The $100,000+ Mistakes Unmarried Couples Don’t See Coming

You've been together for 15 years, but you're not married. Yet, you share everything. Bills, car, house, it all is shared. But one of you dies. What does the other get legally? You could get nothing. You're not going to get the house, the retirement accounts. You won't even get Social Security.

Today, we're walking through the financial landmines that hit unmarried couples: taxes, Social Security, inheritance, and the ones that catch people completely off guard.

Phil, what are the biggest landmines that you talk about with clients that aren't married? And let's just say they're preparing for retirement and they sit down with you and they're not married. What are the landmines you try to help them avoid stepping on?

I think unfortunately the landmines can be broad, but the first thing I ask is why. Why are you not married? Because I don't think there's always a really good reason for that. Some people just aren't married because they say, well, it's comfortable this way, but that's until they think about why it's not going to be comfortable if something goes wrong.

So we can dive into things like taxes. When you're not married, you have a disadvantage if you can't file married in the joint format, right? Married filing jointly is so much better in almost every case. There's retirement shortfalls, Social Security. You could eliminate the opportunity to sort of tag on to your spouse's Social Security. Then if you split, what happens? Generally, people that live together, they don't have division of assets written or well laid out. Who knows what's going to happen?

There's just so many problems, and those are just a few. But there's a lot of issues that come into play when people are just simply living together because it's comfortable, and that's what I hear.

I gotcha. Let's walk through what happens if the worst case scenario happens and your partner, because we can't call him a spouse, but your partner dies. What are the things that you're seeing people not aware of?

So, if somebody dies, I think first and foremost, it's just the legal documents. They don't always have those prepared. People don't do that when they're married. When they're not married, it tends to be forgotten even more. And so if you pass away and you leave a significant other behind, there's a really, really good chance that your significant other isn't going to get anything, because people forget to handle things like beneficiary designations. They forget to do a will.

And what if they had kids by maybe a previous marriage, or what if they had siblings? Or depending on the state, it could end up going to anyone except your significant other, and the chances of that happening are actually quite good.

Yeah.

So somebody dies, there is a lot of unfinished business that could potentially rear its head and cause unintended consequences.

How about an inherited IRA by a non-spouse? Huge landmine.

Huge landmine. So think about the 10-year rule. So you decide you're going to leave your IRA, Spell, to someone who's not your spouse. Well, you can do that, sure, and they don't have to pay immediate tax on it, but they only have 10 years to leave it in that tax-deferred environment. And within that 10 years, they've got to get every dollar of it out of that IRA, down to zero.

Down to zero.

And so that means that best case scenario, they're going to take out one/10enth every year. Well, if they have other income or maybe their tax rate is pretty high already, that's only going to exacerbate things.

Yeah.

So that's point one. Then juxtapose that with: what if it was your spouse? Your spouse can inherit that IRA as though it was theirs from the beginning. And there is no 10-year rule. Now it's lifetime rules. Much better outcome from a tax standpoint. Much better outcome, period. But you don't get that if you're not married, unless you happen to be in one of the few states that look at marriage as more common law.

Yeah.

Right. Or in the common law framework. That only happens in a few states. The majority don't view it that way.

So, one of the things that we hear from folks who sit at the table, occasionally they will say, "Well, we don't do this because it's costly to get married." Sounds like it could be extremely costly to not be married and then eventually pass away and then leave somebody with what sounds like quite a mess.

I don't know where these people are getting their information.

Yeah.

Because if you go check at the courthouse and ask for the price of a marriage license,

Yeah.

it's pretty cheap.

Mhm.

I believe less than $100.

Okay.

Right. So you can go get that marriage license for literally pennies.

Yeah.

You screw up and allow a non-spouse or significant other to inherit something like a million dollar IRA, which people all over and from all walks of life have IRAs today when they reach retirement that are going to be worth, if not already, they're going to be worth seven digits, a million plus.

Sure.

We just met with a client recently who had two and a half million in theirs, not married, and they had no idea that this existed, that it could become an inheritance nightmare.

Mhm.

And their answer was, "Well, she's named as the beneficiary." Well, great. That doesn't mean anything. She's a non-spouse beneficiary.

A non-spouse beneficiary, and there's a set of rules for a non-spouse beneficiary, and they are not in your favor.

Yeah. And so that is going to cost far more than a marriage license.

Phil, let's talk about retirement gaps. That's one of the many landmines that people often find themselves standing on, unfortunately. But talk about, through the lens of a non-married couple, Social Security issues. What are the issues there? If someone's not married, what can they run into?

Well, the simple one, the one that everyone's probably already thinking about here, is when you're married, regardless of what your income was,

Mhm.

whichever one had a greater level of income through their 40 qualifying quarters, that might be enough for your spouse who maybe didn't earn as much. Maybe they can piggyback on your Social Security and actually do better. Well, if you're not married, that option goes away.

Yeah.

Everything when it comes to Social Security goes away, and so you're both on your own.

Yeah.

So to speak. And so you have to hope that yours is as good as it could be. But we've seen a situation plenty of times, Spell, where a spouse worked but didn't make a lot of money and had a Social Security of roughly $15,000 a year.

Mhm.

But their spouse had a Social Security benefit of $40,000 a year or maybe slightly over that.

Yeah.

Well, the spouse who didn't work as much or earn as much, they could simply say, "Hey, I want to piggyback on my spouse's benefit and get 50% of that."

Yeah.

That's more than their benefit would be based on their working years. And guess what? Even if they're divorced, that spouse can still piggyback on their former spouse unless they get remarried.

But you're exactly right. They get remarried, all bets are off.

That's true. But if they don't, they can still piggyback.

Absolutely.

You don't get that option if you never get married.

Yeah, it's a good point.

Now, the other parts of the gap would be that married filing jointly. We'll talk about this, I feel sure, in a few minutes, but from a retirement income standpoint, I say all the time, one of the greatest deficiencies or problems within the retirement income framework is tax.

Yeah.

And if you're paying too much in income tax, you're spending less in terms of retirement, or you have to take more from your retirement accounts, which means you might run out of money sooner. So if we can control the tax environment, then we're much better off. And if you're married, married filing jointly is likely going to give a better result, 100%. So why not save the tax?

Yeah.

And chances are that little $50 marriage license is going to be peanuts compared to what you could save on the tax return.

Well, that is the third landmine, and it's all about tax. So let's just stay there and continue in this framework for a minute. There are a lot of benefits to the married filing jointly status, one of which is higher income thresholds before you jump to the next bracket.

Right. Much higher.

Yeah. Much higher.

So if you're filing as an individual, your income tax brackets are stacking much faster.

Mhm.

Versus filing jointly, as a married filing jointly type return, you could make, say, 34 of a million dollars before you hit the highest bracket.

It's true. Of 37%.

You don't have that luxury as an individual.

No, you don't.

Right. It's significantly lower than that. So from the beginning, it starts ratcheting higher very quickly. So that's not necessarily a reason to go get married. If people don't want to get married, I would say this: you don't want to get married purely for the sake of saving on your taxes. But if you're living together, you love one another, you're making a life together, what's the big deal?

Yeah, right.

What's the big deal? And why would you... Here's the other thing, Spell. I've never met anyone who said to me, "I really want to fix my life so I can pay more tax." I've never met that person.

No.

Have you?

No, I haven't.

So why not do the right thing? Being married is a wonderful thing. There are so many benefits that come with it beyond the tax, beyond retirement, beyond all of these things like inherited IRAs, etc. They're wonderful things.

The implications of being married, I think, get misunderstood, and people think, "Oh, well, I want to be independent. I want to control my life, just in case things don't work out." Well, guess what? If they don't work out, divorce isn't that big of a deal. In fact, I think it's more structured

Yeah.

than getting separated when you don't have things laid out. And people that don't get married tend to not have things laid out very well.

That's true. That's true.

We'll get right back to today's show, but first, I'd like to ask you a quick favor. If you're enjoying this episode, hit that like button and make sure that you're subscribed to our channel so you don't miss what's coming next. And hey, if something in today's episode has you wondering about your own financial plan, why not get a second opinion? Visit omnistarfinancial.com to schedule a consultation with one of our team members. It's quick, it's easy, and it could make a huge difference in your financial future. Now, let's get back to the show.

Let's talk about structure. And usually synonymous with structure is legal, and the controls that you may be giving up if you're not married. So talk to me about things like medical decisions or business ownership and asset control. How do those things get affected? How is that a landmine for a couple that is not married?

Well, I think there's nothing automatic.

Yeah.

Unless you take the time to put the right things in place, the right legal documents. If you have a business, if you don't get that dialed just right, then just because you live together and just because you say, "Well, I intend for all of this to go to my significant other." Well, you can have all the best intentions that you want to have, but as the old saying goes, the road to hell is paved with good intentions.

True.

Right. So you can have all these intentions, but that doesn't mean your wishes are going to be carried out.

Yeah.

So if you're gonna live together, gonna cohabitate, and you're not going to be married, you don't have the legal things working in your favor, you better go get them.

Yeah.

And even when you're married, you should still have a lot of these things. But when you're married, a lot of things default to the spouse in most states because it's your spouse.

Right.

Right. So you can rely on that much better than you can a non-married couple without the legal documentation to create the outcome that you want.

So, Phil, what I think I hear you saying is the system, quote unquote, is structured such that it is more lenient, or it is built towards supporting a married couple more so than it is a non-married couple.

It's how the country was built.

Yeah.

It's how the country was built. The country was built on Christian values. So whether you believe in that or not, that's how our country was built, how our laws were created. It's where the Constitution really was derived.

Sure thing.

And so it's no wonder that our society prefers marriage. That is viewed as a good thing. Now, you don't have to believe in it, but I can tell you this: if you want the law of the land to be on your side, you probably ought to get married. Whether you believe in why it's that way, whether you believe in that, and maybe that's not part of your value system, but I can sure tell you this. The law is on your side

Yeah.

when you're married.

Yes.

Much more so than when you're not.

All right. We started the first landmine with something morbid, and that's death. What happens if someone ultimately passes away and you're not a spouse? We're going to end with something a little less morbid. The last landmine is breakups happen. And so what happens? You're not married. Remember, this couple has been together for 15 years. Steven, never married. What are the breakup risks? Who gets what if a breakup occurs?

It's a really good question. Most couples don't have all of these things laid out the right way. They don't have wills that help decide what's going to happen in the event of death.

So you can imagine that if death isn't involved, they really tend to not have things done. Yeah.

So for example, Spell, let's say that there's debt. Okay. Most couples have debt for sure. In fact, we were just talking about this the other day. About 75% of our economy is debt. Yes, it is. That's what makes this economy go. Yep.

So who gets the debt? So you split, who takes the debt? It's a good question. And who takes the asset that goes with the debt? Yeah. Who gets that?

So, let's say that we have this couple, they're a non-conforming couple, and they own a house. Mhm. And let's say that she, I just happened to be talking to someone yesterday, and this very situation occurred, and she was the purchaser of the home. When the split occurred, she didn't get her house. But she bought the house and she had the debt on the house. Now, that was a long time ago as she described it to me, but she finished paying for that house even though she didn't have it because things weren't laid out very well.

Now, that's probably not going to happen a lot of the time. But the point is, how do you split all that debt? That's a good question. Can both sides qualify for it? If they need to split the debt, can both parties qualify for that debt? That's one of the problems.

Then, so there's debt and liability confusion. Big problem. Then there's insurance. Yep. There's homeownership traps depending, and then there's rental properties that people might own together. Yep. And they split. Then what do they do with that? Do they want to continue to be partners? Maybe. Without structure to all of these things, you can leave things in, things end up in a really nasty situation. Sometimes much worse than a divorce because there's no structure. Yeah.

Sometimes we sit across the table from folks who say, "No matter what you say to me or to us, we're not getting married." What do we then instruct those individuals to do?

Spell, people today, we live in a different age today where being married is not viewed in the same way it was just 25 years ago. Yeah. 50 years ago. At one time it was viewed as a very sacred thing. It was the right thing. We live in an age today where people don't apologize for doing it their way. And I think we've been taught to just do it our way. In fact, Nike told us a long time ago, just do it. And that can apply to anything. And Nike made that very clear. And I'm not condemning Nike. I'm just simply saying that I think structure in your life can lead you to the right answer. I prefer marriage. I think it's the right way.

But you're exactly right. A lot of our people, a lot of our clients, they will say, "No matter what, you're not going to persuade me to get married." And that's okay if that's your choice. But at the very least, put the right things in place to protect yourself.

The fact that it's so casual when people decide to live together, there's zero commitment. Yeah. There's never any commitment. They can say, "Well, no, we're committed to each other." Well, if you were, you'd go through the processes that most married couples go through to get to that point, right?

So, spend some time with a good attorney. Get the right legal documents. Yeah. Have someone counsel you on what those things are. Yeah. Doesn't have to be someone like us. It can be whoever you choose, whoever you trust, but see someone who can give you the right advice. Know what you're bringing to that relationship. Know that you've got it protected the right way. That is doable. It takes some effort. Yep.

Now, here's what a lot of people will shy away from. Putting the effort towards that can put stress on what seems like a really good relationship and a good time, as people like to call it. You need to bring that stress. Yeah. Because if you can't get through that, that relationship probably ain't going to work. Right. If it's that fragile, it's probably not going to last. Yeah. So true.

So I'd say spend some time with the right guides, with the right advisers. Let them help you figure out what you need. Be sure you understand what you're bringing. Make sure if you believe there's an inheritance, if you believe there's something that's going to be coming your way down the road, you better put the right things in place, because once you co-mingle those assets with someone, even in a marriage, they're no longer yours. Right. Right. They're co-owned. Right. Right. That's an unintended consequence generally.

So I would say without a doubt, you got to get good advice. You got to put the right things in place. Spend a little bit of time and money to do that. And before you jump into something that can be really difficult to unwind, I'd say give it lots of thought and go get, even if it's counseling. Talk to someone who can help you think through what you're about to do, whether it's marriage or just living together, whatever it is. I think your relationship deserves that. Yeah. So, I agree. Good counseling goes a long way.

And maybe even though they're against getting married, the last thing that I think we would usually say is we really think you ought to consider getting married. I'm going to push that every time I can. Yeah. But because one, I think it's the right thing. So that's purely my opinion. Sure. And that's where I stand on the issue. But beyond that, I also know the benefits. Yeah.

When it comes to getting married, the system is on your side, all the way to the IRS, 100%. And people can say the IRS is terrible, and I'm not going to tell you that I love them. But I am going to tell you that if you're married, there are some pretty nice benefits that an unmarried couple is never going to receive. Yeah. Like having to put aside a huge box of money for the tax consequences of inheriting an IRA that's not your house. It's going to be huge. That one thing just loan that by itself could be hundreds of thousands of dollars.

Well, think about it. The one that we talked about was $2.5 million. That's more than a couple hundred thousand. Over 10 years, half of that money essentially is gone. Yeah. And so even with good growth, the erosion of that 2 and a half or three million box of money has been whittled in a huge way. Yeah, it has come. It is probably been cut in half. Yeah. And all of that could have been avoided. Yeah. True.

And why not? Who knows? Maybe your marriage is worth a million bucks and you just don't know it. Maybe more. Or maybe you think it's worth nothing and you will continue to be an unmarried couple. There you have it. There you have it.

If you enjoyed this video, be sure to click or tap the screen to check out our next video on the seven biggest retirement mistakes that people make.