"Two can live as cheaply as one." This old saying is mostly true. However, when it comes to death, divorce and taxes, two are probably better off financially if they don't marry.
Intentionally or not, many federal and state laws reward couples who choose to live together without marriage.
Laws relating to Worker's Compensation insurance are one example of this. Someone whose spouse has died in a work-related accident may be eligible to receive a monthly benefit paid for the rest of his or her life. However, most state laws provide that the benefits end if the recipient remarries.
This puts a real cost to remarrying. Consider as an example, a woman who at age 50 loses her husband to a work-related accident and receives a settlement of $2,000 a month for life. Assuming she will live another 35 years and could invest the proceeds in a 3 percent bond, the present value of that income stream is $520,000. That means a person would need $520,000, invested at 3 percent, to give a monthly income of $2,000 for 35 years.
Therefore, if this woman fell in love and wanted to remarry two years into receiving the payments, the remaining 33 years of monthly payments she would forfeit has a value of $502,000. This puts a rather quantifiable cost on one's social, emotional and religious values.
The tax code also encourages couples to remain unmarried. Take a couple who both earn high incomes. Suppose each has taxable income of around $400,000, which is the breakpoint where the 39.6 percent tax bracket begins. As two singles, as long as their taxable income is $400,000 or less, they both remain in the 35 percent tax bracket. However, if they marry, their joint income goes to $800,000, while the 35 percent tax bracket only expands to $450,000 for couples. That means they now pay an additional 4.6 percent in federal income taxes on the excess of $350,000, or $12,600. Some may be quick to dismiss that amount as trivial, given their income level, but the point is still that marriage for them brings a tangible cost in higher taxes.
Those with previous marriages may find another disincentive to marriage in the challenge of passing on assets to children upon your death, or if the new marriage should end in divorce. If leaving assets to children is a priority, you will probably need to negotiate a prenuptial agreement with your fiance. This is especially important for couples with unequal assets. A prenup is a real romance killer. It highlights the reality that every marriage is a business deal, with the added emotional weight of negotiating the divorce settlement before there is a wedding. Some couples find it easier to live together without marriage and keep their assets largely separate.
For couples that decide not to marry, the potential tax planning is ripe with opportunity. Such couples can do anything that the tax code or state statutes prohibit married or related parties from doing. This provides some great tax savings and asset protection opportunities. For example, spouses cannot be the trustees of each other's irrevocable or asset protection trusts, but unmarried partners absolutely can.
Choosing not to marry is becoming especially popular with older couples. This is because many older people with previous marriages have accumulated two things: assets and children. They find marriage less compelling when they and their new partner won't have children together.
Younger couples who do plan to have children still recognize that marriage is important. For many reasons, marriage isn't going out of style any time soon. Few of those reasons, however, are financial ones.
Rick Kahler, CFP, is a fee-only financial planner and author, you can follow him on Twitter Here. Find more information at www.KahlerFinancial.com
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