When it pays to stay single
Is there a time when being single is more financially desirable?
Sure, marriage has many economic advantages, such as pooled income, shared health-insurance coverage, although more companies now also offer this benefit to unmarried couples, and Social Security survivor benefits. Even the marriage tax penalty has been eased in recent years.
But in some instances, it’s more practical to remain unhitched.
“One thing to keep in mind is that it’s always a mix of financial and emotional decisions,” says Scott Farber, a wealth management adviser based in Natick, Mass. “It’s difficult to look at a relationship from a strictly financial standpoint.”
“However, there are some general instances when it might be better not to be married.”
That’s how Sheryl Garrett, a certified financial planner with Garrett Planning Network in Shawnee Mission, Kan., sees it, too.
“There are definitely way more advantages on (the married) side of the fence,” says Garrett. “But there are some clear ones on the unmarried side, too.”
While there’s no “typical couple” that should consider living together without official legal status, there are some typical issues. Basically, says Garrett, staying legally unattached could be financially beneficial for one or both partners when these five issues come into play:
- Liability
- Credit and debt concerns
- Survivor’s benefits
- Taxes
- Children
Liability for married and unmarried
One of the great things about marriage is you get to share everything. That’s also one of the worst things about marriage, especially when it comes to liability issues. You could be financially responsible for judgments against your spouse, such as personal lawsuits or Internal Revenue Service liens and all types of legal actions in between.Janice K. Hobbs, owner of Jan Hobbs Financial Group in Orange, Calif., says this is a concern of many of her clients who primarily are high-income individuals.
“We have a lot of doctors as clients, both partners are physicians, which is a high-liability profession,” says Hobbs. If one of the doctors is sued, the other person’s assets are just as liable — if they are married. By staying single, Hobbs says, only the one physician’s income and assets would be at risk.
The liability issue doesn’t just worry still-working people who are making a good living.
Garrett says a book buyer raised similar concerns at a signing for her book, “Money without Matrimony,” that she co-wrote with Debra Neiman.
The woman, in her late 50s, had a new man in her life and they were considering another go at marriage. She was in a good financial position, but a combination of previous marital and business problems had left him dealing with the aftermath of a divorce, bankruptcy and some lingering financial issues.
“He hadn’t had much of a chance to recover financially, although he had moved on emotionally, and he had a terrible credit score. He was a great guy with completely understandable credit problems,” says Garrett.
“Her question was, ‘If we did get married, would that be a bad idea?’ My answer was that if they keep things separately, depending on the state (of residence), his debts in his name and her assets in her name, you’re fine. But if he gets sued. …
“She said, ‘Stop. I think we’re going to wait.’”
Commingled credit and debt
That cautious woman’s remarriage query also raised the issue of shared credit, which Garrett says can go hand in hand with liability worries.The credit-reporting business has evolved so now each person has an individual credit score. So unless you borrow money together, getting married doesn’t automatically hurt you from a credit standpoint, says Garrett.
Debt is a slightly different matter. That’s because in some states, when you marry you also marry your spouse’s debt, especially if post-marriage payments come out of a joint account.
“If you have a situation where one partner is heavily in debt, especially if the one in debt has fewer assets, marriage could potentially expose the nondebtor’s assets,” says Farber.
Where you live also could affect your debt status. In community-property jurisdictions — Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin or Puerto Rico — community property includes the earnings of both partners while married, as well as everything purchased with that money. If separate property is commingled with community property during a marriage, it could be viewed as community property. Similarly, all debts incurred during marriage, unless specifically noted as separate, become community-property debts.
It’s easier to avoid responsibility for a spendthrift partner’s debts when you simply live together. Just be sure you don’t inadvertently invalidate this unmarried advantage. Don’t take on joint transactions, such as helping your financially struggling partner pay an overdue loan, or it could show up on your record, too.
Securing survivor’s benefits
When it comes to federal retirement benefits, marriage is advantageous for many couples. A surviving spouse gets to choose between his or her own benefits or those of the deceased spouse, whichever is greater. (This usually happens more often with women, says Garrett, though some men receive such benefits.)There’s no comparable survivorship payment for partners who just live together. But this benefit could interfere with the decision of a widow or widower who wants to remarry.
“Say there’s a woman who’s a widow and involved with another man,” says Garrett. “She has her deceased husband’s benefits and the man has his own. Together they have enough to live on comfortably.
“But if they get married, her Social Security goes away and she would qualify for half of her new husband’s benefits. That could be several hundred dollars less a month, and that amount could make a big difference.”
Hobbs agrees. “If your new spouse doesn’t have the same work history as your old spouse, you may have traded off a good benefit,” she says.
Contact your local Social Security Administration office and have them run some numbers for your personal situation. The calculations could help you decide whether you want to walk down the aisle.
Garrett also warns couples not to forget about how tying the knot could affect private-sector benefits.
“Fewer people get traditional pensions nowadays, but folks who are now retired historically had a pension. There are a lot of widows out there who have their husbands’ pensions. If they remarry, they would lose that pension income. Most seniors know this, but what they don’t think about is health coverage, a big issue now. If you’re getting health benefits from a deceased spouse’s coverage, you could lose that, too.
“I really hate that people would choose not to get married if they really want to because of financial issues,” says Garrett, “but at least know what you’re getting into.”
Older couples, who are depending primarily on federal medical coverage, also need to assess their marital or nonmarital situation carefully.
“One of the reasons to get married is to share benefits if you’re older,” says Farber. “But the flip side is that you’ll then be subject to the Medicare claims thereafter.”
For example, say you have a house in your name only. If you’re married and your spouse goes into a nursing home, Medicare will want to tap your home, assuming there are no other assets to pay for nursing-home costs, to recoup its expenses, says Farber. “If you’re not married, you remove the house from that exposure.
“When you have one spouse that’s going to be on Medicare and the non-Medicare spouse is the homeowner, it makes sense to not be married at that point,” she says. “I’ve heard of situations where people even get divorced to prevent exposure of assets they acquired together as a married couple from being subject to claims in this situation.”
Taxes and the unmarried couple
By now, almost every taxpayer knows about the marriage tax penalty. This tax-rate quirk generally affects a couple when both earn roughly the same amount.”The marriage penalty has been minimized greatly from what it used to be,” says Garrett, “but it still exists, especially for people who both make a lot of money.”
And unless Congress takes action to extend the marriage tax relief, the penalty will return in full force in 2011. Meanwhile, even with the temporary tax relief for married couples, there are other tax situations where being single is more fiscally rewarding.
The tax code is fraught with phase-outs and restrictions. “For example, the Roth IRA contribution limit for married couples is higher but not double that of two singles,” says Farber. “If you’re single and make between $95,000 and $110,000, you can contribute to an account. If you’re married, you can contribute if you make between $150,000 and $160,000.
“If each individual earns $90,000, each can contribute up to the limit unless they are married. By being married, their joint income will be taken into account and neither can contribute to a Roth because it exceeds the limit.”
Married couples also could face higher tax costs than living-together counterparts if they own rental real estate.
“Write-offs from rental real estate can be used to offset ordinary income unless your adjusted gross income exceeds $150,000,” says Hobbs. “And that limit is the same, whether you’re married or single.
“Say you had an unmarried couple and each partner kept an old condo and rented it out. They each would have a $3,000 to $4,000 write-off each year. But a married couple with $200,000 adjusted gross income cannot take any of those losses against ordinary income.”
A $100,000-per-year income level is not that unusual for investors looking to get into today’s escalating real-estate market, says Hobbs. That means married rental-unit owners in her Southern California location often lose out on expected tax benefits.
Taking care of the kids
Then there are the kids. Both minor children living at home and adult offspring who are long gone can muddle the married-versus-living-together equation.When it comes to obtaining federal financial aid for college, being unmarried offers an advantage, albeit one that many parents might not be comfortable taking.
“If there’s a child where one adult is the legal parent and the other isn’t, by law you don’t have to report the income of the nonparent, but there are ethical considerations,” says Garrett. “The FAFSA form literally asks for the information on the father and mother. If there’s no legal mother or father, you’re answering it correctly. But if the partner is helping or will help pay for the schooling, that’s something you probably should consider in answering.” (For more on college funding, read “How to find free money for college.”)
A more emotional issue for many unmarried couples is grown kids from previous relationships.
“One of the biggest reasons that some older people choose not to remarry is because of the family dynamics, whiplash or backlash from adult children,” says Garrett. “This new person in a parent’s life might be really charming and attentive, but might just be after Mom or Dad’s money, ‘our inheritance.’”
In such cases, Garrett has some unequivocal advice for the kids: “Get your noses out of your parents’ business and let them get on with their lives.”
Farber agrees that emotional issues “are almost always going to take the front seat.” But, he says, “financial issues you can deal with; you can come up with solutions.” One of the easiest solutions: basic estate planning.
“You have to have a will or trust in place to direct where your assets will go, regardless of whether you’re married or just living together,” says Garrett. “If you’re married, you can say where you don’t want them to go. If you’re not married, you can determine where they will go.”
This explicit distribution direction is necessary because without it, the state decides. If you stay unmarried and have no will or trust, all your assets will go by default to your next of kin, your children. Your partner will get nothing. Conversely, if you marry and don’t have a will or trust, your new spouse will get it all, leaving your kids without an inheritance. (For articles on wills and estate planning, see “Estate planning for everyone.”)
“Put in place a living trust that spells out that my partner will get this and my kids will get this,” says Garrett. “Put all that in print so that it’s not left open.”
