American households are comprising fewer and fewer “traditional” families—historically defined as those headed by two married, opposite-sex partners who may or may not have joint children. According to the U.S. Census Bureau, while married couples represented 71% of U.S. households in 1970, by 2019, that number had dropped to just 48%.
Conversely, “nontraditional” households increased from just 29% in 1970 to 52% today, including unmarried couples, blended families, multigenerational families, single-parent families, and those housing adult children. These “nontraditional” households may face unique financial planning challenges as marital status today plays a prominent role in the rules that apply to financial matters, and existing laws and financial products have been slow to catch up. Extra measures are required to clarify the rights and roles of unmarried partners, stepchildren and extended family members.
Financial Planning Challenges Facing Nontraditional Families
Many rules involving retirement, insurance, income taxes and estate taxes generally provide automatic protection for married couples. This is particularly true in the areas of legal and property rights, medical decision-making and wealth transfer.
But nontraditional households are not entitled to these same provisions. For example, unmarried couples cannot take advantage of unlimited gifts or the unlimited estate tax marital deduction afforded to spouses. Single-income households also have specific planning needs—it can be more challenging to save and plan for retirement when it is likely there will be only one income and no other source of support to fall back on. However, there are many planning strategies that may be used to deal with these limitations or exclusions, particularly in the financial planning areas of retirement, insurance, taxes and estate planning.
Financial Planning for Unmarried Partners
Beneficiary designations are always critical, but that’s particularly true for unmarried partners who cannot take advantage of a spousal default on retirement plans. Listing your partner in your beneficiary designation avoids the probate process that would not consider nonmarried partners as heirs if no will exists.
Further, unmarried couples do not enjoy the same survivorship rights as married couples, which means a surviving partner cannot collect on the deceased partner’s Social Security benefits and some pension benefits. They also have more limited options if they inherit an IRA. While a widow may roll over her deceased husband’s IRA into her own, and a married breadwinner may establish an IRA for a stay-at-home spouse, these options are not available to unmarried couples. As a result, special care must be taken to ensure the financial security of a surviving unmarried partner.
Adequate life insurance is particularly important if one partner is financially dependent on the other. Taking advantage of something like an irrevocable life insurance trust (ILIT) can be helpful, since the unlimited marital deduction for estate tax purposes does not apply to an unmarried surviving partner.
Couples may also want to consider differences in their employer-provided health insurance—in some cases, it may be taxable if provided to a “non-family” member. Additionally, a partner who loses his or her job may also need to consider that COBRA benefits are only eligible for “qualified” beneficiaries such as the employee’s spouse, former spouse, or dependent child.
Unmarried couples may face income tax filing-related issues, such as who gets to claim certain deductions, but there may also be an opportunity to shift taxable assets to the partner in the lower tax bracket. Because of this, it could make sense to establish a separate paper trail for each partner, such as separate bank accounts to record each partner’s “basis” for tax purposes on property.
Estate Planning and Wealth Transfer
The laws of intestacy (those that govern the distribution of estates in the absence of a will) do not recognize the relationships of unmarried partners. This means that although you may have lived as a family for many years, your assets will bypass your partner and go directly to your children or other next of kin. In these types of family configurations, it is essential to have a will in place that describes exactly how you would like your assets to be distributed upon your death.
Transfer of assets can be more complicated for unmarried couples. While the tax code makes broad allowances for transfers between spouses, those who choose not to marry may become subject to gift or estate tax if large amounts of money pass from one partner to another. For example, adding a partner to a real estate deed could result in an (unintended) taxable gift. That is why legal documents and asset ownership decisions become even more essential for unmarried couples.
Financial Planning for Divorced and Single-Parent Families
Without a spousal default, beneficiary planning is important for divorced and single individuals, particularly in cases where there are minor children and guardianship decisions need to be clear. IRAs and most retirement plans have different rules for unmarried individuals. For example, a non-spouse beneficiary cannot treat an IRA as his or her own and defer required minimum distributions (RMDs) the same way that spousal beneficiaries can upon the death of the first spouse. Beyond naming a beneficiary, retirement income planning becomes more important for individuals who do not have a spouse who can “make up the difference” in retirement funds.
As the sole provider for the home, adequate life and disability insurance becomes even more important. It is always a good idea to take inventory of current policies to identify gaps and review beneficiary designations. Life insurance can also be used in an estate-planning strategy to provide an equal inheritance among multiple children or heirs, especially if the estate includes non-liquid assets.
Newly divorced individuals should assess the impact of their new filing status and the possible decrease in deductions. Large transactions like selling your house may also create tax issues for individuals, whereas married couples would typically shelter a larger portion of capital gains from taxation upon the sale of a primary residence.
Estate Planning and Wealth Transfer
Careful consideration is needed in planning for the transfer of assets at death (particularly for large estates) since divorced and single individuals can’t take advantage of the unlimited marital deduction. If an individual plans to remarry, he or she may want to consider planning strategies like a Qualified Terminable Interest Property Trust (QTIP), which allows each partner to ensure his or her own assets go to a specific designated beneficiary (such as children from a previous marriage) after the surviving spouse’s death.
As with unmarried couples, it is also important to review legal documents such as durable power of attorney, health care directives and guardianship plans for minor children.
Get Help for the Planning Challenges Nontraditional Households Face
Demographics illustrate the transformation of the typical family structure in the United States—a trend that is likely to continue. While nontraditional households face specific challenges, several financial planning strategies are available.
Because of the complexities of financial planning strategies in a nontraditional family structure, the advice of a financial advisor can be immensely valuable. Talk to a professional who has expertise in tax, financial, and estate planning to get the most effective, well-rounded approach to meet your family’s financial needs.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
JD, CFP®, Series 7 Securities Registration,1 Series 66 Advisory Registration,† Life and Health Insurance License Kate has been a financial planner at Wealth Enhancement Group since 2007. Previously, she assisted in the management of trusts and portfolios for high-net-worth clients. She is involved with the Roundtable™ and provides her expertise to help walk clients through the best way to organize their estates to ensure their assets are passed in the most...Read More