Navigating personal finances as an unmarried couple presents unique challenges and opportunities. Planning assumptions that married couples may take for granted requires more careful consideration for unmarried couples. This is especially true for retirement and estate planning. As unmarried couples work on planning for and securing their financial future together, these are some of the special topics to keep in mind.
Sharing Resources
Unlike married couples, unmarried partners cannot benefit from tax-free unlimited transfers of assets between spouses. This means you could unintentionally make a taxable gift, if an amount over the annual exclusion ($18,000 in 2024) is given from one partner to the other. This could be a major annoyance for managing day-to-day expenses. Direct payments to institutions for medical expenses and tuition are exceptions that can exceed the annual exclusion and not incur a gift tax. Practically speaking, it is unlikely that gifts between unmarried couples will result in a tax due, even if a gift tax return is technically required. This is because the lifetime exemption for the gift and estate tax is $13,610,000 per person in 2024. That being said, partners with larger estates should pay attention to the cumulative lifetime impact and consider that the exemption may be cut in half at the end of 2025 when the Tax Cuts & Jobs Act sunsets.
Filing Your Taxes
As separate single filers, you may experience tax outcomes that differ from one to another. For example, one person who is still working might have high taxable income from wages while the other has a more modest income from Social Security. With some planning, there could be opportunities to make the most of such disparities. Existing charitable commitments might be sourced from the higher tax person, to capture available deductions against a higher tax rate. The lower tax rate person could evaluate an IRA to Roth conversion, which could help provide flexibility for both persons in the future. A well-designed financial plan can be used to identify tax strategies over multiple years.
Securing Retirement Income
Provisions within Social Security, and some public and private pensions, favor married couples compared to unmarried partners when it comes to the death of the income beneficiary. If a residual benefit is not available to a partner, a financial plan should test the impact of losing the major income source from a premature death. Life insurance on the income recipient may be an option to protect the survivor’s financial security. A thorough financial plan would examine all resources and potential lifestyle changes to help assess this risk.
Rules for inheriting IRAs also favor married persons, allowing the survivor to roll the deceased spouse’s IRA into their own, consolidating accounts and keeping required distributions relatively simple. Unmarried heirs cannot use the spousal rollover provision and will need to maintain a separate inherited IRA account. Furthermore, the SECURE Act implemented a change to required distributions, which may force an inheritor to deplete the IRA within 10 years, potentially increasing tax liabilities over those years. One major benefit an unmarried person could use is that the Act also carved out an exception, where a beneficiary not more than 10 years younger than the original account owner can take distributions over their life expectancy, instead of 10 years. This carve-out could limit the tax impact and allow longer tax-deferred growth for an unmarried heir.
Planning Your Estate
As with gift taxes, estate taxes also favor married couples, making estate planning even more important for unmarried couples. For married couples, an unlimited amount of assets can typically be passed on to the surviving spouse without incurring any estate tax at that time. Any tax that might be due becomes a liability for the estate only after the second death. For unmarried persons, that unlimited marital deduction is not available, which means a large bill could come due at the first death. This cost could impact the resources available to the survivor and if poorly planned, they might need to liquidate assets and suffer additional expense. Even for those without a large estate, state estate taxes could be an issue. Account titles, beneficiary designations, and disability planning documents like a power of attorney and healthcare proxy all merit close attention regardless of total wealth.
Unmarried couples do have more financial risk than married couples as most laws cater towards those that are married. And these are just a few of the considerations to keep in mind. It’s important to plan ahead and seek guidance from experienced professionals that can help you and your partner plan for a successful financial future.
