Financial Planning for Cohabitating vs. Marriage

Written By: Kevin Reardon, CFP®

Adults living together in a romantic relationship outside of marriage, defined as cohabitation, has grown exponentially in the last 50 years. Although many of those are young adults in their 20’s and 30’s, a growing percentage are older adults who were previously married and are choosing not to legally re-marry.

We have experience at Shakespeare with clients in both marriage and cohabitation arrangements and thought it would be productive to share financial planning considerations for both scenarios. There are financial pros and cons of each and having a trusted financial advisor can help navigate your unique scenario.

Housing

Cohabitation: If a couple purchases a home together, they need to be clear about how ownership is structured (e.g. single name, joint tenants or tenants in common). If one partner owns the home, the other might not have any legal rights to it unless an agreement is made.

Marriage: In many states, property acquired during the marriage is considered marital property and may be divided equally in case of divorce.

Income Sources and Budget

Cohabitation: Couples often maintain separate finances, though they may share living expenses. Formal agreements, such as cohabitation agreements, are helpful in setting expectations around financial contributions. This can avoid disputes if the relationship ends.

Marriage: Married couples often share income and expenses. Depending on your state of residence, income earned during the marriage might be considered joint marital property. Couples need to decide whether to merge finances or maintain separate accounts.

Taxes

Cohabitation: Couples cannot file joint federal or state tax returns. They are taxed individually, which may have different implications depending on income levels. Some may benefit from lower individual tax rates, but others might lose certain tax benefits available to married couples.

Marriage: Married couples can file jointly, which may result in tax savings due to joint tax brackets, higher standard deductions, and other tax credits. However, there’s a risk of the “marriage penalty” for those with high income where filing jointly might push them into higher tax brackets.

Estate Planning

Cohabitation: Unmarried partners do not have automatic inheritance rights. It’s crucial to have a Will to ensure assets go to the surviving partner if those are your wishes. Without a Will, assets may go to biological family members instead of the partner. Similarly, for medical and financial decisions, an unmarried partner will need a durable power of attorney for healthcare and finances.

Marriage: Married couples often have automatic inheritance rights and can make medical and financial decisions on behalf of each other without requiring separate legal documents, though it’s still advisable to have a Will and powers of attorney in place.

Health Insurance

Cohabitation: Some employers offer domestic partner benefits that allow cohabitating partners to be added to health insurance plans, but this is less common than for married couples.

Marriage: Spouses can generally be added to each other’s health insurance plans with fewer restrictions and without additional taxes.

Life Insurance

Cohabitation: Partners can be named as beneficiaries on life insurance policies, but there are no automatic rights. It’s important to name them explicitly.

Marriage: Spouses typically have automatic rights to life insurance proceeds unless otherwise specified.

Social Security and Retirement Benefits

Cohabitation: Unmarried partners are not eligible for spousal Social Security or pension benefits, nor can they roll over the deceased partner’s IRA or 401(k) into their own account.

Marriage: Married couples can receive spousal Social Security benefits, survivor benefits, and can roll over IRAs or 401(k)s from a deceased spouse.

Divorce/Separation

Cohabitation: If a cohabitating couple separates, there are generally no legal obligations unless they have joint assets or agreements. Each partner retains their own property unless otherwise agreed upon.

Marriage: Divorce involves the division of marital assets and possibly spousal support, depending on the length of marriage and local laws.

Debt

Cohabitation: Each partner is generally responsible for their own debts unless they have joint accounts or co-signed for loans.

Marriage: In some states, debts incurred during marriage may be considered joint marital debts, even if taken out by only one spouse.

Children and Child Support

Cohabitation: Unmarried parents have the same rights and obligations regarding child support and custody as married parents, but legal steps may be necessary to establish paternity and custody arrangements.

Marriage: Married parents have automatic parental rights, and child support or custody is determined in case of divorce.

Cohabitating partners often need additional legal protection through the use of wills, powers of attorney, and cohabitation agreements to ensure their financial and legal rights are safeguarded. In contrast, marriage confers a wide array of automatic legal rights but also comes with obligations, particularly in terms of shared assets, debts, and tax filing. Each couple should carefully consider their goals, assets, and obligations before deciding which arrangement suits them best. For further discussion, reach out to your Shakespeare Advisor.