Over time, most households that are responsible with their money begin to accumulate long-term assets. These assets commonly fall into three categories; Real Estate, Regular Investments and Retirement Investments. If a couple is married and later decide to divorce, then a whole bunch of rules come into play, some created by courts as “common law” doctrines, others put in place by legislatures in the form of “statutes”, and yet others, in the form of IRS regulations and practices, governing tax treatment of gains and losses.
Census data makes it clear that fewer people are choosing legal marriage than they used to, or are putting it off until later in their lives. However, many people are living together, and gradually move into sharing their finances without ever crossing a clear legal line. Unless the unmarried partners have a written agreement governing their finances and what will happen if they break up, non-married joint finances are a train wreck waiting to happen. If Long Term Assets are involved, the wreck will likely be worse.
I’m not saying that a joint account for regular expenses is a bad idea. It is okay, because money flows in and out without accumulating. But joint ownership of long term assets without an applicable and valid contract puts both parties into a situation that most state’s laws are not really designed to handle.
If you are going to have any joint assets, why are you deciding not to get married? The answer may tell you something. If the answer is that there are good reasons for BOTH to stay single AND to have joint assets, this is a great time to visit a general practice lawyer and get what you are both agreeing to in writing. As the mechanic on the Fram Oil Filter commercial used to say, “Pay me now, or pay me later.” And later will be much more expensive.
However, let’s assume that for whatever reason, no formal agreement was ever made, and there are now long term assets that both non-married parties have contributed toward. In order to determine their status, a lawyer or accountant must ask the following questions for each asset:
Having answered those questions, the lawyer or accountant can develop an appropriate strategy for the client.
We will start off with retirement assets, as they are typically the easiest to figure out. Retirement assets can take quite a number of forms, and the tax implications vary widely, depending on the form. Most have a portion of employee contributions matched by the employer, some do not.
Since these are most often accrued only at work, they are almost always held in sole, rather than in any type of joint, ownership. (Even if a spouse holds a contingent interest in this as a “marital asset”, this is not reflected in the legal title.) Similarly, the employee-holder may have designated a domestic partner or spouse as the beneficiary in the event of his or her death. However, the employee generally has the right to change the designation of a beneficiary, with or without notice to the current beneficiary.
So, the rule for non-married partners of retirement benefit holders is pretty simple and straightforward. Unless you are the designated beneficiary, you have no rights, legal or equitable, in your partner’s retirement assets.
(There are always exceptions to general rules. For example, if you live in a community property state, such as California, different rules may apply.)
Unfortunately, the rules are not so simple when dealing with other long-term investments, personal property, or real estate. We’ll discuss them in the next post in this series.
Senior Policy Advisor