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| The Basics | How to shack up, financially
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Single soul mates or married at heart? Make your wishes clear and your finances clearer -- or you might wind up accidentally married.
By Bankrate.com
Before Alan Stewart and Sandy Overton moved in together, they carefully discussed finances. They decided to keep everything separate, as if they were roommates rather than lovers. She chips in on groceries and utilities, but each partner maintains a checking account and pays income taxes individually. Overton even kept her house on the south side of Indianapolis, leasing it out after she joined Stewart. He continues to pay his own mortgage, just as he did before they met.
"Finances aren't a fight for us," says Stewart. "I can't complain about the cost of a haircut when it's her money."
It's almost the perfect setup, say financial experts who deal with the intricacies of cohabitation arrangements. For starters, should this couple decide to move to any of the 14 states that confer common-law marriages on similar arrangements, there's no danger they'll make a slip that slaps on a label they didn't choose. And that's just the start of the curiosities couples living together need to navigate.
The widely held belief that states consider a couple married after seven years together is pure baloney. In 14 places (Alabama, Colorado, Georgia, Iowa, Kansas, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, New Hampshire and Washington, D.C.) couples must follow these four steps to label themselves as married, whether or not they walk into city hall:- Live together.
- Present themselves as a married couple -- e.g. use the same last name, refer to each other as husband and wife, file a joint tax return or establish joint bank accounts with the same last name.
- Live together a significant period of time, although the laws don't specify exactly how long.
- Intend to marry.
"Yet, specific as these requirements are, some folks in New York who own second homes in Pennsylvania woke up one morning to find themselves unintentionally married in the eyes of the Pennsylvania courts," says Donna LeValley, contributing editor of J.K. Lasser's "Your Income Tax 2005." "After all, they met all four criteria during the summer months they spent in that house. I call it married by adverse possession," she says.
Other legal minds, such as Marshall Miller, co-founder of the Alternatives to Marriage project, recommend that couples living together in these 14 states draft a signed, dated agreement saying they agree to live together as two independent beings who have no intention of being married by any means.
After all, the financial consequences for a misunderstanding can be severe.
Tax concerns
Take the IRS, for instance. It's illegal to file a joint tax return unless you're married or in a common-law union. Most folks who overlook this detail quickly find themselves agreeing to this status as opposed to admitting tax fraud. In Overton and Stewart's case, it's much cheaper for each to file as single, so a mistake here could prove costly. The real kicker is: Once you file as a common-law household, you must then fill out those subsequent returns as married filing separately or married filing jointly. Declaring yourself single lands you in hot water as well, LeValley says.
Once you say you're married, a breakup is no longer confined to moving vans and hurt feelings. Common-law marriages require dissolution by a divorce court, complete with legal fees and property laws. On the upside, divorces are heard in a court where judges are sensitive to relationship squabbles. "Unmarried couples who require legal intervention wind up in civil courts, where the robes behind the benches aren't as well versed in the details," says Emily Doskow, editor of the Nolo press book, "Living Together: A Legal Guide for Unmarried Couples."
Related news and commentary on MSN Money
If a couple living together purchases a house as a team, only the Social Security numbers on the 1098 forms may claim the deduction. When both parties put their names on the line, they should proportion their tax deduction according to the amount they pay. So if one person chips in 70%, his tax return may include 70% of the mortgage interest deduction available.
"As time goes on, it may be that one person starts making more money, so their ability to maximize the interest deduction may wane," says LeValley. "In that case you may want to do some switching. Have the higher earner pay bills that aren't deductible anyway, and let the person who can best take advantage of the mortgage deduction handle that payment."
And in living arrangements when one person pays for more than half of the other's total support and that partner earns less than $3,200 a year, the party footing the bills can claim head-of-household status on his or her tax forms. As an added perk, if the person claiming head-of-household status buys insurance plans through an employer for the partner, those payments become tax-deductible.
The estate
Like a vast majority of Americans, Overton and Stewart haven't committed their final wishes to paper. Details such as who makes life-and-death medical decisions and who gets which portion of the estate lie in limbo at the moment. But unlike their married counterparts, they're flying without a legal safety net.
Many cohabiting couples mistakenly assume there's a magical point where the legal system fades out of their business.
"They may feel like an old married couple, but legal rights don't automatically come along at certain milestones," says Miller.
In fact, should one fall ill or die, the courts won't give the partner any more weight than the man in the moon. So without a written will or power of attorney, your next-of-kin whom you've not spoken to in 20 years may still get the money and power. Heck, leave it to the law and your cousins will get a share of the loot before your loved one.
The good news is this step doesn't need to be any more complicated than filling out a form downloaded from the Internet and signing it before witnesses. Miller doesn't recommend bringing in a lawyer unless the estate exceeds $1 million.
Everyday life
When it comes to houses, bank accounts, cars and credit cards, Miller is cool with cohabitants combining their monies. Others, such as Wynne Whitman, an attorney with Schenck, Price, Smith and King in Morristown, N. J., believe it's wise to take Stewart and Overton's route and keep everything separate. But both agree couples who live together should complete a cohabitation agreement to back up their planning.
"It doesn't sound sexy at all," Miller says, "but essentially you're just outlining any property you brought into the relationship that you want to consider yours."
Don't worry about fancy lawyer phrases -- a piece of notebook paper and plain language with both signatures at the bottom will hold up in court, says Doskow.
Be sure to spell out ownership, how to split household expenses and rules for use on joint items like credit cards. Finally, write out what happens if you break up, including areas such as how quickly to cancel credit cards and whether to seek mediation, arbitration or the courts should you come to loggerheads.
Again, such documentation can save you from the state's meddling. In some states, not necessarily those that confer common-law marriage, community property laws mean without any agreement, each party gets 50% of the combined accounts should they bid each other farewell.
"The conversations you force yourself to have will do amazing things for your relationship," says Miller. "Which isn't to say you'll never have another fight again about money, but when disagreements come up, you have an outline of the expectations."
By Julie Sturgeon
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