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SEATTLE — If you’re living together before marriage or committed long-term without plans to tie the knot, you’ll need to prepare for the future — or you may face challenges later, experts say.
There are “rising rates of cohabitation,” with many couples skipping marriage because “they don’t see the benefit,” said Michelle Petrowski, a certified financial planner at the Phoenix-based financial firm Being in Abundance.
Financially speaking, “it can be a blessing and a curse,” she said, speaking at the Financial Planning Association’s annual conference on Monday.
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Over the past two decades, American couples have increasingly moved in together before marriage, according to data from the Pew Research Center.
The percentage of married US adults declined from nearly 60% in the 1990s to less than half in 2019, research shows. During the same period, the share of US adults ages 18 to 44 cohabiting with a partner increased to 59%.
While some couples opt out of marriage for financial reasons, they may not understand the pitfalls, Petrowski said. “We always think an emergency will never happen.”
Here are some unexpected financial issues unmarried couples need to consider.
1. You can’t claim Social Security benefits based on your partner’s work history
If you’re married for at least 10 years, you may be entitled to collect Social Security benefits based on your spouse or ex-spouse’s work history, including spousal or death benefits.
However, unmarried partners don’t have access to these payments together or after a breakup, even if they’ve been together for more than 10 years.
Petrowski said that Social Security benefit claiming strategy can be valuable for spouses who leave the workforce for years to care for children.
2. Inherited individual retirement accounts may trigger ‘unintended consequences’
Inheriting an individual retirement account also becomes more complicated for unmarried couples, Petrowski said.
Thanks to the Secure Act of 2019, certain heirs, including non-spouse beneficiaries, must deplete inherited retirement accounts within 10 years, known as the “10-year-rule.” Previously, non-spouse beneficiaries could stretch distributions over their lifetimes.
“That could have unintended consequences,” Petrowski said, as higher income during the 10-year period may affect college financial aid, Social Security taxes or higher Medicare premiums.
3. Your partner may be ‘left with nothing’ if you die
Whether you keep assets separate or purchase property together, unmarried partners need guidance on proper titling and legal documents to protect both parties, Petrowski said.
For example, you’ll need to consider what happens if you pass away while your partner is living in your home, she said.
“If you die without a will and you don’t plan, that person’s whole life is blown apart,” Petrowski said,
The property typically passes via state intestacy laws to your biological or legal heirs.
You may opt for a cohabitation agreement, which is like a pre-nuptial agreement for unmarried couples, or a will to cover what happens to property if one partner dies. You’ll need to speak with a local estate planning attorney since the exact laws vary by state, Petrowski said.
“Your partner may be left with nothing,” she said, so it’s critical to plan for worst-case scenarios in advance.