How to create a financial plan as an unmarried couple

Sharon Epperson's money is headed towards 2023

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SEATTLE — If you’re living together before marriage or making a long-term commitment without making plans, you need to prepare for the future — or you could face challenges down the road, experts say.

There are “increasing cohabitation rates,” with many couples skipping marriage because “they don’t see the benefit,” said Michelle Petrowski, a certified financial planner at Phoenix-based finance firm Being in Abundance.

Financially, “it can be a blessing and a curse,” she said Monday at the Financial Planning Association’s annual conference.

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According to data from the Pew Research Center, American couples have increasingly moved in together before marriage over the past two decades.

The percentage of married adults in the US has fallen from nearly 60% in the 1990s to less than half in 2019, research shows. During the same period, the proportion of American adults ages 18-44 living with a partner increased to 59%.

While some couples pull out of marriage for financial reasons, they may not understand the pitfalls, Petrovsky said. “We always think that an emergency will never happen.”

Here are some unexpected financial issues unmarried couples need to consider.

1. You cannot claim Social Security benefits based on your partner’s work history

If you’ve been married for at least 10 years, you may be eligible for Social Security benefits based on your spouse’s or ex-spouse’s work history, including spousal or death benefits.

However, unmarried partners do not have access to these payments together or after a separation, even if they have been together for more than 10 years.

Petrovsky said the Social Security claiming strategy can be valuable for spouses who leave the workforce for years to care for children.

2. Inherited individual retirement accounts can trigger “unintended consequences.”

The inheritance of an individual retirement account is also becoming more complicated for unmarried couples, Petrovsky said.

Thanks to the Secure Act of 2019, certain heirs, including non-spousal beneficiaries, must use up inherited retirement accounts within 10 years, known as the “10-year rule”. Previously, beneficiaries without a spouse could spread the distribution over their lifetime.

“There could be unintended consequences,” Petrowski said, since higher income over the 10-year period may impact college financial aid, Social Security taxes, or higher Medicare premiums.

3. Your partner can “be left with nothing” when you die

Whether you keep assets separate or buy property together, unmarried partners need guidance on proper titles and legal documents to protect both parties, Petrovsky said.

For example, you have to consider what happens if you die while your partner lives in your home, she said.

“If you die without a will and if you don’t plan, that person’s whole life will be destroyed,” Petrovsky said.

Ownership usually passes to your natural or legal heirs through state inheritance laws.

You can opt for a cohabitation agreement, which is similar to a marriage contract for unmarried couples, or a will, which covers what happens to the property if one partner dies. You’ll need to speak to a local estate planning attorney because the exact laws vary from state to state, Petrovsky said.

“Your partner might be left with nothing,” she said, so it’s important to plan for worst-case scenarios ahead of time.