As marriage declines in the U.S., couples should understand the financial impact of avoiding saying ‘I do.’
By Dr. Robert Pokorski
If it seems you’ve gotten fewer wedding invitations lately, it’s not your imagination. Marriage is declining, and not only among young couples. Those nearing retirement age are shying away from marriage, too.
Generally, American couples are marrying later than ever, and more are living together. About 18 million unmarried couples are living together—a 138 percent increase since 1990, according to the most recent U.S. Census Bureau data. In addition to younger couples opting out of or delaying marriage, the trend includes couples nearing retirement, many who’ve been divorced and choose cohabitation the second time around.
Many unmarried couples worry they’ll need to pay more taxes. They fret about joint liability for debt. And many fear the risk of divorce most of all, according to a recent Prudential study.
Unfortunately, those who never marry could find themselves without a financial safety net. Laws protecting married couples—whether related to property, divorce, inheritance rights, health care decisions and even child custody—often don’t apply for unmarried couples.
First, let’s address a big financial myth—the so-called marriage penalty. It’s often true that combining incomes can push couples into a higher tax bracket, sometimes leading to higher taxes. However, when couples have unequal incomes, combining them can pull some of the higher income earners into a lower bracket, sometimes creating a marriage bonus. There are many variables, of course, but the 2018 tax law has, generally, minimized the tax penalty for most couples except those earning more than $400,000.
And here are a few things worth planning for or worrying about. Couples who never marry:
- Forfeit survivor’s benefits or spousal benefits from Social Security.
- Pay estate taxes if one of the partners dies, even if there is a will. Federal estate taxes would only apply in 2018 if the deceased has more than $11.18 million in assets, but this will be cut in half after 2025 pending a change in the law. State inheritance tax generally exempts property passing to a spouse but not for a non-spouse partner.
- Might have to yield medical or financial decisions to next of kin when it comes to critical or terminal illness.
- Surrender the ability to contribute to a spousal Individual Retirement Account if one partner isn’t working. For married couples, a stay-at-home spouse can make contributions to an IRA in their own name from the couple’s joint income.
- Lose flexibility when it comes to health insurance—often not provided to unmarried couples. When employers do offer health insurance to partners, the federal government taxes that benefit. Additionally, unmarried partners may not be allowed family leave to take care of a partner during illness.
- Give up spousal veterans and military benefits, including those for medical care, special loans or education.
- Forfeit “family rates” for home, auto and other types of insurance, or the ability to get insurance benefits through the partner’s employer. For a couple sharing a home, one partner most likely would not be covered under homeowners insurance and would need to buy renter’s insurance unless both own the property.
By now you’re surely thinking, “But if you live together long enough, you’re considered ‘common-law’ married, right?”
Wrong. Couples often assume they’ll be “common-law married” and enjoy the financial benefits of marriage, holding the historical belief that couples are considered married after a certain period, often seven years.
Common-law marriage is a bit more complicated than that. First, while laws vary by state, couples must “hold themselves out as married.” That could mean sharing a last name or filing taxes together. Only 16 states recognize common-law marriages—which carry specific requirements. And of those states, many no longer allow new marriages. Pennsylvania, for example, recognizes such marriages formed only if they occurred before 2005.
Outside of formal common-law marriage, unmarried couples need to document everything from property ownership, to how to manage children (35 percent of cohabitating couples have children, according to the Pew Research Center) to medical decisions. Financial advisors can help, as can attorneys and any number of books that provide guidance on living together.
No doubt it’s much better to remain single than marry the wrong person. But unmarried couples devoted to each other should rethink their strategy to avoid financial pitfalls. If they take stock of everything marriage has to offer, including the financial benefits, they may decide it’s worth getting hitched after all.
Dr. Robert Pokorski, a vice president and medical director at Prudential, helps financial advisors, their clients, and consumers better understand health issues and other non-financial shocks that can threaten retirement security.