When the tie that binds you is not marriage, investing together can be a bit more complex.
Unmarried couples don’t share the same ownership and property rights that married couples do. And that has a major impact on investment decisions that unmarried couples face.
For example, while married couples can transfer investment property to each other, or divide assets between them any way they like, unmarried couples can’t without risking potentially serious tax consequences.
And while one spouse would be automatically entitled to a share — rarely less than one-third and often more — of the other’s property should there be no will, an unmarried partner would be entitled to nothing.
Without those legal protections, unmarried investment partners must plan carefully, right from the beginning, for equitable ways to own and distribute their property, not only in case of separation, but also when one of them dies.
Women involved in long-term partnerships often need to handle their investments differently than either single or married women.
- The annual ceiling on tax-free gifts applies to property transfers between unmarried partners.
- If your partner dies without a will, you may not have a legal right to property held in his or her name.
- Older couples may choose not to marry to make it easier to leave their entire estates to children from earlier marriages.
- You and your partner may have more trouble arranging for a mortgage than a married couple with comparable income.
Sharing the wealth
With the exception of the arrangement known as tenants by the entirety, unmarried partners can own investment assets any way they choose: solely, jointly with rights of survivorship, or as tenants in common. Joint tenancy works the same way for unmarried as for married people. At the death of one owner, the property automatically goes to the survivor.
However, when a couple is unmarried, the total value of the property is legally considered part of the estate of the first to die unless you can prove otherwise. That could mean potential estate and inheritance taxes. While there’s no federal estate tax due on assets that are passed to a spouse who is a US citizen, that marital exception doesn’t apply when the assets go to an unmarried partner.
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If you name your partner as beneficiary for your pension, retirement plan, or insurance policy, that person will collect the money the plan provides when you die.
Your partner will have the same right a spouse would to any retirement plan pay-out or tax-deferred IRA, and you will have provided that the money goes to the right person. An added advantage is that documents naming beneficiaries may be less likely to be contested than wills.
Another way to pass investment assets to your partner outside your will is to create a trust, a legal document that transfers ownership to a trustee until it goes to the beneficiary either at your death or at any time you name. Of course, there are many other uses for trusts. Married couples use trusts for tax-saving reasons as well as naming beneficiaries and controlling how the assets are spent. Many people who own property in more than one state or want to leave assets to minors prefer trusts as well.
You shouldn’t attempt to create trusts without legal advice, though. They must be drawn up correctly to achieve the results you want.
In trust for…
You can arrange to leave money directly to a specific person when you die, without the expense of establishing a formal trust agreement or including the bequest in your will. You can set up a bank account in trust for the person you want to have it or one that’s payable on death (POD). Or you may be able to set up transfer on death (TOD) registration for your mutual fund or brokerage accounts. At your death, the beneficiary you’ve named becomes the owner. But at any time before you die, you can change your mind about any aspect of the bequest, take the money out, or add assets to the account. It’s always best to get legal advice about any arrangements you make to dispose of your property. That’s especially true if you’re concerned that your family might contest bequests you make to your partner.
Buying an annuity
Annuities, which are insurance contracts designed to provide retirement income, are another way to provide financial security for your unmarried partner. Basically, you buy the annuity, either with a lump sum or over a period of years, naming your partner as beneficiary or co-beneficiary with yourself. At a date you select, the annuity begins to pay out the accumulated assets, providing an income for life or for a set period of years. Here, as with other assets that are transferred outside a will, there is less risk of legal challenge.
All the techniques described on these pages as ways of transferring investment assets to an unmarried partner work similarly if you use them on behalf of your spouse, children, family, or friends. (Remember, though, you have to make special arrangements for children who are minors.)
Except for certain trust documents, most of these techniques are revocable, which means you maintain control of the assets while you are alive, and you can change the beneficiary. Yet all of them are designed to let you pass along assets with less time, trouble, and expense, and, if it’s important to you, with less publicity than through a will.
Investing Inside And Outside Your 401(k) by Inna Rosputnia
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