credit cards.

Planning for retirement—separately or as a couple
When planning for retirement, you need to decide whether to plan separately or as a couple. As an unmarried partner, you're not eligible for spousal benefits from two key sources that many married partners depend on: Social Security and defined benefit pension plans. Given this, you should carefully consider what retirement benefits you can count on receiving from each other. Unless you have a written agreement or an irrevocable trust in place that will withstand a permanent separation, it may be best to consider yourself a single person and plan for your own future. You should also keep in mind that it's always possible that your relationship could end before retirement. If you decide to plan for retirement together, there are some approaches you can take:

• Investigate the availability of joint and survivor benefits for your partner
• Increase your level of savings
• Use life insurance to fund your partner's retirement
• Designate your partner as the beneficiary of your qualified retirement plan

Consider protecting yourself with a domestic partner agreement
A domestic partner agreement is a written contract between you and your partner that primarily addresses the sharing of income, expenses, and property. It supports your ownership rights and clarifies your intentions for the distribution of your property if you die or your relationship ends. Few, if any, laws specifically govern the rights and responsibilities of unmarried partners regarding the sharing of property and finances. If your relationship ends, there are no uniform guidelines for sorting commingled finances and dividing shared property. By setting clear ground rules up front, a domestic partner agreement can help your relationship run more smoothly and ease the handling of disputes in case of separation or death. For more information, see Domestic Partner Agreements.

Handling personal finances—separately or as a couple
As unmarried partners, you must decide whether to handle your finances separately or as a couple. A candid discussion of your financial values, priorities, and goals provides a solid foundation for making these decisions. If you decide to handle finances as a couple, ask yourselves if this includes long-range retirement planning or just short-term activities, such as managing household finances. By clarifying this now, you can ease all your financial decisions and activities, including managing household expenses, deciding whether to open joint accounts, and developing a budget.

Some of the planning items and decisions you should consider include the following:

• How will you handle household expenses, separately or jointly?
• If you pay household expenses jointly, how will you split them, equally or apportioned in some way?
• Will you open a joint checking account? If you do, and your partner fails to meet his or her obligations—for example, if your partner fails to cover a bounced check—you may become responsible for any related bank fees. What will you do if your partner begins draining off assets in a joint account? What will you do if your partner simply takes off with the funds?
• What about the rest of your income and your other personal expenses? Will you pool all your finances or keep some income separate for your own personal use?
• Will you hold joint credit cards? What will happen if your partner overextends the account and damages your credit rating? What if your relationship ends and your partner refuses to contribute to the balance on the account?
• Will you plan for retirement separately or as a couple? What approaches will you take if you're ineligible to receive benefits from one another's retirement plans?

Estimating your net worth—separately and together
Your net worth is simply your assets minus your liabilities. Put another way, it is all that you own, less all that you owe. A net worth statement measures your financial position. You can use it as the basis for determining how much you'll each contribute to your common expenses, such as household expenses. With periodic updating, your net worth statement presents a picture of your progress in meeting your long-term financial goals. It provides information you can use to formulate a sound investment strategy and to plan for your insurance, retirement, and estate needs.

You should consider calculating your net worth separately and also jointly if you're planning to pool financial resources. In calculating your net worth separately, account for only your individual portion of jointly owned assets and shared liabilities. If you prepare a joint net worth statement, put both your names on it and don't include any separately owned assets. You can adapt any net worth format for joint use merely by adding columns—one for you, one for your partner, and one for your combined resources.

Handling household finances
Separately or jointly
One of the first issues you face when living together is how to handle your household expenses. Will you manage your finances separately? Will you share some costs, paying others individually? Or, will you pool income and expenses? There are probably as many arrangements as there are couples. The cleanest approach is to keep your finances separate, but that's not always convenient. Also, it doesn't promote relationship building as a couple.

Caution: Before combining your finances, you should realize that your relationship lacks many of the legal safeguards that the law extends to married couples. There are no divorce courts, laws, or uniform guidelines to aid in separating your assets once you combine them. If your partner fails to meet his or her obligations, you'll bear the entire burden of any joint debt. A restraining order that prevents your partner from selling off joint assets may not be as readily available to you as it would be to a spouse.

Paying expenses from a joint bank account
If you decide to combine bill paying, one approach is to open a joint checking account for shared bills, while keeping separate checking accounts for personal expenses. You can avoid problems by clearly defining the expenses your joint account will cover. Joint expenses generally include housing-related costs, such as mortgage or rent, utilities, household insurance, property taxes, and food. Personal expenses typically include clothing, car expenses, personal insurance, personal debt, and individual hobbies or interests. You can categorize expenses in whatever way works best for you.

You can begin the process by following these steps:

• Forecast your annual expenses. Once you've identified your joint expenses, forecast them for a year, being sure to include those that come due monthly, quarterly, semiannually, and annually. Divide the yearly total by 12 to get an average monthly cost.
• Decide how you'll split these costs, equally or apportioned in some way. If you decide to apportion your expenses, net worth is a better basis for apportioning them than income. Every month, you each deposit a check from your personal account into the joint account to cover your share.

Caution: While joint accounts make sharing expenses easy, there are some big drawbacks to consider. Once you open a joint bank account, you're each responsible for all checks drawn on that account, plus all bank charges. Record keeping can become a nightmare, especially if you're both simultaneously writing checks and withdrawing cash from automatic teller machines. Creditors can seize the funds in a joint bank account to satisfy one partner's obligation. If your relationship ends, verifying your contribution to the shared expenses may be difficult. One of you can drain the funds in a joint account, while the other may find it difficult to get a restraining order preventing this. Or, one of you could simply clean out the account and walk away with the funds.

Tip: You can protect yourselves by setting up a joint account that requires both signatures for withdrawals. Also, if you each contribute an average monthly amount, set up an interest-bearing account, since it may be carrying funds from month to month.

Paying expenses from separate bank accounts
If you prefer a simple financial arrangement and want to avoid the liability of a joint account, you can keep your finances separate. This is the cleanest approach. One of you can pay the bills and collect from the other. Or, you can both split the task, with each of you paying certain bills and squaring accounts monthly.

Tip: Always pay your share by check, or get a receipt from your partner. This helps to straighten out any bill-paying errors and also documents your contribution in case of a breakup.

Pooling income and expenses
You can also opt to pool your incomes and pay expenses from a joint account. This may work best when you're in a long-term relationship, when your incomes are comparable, or when you've made equivalent tradeoffs, such as one working while the other cares for the family or home. Before pooling your financial resources, be sure you agree on financial goals and have a spending plan.

Caution: Once you open a joint bank account, you're each responsible for all activity in that account. As mentioned above, there are some big drawbacks to consider.

Developing a budget
The thought of developing a budget intimidates many people. Don't let that happen to you. A mutually agreed-upon budget helps to keep finances straight and avoid arguments over money and bills.

Begin by agreeing on which expenses you'll share and which you'll keep separate. For shared expenses, decide whether you'll split them equally or in proportion to your income or net worth. Include your share of household expenses as a fixed cost in your budget so you don't forget to set aside funds to cover it. There are many formats available for personal budgets, which you can easily adapt with the simple addition of a few columns. One format is illustrated below, showing which expenses this couple agreed to share and which they kept separate:

Example(s): Fran and Tony use a budget format that identifies the expenses they share and those they keep separate.

Credit cards—separate or joint
You can open a joint credit card account, or you can add your partner to your existing credit card as an authorized user.

• Joint credit cards—If you apply for a joint credit card, you each fill out a separate credit application and each must pass a separate credit review. If you receive joint cards, you are each fully responsible for all charges on the account—your partner's as well as your own. You must both faithfully record your charges. An unexpected bill due to a forgotten charge or a lost receipt can derail your budget. If these surprises result in late payments or leave you unable to pay the bill, they can damage your credit rating.

  Tip: If your relationship ends, request each creditor to close each joint credit card account. Don't split the cards with your partner, taking some while he or she takes others. You are each still fully responsible for all charges on any joint account.

• Adding your partner to your credit card as an authorized user—You can add your partner to your existing credit card as an authorized user simply by requesting this of your credit card company. In this case, your credit application is based solely on your own credit rating, and you are solely responsible for all payments on the account.

  Tip: Even if you establish joint credit card accounts, you should consider the importance of establishing or maintaining a separate credit history.

Planning for retirement—separately or as a couple
You lack the spousal benefits available to married couples
How will you plan for retirement—separately or as a couple? Before answering this question, you should consider that as an unmarried partner, you're ineligible to receive spousal benefits from two key sources that many married partners depend on: Social Security and defined benefit pension plans.

• Social Security—Social Security does not pay benefits to an unmarried partner. While you may qualify for Social Security benefits based on your own earnings, or that of a deceased former spouse or ex-spouse, you can't receive benefits based on your unmarried partner's record.
• Defined benefit pension plans—Defined benefit pension plans typically don't offer benefits to a nonspousal beneficiary. A spouse, in contrast, is legally entitled to receive benefits unless he or she waives that right. A surviving spouse can expect to receive 50 percent of a deceased partner's pension benefits. If the partner dies before benefits begin, the surviving spouse will receive 50 percent of the accrued benefit.

Consider creating your own safety net separately
You should clarify what retirement benefits you can expect to receive from each other. Unless your partner has set up a funded irrevocable trust for you that will withstand a permanent separation, it may be best to plan as if you're single. Also, you should consider the possibility that your relationship could end before retirement.

Planning for retirement together
If you choose to plan for retirement together, here are some approaches you can take:

• Investigate the availability of joint and survivor benefits—If you're in a defined benefit pension plan and your employer requires you to take an annuity (or if you prefer to take one), your employer will likely pay it to you as a straight life annuity because you are unmarried. This means that you will receive a monthly payment as long as you live, but when you die, the payments will stop, leaving your partner with nothing. Ask if your employer's plan allows a joint and survivor benefit for your unmarried partner. Some companies do. If your company allows this, arrange for your partner to receive a joint and survivor annuity. However, you must do this before you retire. Once the payments start, it's too late to change how you'll receive them. You could take a lump-sum/individual retirement account (IRA) rollover option, if that option is available to you. Or, you could take a large annuity payout and use the difference over the joint payout amount to buy a life insurance policy to replace the income.
• Increase your savings now—Plan to set aside a higher level of savings now to replace the spousal benefits your partner won't receive from Social Security and your defined benefit pension plan.
• Use life insurance to fund your partner's retirement—Life insurance offers a vehicle to provide significant replacement income for your partner. You can cross-own life insurance policies, or you can purchase an individual policy naming your partner as the beneficiary.
  
  1. Cross-owned policies—With cross-owned policies, you each buy a policy on the other's life. When one of you dies, the surviving partner cashes in the policy and invests the proceeds to produce the needed income. You may need to demonstrate that you have an insurable interest in each other to cross-own life insurance. Married couples are assumed to have an insurable interest. Unmarried couples who own a house or business together are also considered to have an insurable interest, although only up to the value of their shares of the mortgage or business. You can prove insurable interest by providing evidence of jointly owned assets and, possibly, copies of wills or trust documents.
     
  2. Individual policies—You can also own an individual policy, naming your partner as the beneficiary.

  Caution: Because an individual policy is your property, it is included in your estate when you die. Any amount over the applicable exclusion amount ($2 million in 2006, 2007, and 2008) may be subject to estate taxes.

• Designate your partner as the beneficiary of your qualified retirement plan—You can name each other as beneficiaries of qualified retirement plans, such as 401(k)s, 403(b)s, and individual retirement accounts (IRA).

  Caution: However, upon your death the options available to your partner will generally not be as favorable as the options that would be available to a spouse beneficiary.

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