Income Strategy

The Challenges of Couples-Planning

How marital status can alter or redirect the income strategy

by Herbert K. Daroff, J.D., CFP, AEP

Mr. Daroff is affiliated with Baystate Financial Planning, Boston, Ma. Connect with him by e-mail:

Looking at marriage purely from a tax and creditor protection perspective, there are a number of benefits… and drawbacks too.

Let’s look at home ownership, for example. Married couples can title their home as Tenants by the Entireties, a special form of joint tenancy with rights of survivorship. And T-by-E comes with significant creditor protections. Only the mortgage lender and tax collector can recover against T by E property. However, unmarried couples can take advantage of Homestead election. Homestead election is an extra level of protection for married couples even with T-by-E.

How should the house be titled by the unmarried couple? Likely they will use Tenants in Common so that each continues to own their share and can pass their share onto the heirs. But, they should establish a buy/sell agreement, just like a business owner, to anticipate risks and consequences. Risk management is all about the frequency and severity of risk. Risks are managed using a combination of Insurance Products, Hedging Strategies, Risk Transfer Strategies, and Retention.

Remember, you retain all of the risks that you don’t identify.

Risks Abound

What happens to the house when a married couple gets divorced? It is part of a property settlement along with other assets, and income (usually in the form of alimony and/or child support), as well. Especially if each member of the married couple does not contribute equal amounts to the purchase and maintenance, they could have hedged or transferred some of the risk of divorce with a prenuptial agreement.

Unmarried couples who own a house together should establish a buy/sell agreement, just like business owners, that covers what happens under various circumstances, like the couple splits up. What if “A” pays cash for the house while “B” takes out a mortgage for the other half of the house purchase. What should happen if they split up and sell the house? The purchase price should be split equally. “A” keeps the cash, net after any tax on gain. “B” pays off the mortgage and keeps any cash, after gain. Even though they are unmarried, if they lived in the house as their primary residence for at least two of the previous five years before sale, they would each benefit from a $250,000 step-up in their cost basis. So, on that point, there is no difference between married and unmarried couples.

By the way, each filing their own individual income tax return, may very well pay less tax than a married couple filing jointly or a married couple filing seperately.




tend to retain

look to hedging and transfer strategies


tend to insure

would insure, but cost would likely be prohibitive — look to transfer strategies, like LLC


Unforseen Risks

But, what if they were supposed to be sharing all of the household expenses, and one was in arrears. There should be careful records kept and a reconciliation at the point of sale, as provided by the buy/sell agreement.

What if “B” doesn’t keep up with the mortgage payments. The whole house is at risk, not just half. If properly covered in the buy/sell agreement, “A” should be able to have the right to buy the other half from “B” and maybe even have “B” forfeit the funds that have been paid so far as penalty for the breach. Or, if the house has to be sold upon default, “B” should receive less than “A” since it was the breach by “B” that caused the default. All of this can be anticipated and covered in a buy/sell agreement.

If may be that the potential default on operating expense sharing and/or mortgage debt results from reduced income due to a disability. This can be covered with disability insurance.

The unmarried couple should also consider forming a Limited Liability Company (LLC) to hold the house. The operating agreement will cover the buy/sell provisions. Holding the house together would likely qualify as a legitimate business purpose in most, if not all, states.

What if one party dies? The buy/sell or operating agreement should anticipate that risk and make provisions. “A” may not want to own a house with “B”’s parents or siblings or trust. Life insurance should be considered.

How is the house treated for custodial care (Medicaid) purposes? Depending on the value of the home, it may not be countable for qualification purposes, but a lien may be put on the property so that the State can recover benefits paid out. For married couples, the assets of the community (at home) spouse count against the spouse needing custodial care. For unmarried couples, the other party’s assets do not count. For married and unmarried couples, long term care insurance or a combination life insurance with long term care access to death benefit and/or cash value can help mitigate this risk.

What if an unmarried couple decides to rent instead of buy? What happens if they split up? What happens if one is delinquent on the rent or other expenses? Similar to a buy/sell agreement, the couple should enter into a contract laying out the terms along with what happens in the event of breach. But, this contract needs to be coordinated with the lease from the landlord. If “A” walks out, can “B” sublet to someone else, or does that need landlord approval? Can “A” evict “B” for not providing the agreed upon fair share of the rent and other expenses?

Remember, you retain all of the risks that you don’t identify

Money Risks

Beyond living arrangements, what other tax and creditor protection issues should be considered when deciding to marry or just live together. How about credit rating. Even with a prenuptial agreement, if you marry someone with a poor credit rating, your credit rating will be adversely affected. Living together does not result in a reduced credit rating by the other party.

I mentioned divorce above. Married couples can divide retirement plan assets without incurring current income taxes through a qualified domestic relations order (QDRO). Unmarried couples cannot, but they may not need to divide assets in the first place upon splitting up.

Staying with retirement accounts for a moment, a surviving spouse can rollover a deceased spouse’s retirement accounts, and can convert to a Roth. Unmarried couples, if naming each other as beneficiary, create an inherited IRA, and the survivor cannot convert to a Roth.

With retirement plans covered by ERISA, the spouse is the automatic beneficiary of the other spouse’s benefit and the spouse needs to sign any change of beneficiary. Unmarried couples are not protected in that manner.
Social Security has significant benefits for spouses and surviving spouses. Unmarried couples must rely on their own Social Security benefits.

There are certainly moral, ethical, religion, and other factors involved in deciding whether to marry. Any decision to share assets with others needs careful consideration regarding tax consequences, benefits gained or lost, creditor protections, and much more. See the graph below. ◊