Planning Concerns of Unmarried Couples

Planning Concerns of Unmarried Couples

What is it?

As an unmarried couple, you lack many of the legal protections and advantages that married couples automatically receive. For example, divorce laws don't apply to you, tax laws treat you differently, and government and employer-provided retirement plans may not recognize your relationship. You face many issues involving money, insurance, property ownership, parental rights, estate planning, and taxes. If you are a gay or lesbian couple, you face additional issues in all these areas. Although opposite-sex couples may be unmarried by choice, gay or lesbian couples in many states may want to marry but cannot because their state does not allow marriage between same-sex couples. Because of the many issues you, as unmarried partners, face, you need to take extra steps to secure a solid financial future for your partner and yourself. You must create your own legal safeguards with the help of an attorney or experienced advisor through domestic partner agreements, property ownership as joint tenancy with rights of survivorship, wills, living trusts, powers of attorney for health care and finances, and documents that will help you safeguard your parental rights.

Tip:     Some states have legalized same-sex marriages between residents. Partners in these relationships will gain all the benefits and protections of marriage that their respective states confer (e.g., inheritance, property ownership rights). Other states provide the equivalent of state-level spousal rights to same-sex couples within the state through civil unions or domestic partnerships.

Domestic partner agreements

A domestic partner agreement is a written legal contract between you and your partner that supports your ownership rights and clarifies your intentions for the distribution of your property if you die or your relationship ends.

If any of the following situations applies to you, you may want to consider a domestic partner agreement:

·       You want to protect your income and property rights in case of separation or death

·       You have more than a minimum of assets

·       You expect to commingle your finances, perhaps by purchasing household goods or other property together, sharing income, or holding joint bank accounts or credit cards

·       You want your relationship to run smoothly with a clear understanding of your financial rights and responsibilities

Money issues that concern unmarried couples

If you combine your finances and your relationship ends, no divorce courts or uniform guidelines exist to separate your commingled assets. Your relationship lacks many of the legal safeguards that protect married couples. Before combining your finances, take some time to discuss your financial values, priorities, and goals. For example, how will you handle household expenses, separately or jointly? If you pay expenses jointly, how will you split them, equally or apportioned in some way? Will you open joint checking and credit card accounts? If you do, how will you protect yourself if your partner fails to meet his or her obligations and you become responsible for the entire joint debt? Will you plan for retirement separately or as a couple? How will you replace the spousal benefits that your partner won't receive from your Social Security earnings and your defined benefit pension plan?

Insurance issues that concern unmarried couples

Life insurance

Life insurance can provide a vehicle to address many concerns of unmarried partners. For example, government and employee benefit programs don't replace income for your partner after your death, as they do for a spouse. Tax laws don't shelter your estate, as they do for a married couple. You may face a greater likelihood that disapproving relatives will contest your will. Life insurance offers a vehicle to replace income after the death of your partner, provide cash to pay estate taxes, and provide funds that avoid probate.

Health insurance

A growing number of employers now offer domestic partner benefits--including health insurance--to the unmarried partners of employees. A major disadvantage of these plans is that the health coverage your employer provides to your unmarried partner is generally treated as taxable income to you at the federal level (unless your partner qualifies as your dependent for federal income tax purposes), but not always at the state level. If your employer offers these benefits, you should complete a cost/benefit analysis, taking the tax effect into account, before your partner enrolls. Or, if your employer offers domestic partner benefits and your partner's employer also offers health insurance, you should compare the annual cost of each plan before selecting coverage. You may find the additional tax on the domestic partner coverage outweighs the benefits of enrolling in a domestic partner benefits plan.

Property ownership issues that concern unmarried couples

As an unmarried couple, no uniform guidelines aid in dividing your shared property if your relationship ends. If you die, your property does not automatically pass to your partner. There are three main categories of property to consider: (1) property with a documented evidence of ownership, such as real estate, vehicles, bank accounts, and securities (stocks and bonds), (2) property in the form of income, and (3) untitled property. By understanding the different forms of property ownership that are available to you (sole ownership, joint tenancy with rights of survivorship (JTWROS), and tenancy in common), you can protect your rights and ensure that your property is disposed of as you wish. A written agreement, such as a domestic partner agreement, can support your ownership rights and your intentions if you die or your relationship ends.

Parental rights issues that concern unmarried couples

As an unmarried parent, you must take extra legal precautions to protect your rights. Parenting rights that are automatically conferred on married partners don't necessarily apply to you. For example, you may not be allowed to authorize emergency medical treatment for your partner's child. You're not automatically granted custody or visitation rights to your partner's child if the relationship ends. You don't automatically become the legal guardian of your partner's child if your partner dies, no matter how long you've raised the child. If you're an unmarried father, you may not even be recognized as your biological child's legal parent. You can protect your parenting rights with key legal documents.

Estate planning issues that concern unmarried couples

As unmarried partners, you have no automatic legal right to inherit each other's estate. Unless you have a will or will substitute to provide for your partner, your estate will go to your legal next of kin. Because you cannot take advantage of the unlimited marital deduction, which is only available to married couples, your estates may be subject to federal taxation on any amounts in excess of the applicable exclusion amount that you leave each other. Gifts you make to each other are also taxable if in excess of the $14,000 annual gift tax exclusion (2015 figure) and not sheltered by your applicable exclusion amount ($5,430,000 in 2015). Although property you share through a JTWROS avoids probate, it does not automatically escape estate taxes. Without a durable power of attorney for health care, you may be excluded from medical decision making or even from visiting your partner if he or she becomes seriously ill or incapacitated. If you don't have a durable power of attorney for finances, you have no authority to manage your partner's affairs, as he or she would wish.

Tax issues that concern unmarried couples

Because the federal tax laws generally favor married couples, you face many disadvantages in how you're treated for income tax purposes. The so-called marriage penalty is one exception that may work to your benefit. If you both work and earn approximately equal incomes, you may pay less tax as two individuals filing separately than if you were a married couple filing either jointly or separately. Federal gift and estate tax can also affect you differently. Because you're not entitled to the unlimited marital deduction, you may face limits on the size of the nontaxable estate you can leave your surviving partner. Although property you share through a JTWROS avoids probate, it does not automatically escape gift and estate taxation. Any property you transfer to your partner for less than its fair value may be subject to gift and estate tax. Preparing income tax returns can be especially complex for same-sex couples who live in states that recognize their marriages, civil unions, or domestic partnerships, or who live in community property states. Consult an experienced tax professional for more information.

Special considerations for unmarried gay and lesbian couples

As a gay or lesbian couple, many of your needs are the same as any other unmarried couple, but you also face special financial planning challenges. Most important, perhaps, is that in most states you cannot marry even if you would like to. You may be in a long-term committed relationship and consider yourself "married" but still lack the automatic rights, benefits, and protections that legally married couples enjoy. Because the legal issues you face may differ from state to state, it's extremely important to get help from an attorney or advisor in your state who is experienced with the needs and concerns of same-sex couples.

Securities and Investment Advisory Services may be offered through NFP Advisor Services, LLC, (NFPAS), member FINRA/SIPC. NFPAS may or may not be affiliated with the firm branded on this material.

The Civil Service Retirement System (CSRS)

What is the Civil Service Retirement System (CSRS)?

Federal employees hired before January 1, 1984, were automatically covered by CSRS, which was created in 1920. CSRS covered most federal employees until the Federal Employees Retirement System (FERS) was enacted. Today, most federal workers are covered by FERS, in part because federal workers who were covered by CSRS had the chance to transfer to FERS during a 1987 transfer period. Like employees covered by FERS, CSRS employees may be eligible for retirement and disability benefits, and if they die, their survivors may be eligible for survivor annuities or lump-sum death benefits. CSRS employees are also entitled to contribute to the Thrift Savings Plan on a limited basis.

How is CSRS funded?

CSRS is funded by contributions from both the employee and the federal government. Most employees contribute 7 percent of their basic pay (members of Congress, Congressional employees, law enforcement officers, certain air traffic controllers, and firefighters may have different contribution percentages). The government agency for which they work matches those contributions. Additional funds for the program come from the General Treasury.

Retirement benefits under CSRS

Eligibility requirements

To be eligible to receive a CSRS retirement annuity, you must have worked for the federal government as a civilian for at least five full years. In addition, you must have been employed under CSRS for at least one year out of the last two years before you retired or separated from government service, unless you are retiring on disability.

Immediate annuity

If you retire or separate from government service, you may be entitled to receive an immediate annuity by meeting certain age and length-of-service requirements. You will receive your first annuity payment on the first day of the month following the month you stopped working. For instance, if you retire on any day during September, your annuity will begin on October 1. The following table outlines age and length-of-service requirements for immediate annuities:

Type of Retirement	Minimum Age	Minimum Years of Service
Optional	62 60 55	5 20 30
Special optional (law enforcement officers and firefighters)	50	20
Special optional (air traffic controllers)	50 Any age	20 25
Early optional (agency reduction in force, reorganization, transfer of function)	50* Any age*	20 25
Discontinued service (involuntary separation)	50* Any age*	20 25
Disability	Any age	5

*Annuity reduced if under age 55 and separated involuntarily. The annuity is reduced by one-sixth of 1 percent for each full month the employee is under age 55 (2 percent per year).

Deferred annuity

If you leave federal employment and are not yet eligible for an immediate annuity, you have two choices: You can withdraw your contributions to CSRS, or you can leave the money in the system. If you've completed at least five years of civilian service and you leave your money in the system, you will be entitled to receive a deferred annuity at age 62.

Caution:         Before choosing to leave your money in the system, however, determine if the CSRS annuity you receive will affect your future Social Security benefit. If you will be entitled to a Social Security retirement benefit because you worked in a job where you paid Social Security taxes, your CSRS pension may affect how your Social Security retirement benefit is calculated. In addition, if you receive a government pension and you also receive a spousal Social Security retirement or survivor's benefit, your Social Security benefit may be reduced.

Alternative Form of Annuity

If you are retired and have a life-threatening illness or medical condition, you may be able to receive a reduced monthly benefit plus a lump-sum payment of your unrefunded contributions to the retirement fund in lieu of a regular retirement annuity. For more information, check with the Office of Personnel Management (OPM).

Caution:         You can't be retired under disability rules or have a former spouse entitled to court-ordered benefits, and you must have your spouse's consent to elect an Alternative Form of Annuity.

Forms of retirement annuities

At the time you retire, you can elect to receive your annuity in one of three ways:

·        

·       Payment of an annuity to you for life

·       Payment of an annuity to you for life, with a survivor annuity payable to your spouse for life after you die

·       Payment of an annuity to you for life, with an insurable interest annuity paid to your beneficiary after you die

Tip:     A fourth way, a lump-sum option, is currently available only to individuals who can elect an Alternative Form of Annuity. Prior to October 1, 1994, workers who were involuntarily separated could receive a lump-sum payment for contributions made to the CSRS system. To elect an Alternative Form of Annuity, you must have a serious medical condition or life-threatening illness.

Benefit amount

Your retirement annuity is computed based on your length of creditable service and your

 high-3 average pay . The annuity is computed by adding:

·        

·       1.5 percent of your high-3 average pay

·       multiplied by service up to 5 years

·       plus 1.75 percent of your high-3 average pay

·       multiplied by years of service over 5 and up to 10

·       plus 2 percent of your high-3 average pay

·       multiplied by years of service over 10

Example(s):   Bonita's high-3 average pay is calculated to be $20,000. She worked for the government for 30 years, so her annuity is calculated as follows:

1.5% x $20,000 x 5 years	=	$ 1,500
1.75% x $20,000 x 5 years	=	$ 1,750
2% x $20,000 x 20 years	=	$ 8,000
	=	$11,250

If your high-3 average pay is under $5,000, however, you can choose to calculate your basic annuity by an alternative method. For details, check with a benefits advisor through OPM. Your benefit will be reduced if you retire before age 55 (unless you retire for disability or under special provisions affecting law enforcement officers, air traffic controllers, and firefighters) or if you provide an annuity for a survivor. Other reductions apply as well that pertain to deposits prior to October 1, 1982, and redeposits of refunds for periods of service ending before October 1, 1990. A few CSRS employees are also covered by Social Security and are known as CSRS offset employees. If you are one of these employees, your CSRS annuity payment will be reduced when you become eligible for Social Security. Survivor annuities will be similarly reduced.

Survivor benefits under CSRS

Eligibility requirements

If you die while you are actively employed by the federal government after 18 months of civilian service, your spouse will be entitled to an annuity if you were married for at least 9 months. However, if your death was accidental or if there is a child of the marriage, the 9-month rule does not apply.

If you die while actively employed by the federal government but before you have worked 18 months, or you have no widow, former spouse, or children who are eligible for a survivor annuity, your named beneficiary will receive a lump-sum payment equal to your contribution to CSRS, plus any accrued interest. (No interest is payable if you paid into CSRS for less than one year.)

Spouse's benefit

·        

·       If you die before retirement from service--Your spouse will be entitled to receive 55 percent of the basic annuity you had earned at the time of your death or, if it will result in a higher benefit, 55 percent of the guaranteed minimum benefit.

·       If you die after retirement from service--If you are married, your retirement annuity will automatically be reduced to include a survivor annuity for your spouse unless you and your spouse waive this in writing. Your annuity will be reduced by 2.5 percent of the first $3,600, plus 10 percent of the annuity over $3,600. Your spouse will usually receive this annuity until he or she dies or remarries (prior to age 55). You can elect to provide your spouse either a full survivor annuity or, if your spouse consents, a reduced survivor annuity. Your spouse will receive 55 percent of the annuity you were receiving.

Example(s):   Evelyn retired from government service and began receiving an immediate annuity but reduced to provide a survivor annuity for her husband. Her annuity of $1,926 was reduced to $1,878, which she received monthly for five years. When she died, her husband began receiving a monthly annuity equal to 55 percent of Evelyn's unreduced annuity, or $1,059.

Former spouse's benefit

If you were divorced after May 6, 1985, your former spouse may receive all or part of your survivor annuity by court order. Or, if your current spouse agrees to it, you can elect a survivor annuity for your former spouse when you retire.

Child's benefit

If you die while employed by the federal government, your unmarried children under 18 (22, if in school full-time) will receive an annuity. A child over age 18 who is disabled will also receive an annuity if the child's disability began before age 18 and if the child is dependent on you for support.

An insurable interest benefit

You can also elect to reduce your retirement annuity to provide a survivor annuity to a person who has an insurable interest in you. This might be someone who depends on your income, such as a dependent parent. You might also elect to provide an insurable interest annuity to your current spouse if he or she is ineligible to receive an annuity because your former spouse has a right to a court-ordered survivor annuity. To provide an insurable interest annuity, your annuity would be reduced between 10 percent and 40 percent, depending on the difference in age between you and the beneficiary named.

Caution:         You must be in reasonably good health and not retiring as a result of disability to provide an insurable interest survivor annuity. This annuity can be elected in addition to a regular survivor annuity.

Disability benefits under CSRS

Eligibility requirements

If you have completed at least five years of service under CSRS, you may receive disability retirement benefits if you suffer an injury or disease and are unable to perform useful and efficient service in your current position. In addition, you must not decline any alternative positions offered to you for which you are qualified, which are at the same grade or pay level and within the same agency and commuting area.

Caution:         You must file for disability benefits before separation from service or within one year of separation. This may be waived if you are found to be mentally incompetent to file within that time limit.

Benefit amount

The annuity payable to you for disability will usually be either 40 percent of your high-3 average pay or your regular annuity after increasing your service by the number of years between your retirement and your 60th birthday. You will receive the smaller of the two amounts. This guaranteed minimum only applies, however, if you are under age 60 when you retire and your earned annuity that is based on actual service is less than this minimum. At age 60 or above, your disability annuity will equal your actual earned annuity.

Caution:         Special rules affect individuals receiving military retired pay from the Veterans Administration. Contact the Office of Personnel Management for more information.

Questions & Answers

Can you receive both a retirement annuity under CSRS and a Social Security survivor's benefit based on your spouse's earnings?

Yes. If your spouse paid Social Security taxes and is entitled to Social Security benefits, you may be entitled to a Social Security survivor's benefit. However, because you also receive a retirement annuity under CSRS, the amount of Social Security survivor's benefit you receive may be reduced. This reduction, known as the government pension offset, will reduce your Social Security benefits by two-thirds of the amount of your government pension. So, for instance, if you receive $600 a month from your CSRS annuity and would normally be entitled to a $500 benefit from Social Security, your Social Security benefit will be reduced by $400, two-thirds of the amount of your government pension. Thus, you will end up receiving a $600 monthly annuity payment from CSRS but only $100 from Social Security. Some government pension benefits do not trigger the government pension offset. For more information, see Social Security Administration Publication 05-10007.

Securities and Investment Advisory Services may be offered through NFP Advisor Services, LLC, (NFPAS), member FINRA/SIPC. NFPAS may or may not be affiliated with the firm branded on this material.