American households are comprising fewer and fewer “traditional” families – those headed by two married, opposite-sex partners who may or may not have joint children. While married couples represented 78% of U.S. households in 1950, by 2010, that number had dropped to just 48%. We have seen a rise in many different family configurations, including unmarried couples, same-sex couples (either married or unmarried), blended families, multigenerational families, single-parent families, and those housing adult children. If you live in one of these nontraditional households, family financial planning can present a special challenge. This article will focus on the particular needs of same-sex and unmarried partners.
Despite the rising prevalence of nontraditional households, existing laws and financial products have been slow to catch up. The fact is that financial and estate planning is simpler for traditional nuclear families than those with different configurations. Extra measures are required to clarify the rights and roles of unmarried partners, stepchildren, and extended family members and to provide financial protection for these loved ones.
In addition to the financial planning obstacles that nontraditional families face, they also tend to struggle more with day-to-day finances. A recent study of such families by Allianz revealed that 73% of nontraditional families experienced financial hardships such as bankruptcy, unexpected loss of income, or disability. Only 42% of traditional families reported these types of hardships. The one nontraditional family configuration that was found to excel in financial matters was same-sex couples, who tend to be about as financially secure as traditional families and more likely to seek professional guidance for financial planning than members of other types of nontraditional families.
Same-sex couples have seen increasing legal acceptance over the last decade and a half, from California’s first recognition of domestic partnerships to the current 19 states in addition to the District of Columbia that grant full marriage rights to same-sex couples. Because married partners receive preferential tax and survivorship treatment from both states and the federal government, progress in the legal rights of same-sex couples has simplified financial and estate planning within the states that recognize their unions. It can become more complicated, however, when a married same-sex couple relocates to a state that does not recognize their marriage. In that case, the couple must provide for their families with the types of strategies used by nonmarried partners.
There is much less social pressure to marry today than there has been in the past. Many couples now choose not to marry, although they may consider themselves to be in committed family relationships. Although such couples enjoy increasing social acceptance, they don’t have the same legal and financial benefits of married partners. As a result, they must take special measures to protect their families’ rights and financial security.
Estate planning is of critical importance for unmarried couples. The laws of intestacy (those that govern the distribution of estates in the absence of a will) do not recognize the relationships of unmarried partners. This means that although you may have lived as a family for many years, your assets may bypass your partner and go directly to your children or other next of kin. In these types of family configurations, it is essential to have a will in place that describes exactly how you would like your assets to be distributed upon your death.
Health care planning is also especially important for nonmarried partners. If you are sick or injured and incapacitated, hospitals and other care facilities may not grant rights to people with whom you do not have a legal relationship. You can create the legal relationship that hospitals need to see without getting married through a power of attorney (POA) for health care decisions. This document names a person to make medical decisions in your place in the event you are unable to do so.
In addition, unless you share joint ownership of all of your assets and accounts, it is also helpful to have a POA for finances in place. In Iowa, you can choose either an immediate or a “springing” power of attorney, which goes into effect when triggered by an event, such as incapacity, that is specified in the POA.
Unmarried couples do not enjoy the same survivorship rights as married couples. This precludes them from collecting their partners’ Social Security benefits and some pension benefits. They also have more limited IRA options. While a widow may roll over her deceased husband’s IRA into her own, and a married breadwinner may establish an IRA for a stay-at-home spouse, these options are not available to nonmarried couples. As a result, special care must be taken to ensure the financial security of a surviving unmarried partner.
Finally, transfer of assets can be more complicated for unmarried couples. While the tax code makes broad allowances for transfers between spouses, those who choose not to marry may become subject to gift or estate tax if large amounts of money pass from one partner to another.
Because of the complexities of financial planning in a nontraditional family structure, the advice of a financial advisor can be immensely valuable. Talk to a professional who has expertise in tax, financial, and estate planning to get the most effective, well-rounded approach to meet your family’s financial needs.
Material discussed herein is meant for general illustration and/or informational purposes only. Because individual situations will vary, the information shared here should be used in conjunction with individual professional advice.