Should I Say, “I Do”? Considerations for Unmarried Couples
The number of unmarried couples who live together are on the rise whether you know it or not. In fact, I’m willing to bet that some of your “married” friends are actually domestic partners. You may have attended their wedding but that does not mean they signed the legal document. Only their accountant or financial planner may know the truth.
Marriage is a legal contract and offers benefits and consequences when the marriage ends in divorce. Historically, marriage was a business transaction between families. The concept of “I Love You” marriage is modern. Current marriage and divorce laws were put in place mainly to protect the wife, as women often were homemakers and would be financially devastated in the event of a divorce.
As more women join the workforce and become the breadwinning partner (as is often the case for women attorneys), these laws can seem antiquated and often work against us. I am not suggesting that you never get married. But it may make a lot of sense to delay marriage for some time. There are a few, mostly financial, perks of cohabitating without signing a marriage certificate. For certain situations, staying unmarried may be the best move
Unmarried Couples Save on Taxes
Prior to the Tax Cuts and Jobs Act of 2017, many dual professional married couples were subject to a marriage penalty tax. That’s because the married tax brackets were not double the single tax brackets. The penalty came into play when both partners made similar incomes. If one partner made significantly less, or was a stay at home spouse, then a marriage bonus may have applied.
The new tax law has largely eliminated the penalty, but it has introduced another penalty for married couples living in high income tax states — a limit on state and local tax deductions on tax returns, also known as SALT. SALT is now limited to $10,000 whether you are single or married. So, a married couple can deduct $10,000 versus two unmarried partners who can deduct $10,000 each.
There are a few other tax benefits for unmarried couples with children. One partner may file as head of household (HOH) and the other partner files as single. The 2019 HOH standard deduction is $18,350 while the deduction for filing single is $12,200 for a total of $30,550. Contrast this with married filing jointly whose standard deduction is $24,400 total.
If the unmarried couple with children also has access to a high deductible health plan with a health savings account (HSA), they can take advantage of having both a family HSA and a single HSA for a total of $10,500 versus $7,000 for a family HSA only. Hopefully, they are using it as a stealth IRA.
Unmarried Couples May Save On Student Loans
Staying separate can sometimes help with student loans. You may save tens of thousands of dollars if you’re pursuing income-based repayment, including pursuing Public Service Loan Forgiveness. This makes sense especially if you are with another high-income earner.
However, being married may be more advantageous if you live in a community property state (California, Texas, Arizona, New Mexico, Louisiana, Nevada, Idaho, Washington, and Wisconsin) and file taxes separately. In community property states, you can divide the combined income in half. This works well for someone with a partner who makes less.
These calculations can be complicated. I recommend seeking professional student loan advice before delaying marriage for this particular reason.
Blended Families are Complicated
When partners come together with children from previous relationships, they become a blended family. There is no doubt that this adds both emotional and financial complexity to the partnership. As a result, the divorce rate for blended families is about 60%, higher than for couples who bring no children into the marriage. If both partners bring in children, it approaches 70%.
We all know divorce can be financially catastrophic for physicians. I believe a prenuptial agreement is a significant and often overlooked element of asset protection for anyone entering into a blended family.
Those in blended families should also be aware of all the financial obligations your partner has. Read the parenting agreement which outlines the custody agreement and each parent’s financial responsibilities. Consult a family lawyer in the state of custodial residence of the child(ren) to discuss any precedents.
Although most, if not all, states consider the new spouse’s income separate, it can play a role in certain situations. For example, it does not stop an ex-spouse attempting to file for more child support. Courts have ruled both ways. Because of the above, I believe forming a “legally” blended family is a top reason to delay marriage until the children no longer require child support and college assistance.
Financial Benefits of Marriage
There are plenty of financial benefits for married couples! You can gift unlimited amounts of money to each other, get access to your spouse’s social security benefits, and automatically be named next of kin. You can also share the estate tax limit — whatever your partner does not use goes to you (if you file an estate tax return). Married partners also have the ability to fund a spousal Roth IRA and to stretch an inherited IRA.
Access to health insurance is generally easier for married couples, although many employers now allow domestic partners to enroll.
Legal Documents for Unmarried Couples
If you opt out of a legal marriage contract, it is even more important that you have other documents in place for protection.
One of the most essential is a Last Will and Testament (LWT) for each of you. Your LWT allows you to name your children’s guardian(s). It will also ensure distribution of your estate according to your wishes. Otherwise, the laws of your state will determine which relatives get what and it’s a pretty sure bet your partner will be left empty-handed – probably after a nasty court fight.
Your LWT also allows you to name an Executor. Without an Executor, the court will decide who handles your estate and controls distribution.
You should each also have Durable Powers of Attorney in case one partner becomes incapacitated. If you don’t have one, again, the court will have to decide who has permission to make financial decisions on your behalf. Of course, we all know about health care proxies. Be sure you have one on file for your state of residence.
Because insurance and retirement account proceeds do not pass through your estate, be sure to update your beneficiaries. Otherwise, the courts will decide who receives the proceeds, such as your partner’s ex-spouse.
Don’t forget to have all of these documents signed and notarized according to the laws of your state or they will probably not be valid. Be sure to keep copies where the other partner can find them. Also, give your partner access to the passwords for your online accounts. Consider a password aggregator, such as LastPass.
Don’t Lose Track of Your Previous Employer Retirement Plans
In December 2018 it was announced that MetLife was ordered to pay a fine of $1 million and provide payments, with interest, to 13,500 people nationwide it had wrongly designated as “presumed dead.” MetLife bought the obligation to pay the employees’ pensions from their former employers and was required to keep funds in reserve for these retirees and to make payments when the former workers came of age. In 2017, the company disclosed it failed to make payments to thousands of retired workers because of MetLife’s own inability to locate them.
When changing jobs, you may have choices to make about your retirement money. The choices will depend on your age and the type of plan you are in, as well as the rules of the plan. If you are in a traditional pension plan, you may not be able to receive your benefits until you meet the plan’s requirements for retirement, or early retirement if the plan rules allow it. You must keep track of the pension and make sure the administrators of the plan know how to contact you.
Some people lose track of their pension plan from a prior job. A company might merge with or be bought by another company and change its name, move to a new location in a different city or go out of business. It might take a little research to find out what happened to your plan. Here are some tips to make sure you don’t lose track of your pension.
Educate Yourself about Your Plan
While you are still working for a company with a pension, educate yourself about how your plan works. Contact your company’s benefits officer and ask for a Summary Plan Description. This will show how your pension is calculated. Request a personal statement of benefits which will tell you what your benefits are currently worth and how many years you’ve been in the plan. It may even include a projection of your monthly payment amount. Check the statement for accuracy. Is the plan crediting you with the correct number of years of service? Do the statements show all the contributions you have made?
”Pension File”
Create a “pension file” to store all your documents from your employer. Also keep records of the dates you worked and your salary since this type of data is often used by employers to calculate the value of pensions. All correspondence including any notices or documents relating to the retirement plan and your benefits should be retained.
Summary Plan Description
If you leave the employer before retirement age, verify you are vested in the plan and make sure you have a copy of the most recent Summary Plan Description. Before leaving, verify your beneficiary election and keep it in your pension folder.
Now it will be up to you to keep track of your former employer and pension administrator. Summary Plan Descriptions are updated every year. Make sure you contact the employer to get a copy of the latest update every year. Use this opportunity to verify they have your correct contact information on file.
Search for Unclaimed Retirement Benefits
Your plan could be terminated before you reach retirement age. Traditional defined benefit pension plans that are fully funded are generally sold to companies like MetLife to pay all promised benefits as workers qualify. Underfunded plans are likely to end up with the Pension Benefit Guaranty Corporation (PBGC). The PBGC guarantees benefits in most traditional pension plans, but not all benefits are protected. The PBGC maximum guarantee for participants in single-employer plans is determined using a formula prescribed by federal law that calls for periodic increases tied to a Social Security index. The maximum monthly guarantee in 2019 for a 65-year old retiree is $5,607.95/month for a straight life annuity and $5,047.16/ month for joint and 50% survivor annuity.
Pension Benefit Guaranty Corporation
The PBGC is a good place to start for anyone who has already lost track of their pension. They maintain a database2 of unclaimed pensions that lists approximately 38,000 people who are eligible for pension payments that could not be located by the PBGC or their former employer.
The PBGC does not have anything to do with defined contribution plans like 401(k)s and 403(b)s. To find one of these plans start with your former employer. If the company has gone out of business, try the Department of Labor’s Form 5500 search. Plan administrators are generally required to file Form 5500 annually. The form should contain the name of the plan administrator and their contact information. Unfortunately, the search only goes back to 2009. This won’t help if the plan went out of business before 2009.
National Registry of Unclaimed Retirement Benefits
The National Registry of Unclaimed Retirement Benefits3 is another free service to assist former employees looking for their unclaimed retirement benefits. A Social Security number is required to perform the search. The registry provides contact information for former employers when a match is found so the employee can claim their account.
Take Your Assets with You
Probably the best way to keep track of your retirement funds is to take them with you when you change jobs. There are usually limited options with a defined benefit pension. You may be able to take the money as a lump sum if the vested balance is small. Be sure to ask. The lump sum payments are eligible for rollover to an IRA to avoid tax. Defined contribution plans like 401(k)s and 403(b)s can also be rolled over to an IRA and sometimes to your new employer’s plan.
Your goal should be to have all your retirement funds working together for you in the most efficient manner possible. Some people think having multiple accounts is a form of diversification. It is not. The investments within the account are what provides diversification. Having fewer accounts to monitor makes implementing your investment strategy easier and helps to avoid losing track of a plan in the future.
Planning for a Divorce Post Tax Cuts and Jobs Act
By now divorce attorneys are familiar with the direct change the law known as the Tax Cuts and Jobs Act, made to divorce planning with the elimination of deductible alimony payments. However, there are ancillary and indirect changes that are not as obvious, but which might affect planning for divorced. In many instances, the TCJA amendments will change long-time planning. These changes will require advisers to pause before giving advice so that they may ponder whether the fundamentals of planning still apply. In many cases they will not.
Most important, the ripple effects of the broad TCJA changes will have unexpected consequences that many clients will not even realize require seeking professional advice. I encourage all clients that are divorced, in the process of divorcing, or have prenuptial or post-nuptial agreements to meet with their adviser’s team to review the potential consequences.
TCJA direct changes
The primary direct divorce change of the TCJA is that alimony payments will not be deductible by the payer spouse but will also not be included in income of the payee ex-spouse. This change is permanent and will not sunset (as many other personal income tax changes do). This new rule applies to any divorce or separation instrument (as defined in Sec. 71(b)(2)) executed after Dec. 31, 2018, or for any divorce or separation instrument executed on or before Dec. 31, 2018, and modified after that date, if the modification expressly provides that the TCJA amendments apply.
To determine the tax status of alimony payments you should confirm the date of the divorce agreement, whether it was modified, and, if modified, whether the TCJA provisions apply. If there is any ambiguity as to whether a modification applied the TCJA rules, CPAs should request that the client’s matrimonial attorney confirm. For example, does a modification of a divorce agreement after 2018 “expressly” provide that the new rule should apply? Document the status of any agreement that the CPA is reporting for tax purposes in the client’s permanent tax file.
Under pre-TCJA law, until the end of 2018, an alimony trust could have been used in a divorce to minimize the interactions of the former spouses. If a family business was involved, the alimony trust could have been used to hold interests in the business to protect the business interest while securing the interests of the payee spouse. The TCJA prevents the prospective use of alimony trusts in divorces after 2018 — with the TCJA’s repeal of Sec. 682, the spouse who creates the trust will be taxed on the income under the Sec. 672(e) grantor trust rules.
Indirect TCJA consequences practitioners should consider
The changes in the deductibility of alimony will have dramatic consequences to divorcing clients; that provision has received considerable attention. However, the TCJA made many other indirect changes that could have profound impact on divorcing clients. The discussion below points out only a few of these, but demonstrates how far-reaching the TCJA really is.
- Exemptions: Many divorce settlement agreements included good-faith negotiated provisions specifying which ex-spouse would get to claim which children as exemptions and in which years. The TCJA has suspended personal exemptions (other than for disability trusts that effectively will enjoy inflation-adjusted exemptions of $4,200 for 2019).The new larger standard deductions have been presented as a substitute for the lost personal exemptions. This elimination of personal exemption sunsets after Dec. 31, 2025. Clients who had given up other items of value to claim exemptions under the divorce settlement will be dismayed to learn that the bargained-for benefit has evaporated. There is likely little that can be done to salvage this. While it might be possible for the client to return to court to argue a change in circumstances, that will likely be more costly than the tax benefit lost.
- Fewer clients will plan their estates: A couple with a $6 million estate may view estate planning as irrelevant (assuming that they do not live in a decoupled state) as even a halving of the estate tax exemption will not result in their estates’ being taxable. The unfortunate consequence of this is that even many wealthy clients will rely on old simplistic wills that do not provide adequate trusts for divorce protection for their heirs. Outright bequests and bequests to simplistic trusts that distribute outright to a child at a specified age, e.g., 30, will expose all of those assets to divorce claims.
- Nongrantor trusts: Grantor trusts are the focus of much income and trust planning post-TCJA. However, clients making transfers to irrevocable trusts, unless they are very wealthy, will need access to trust assets. A trust can be structured to be both nongrantor and permit a spouse to have access by requiring that an adverse party, e.g., a remainder beneficiary whose interests will be reduced by the approved distribution, consent to any distribution to the spouse. You will have to consider the potential consequences of this if the couple later divorce. For example, who is named as the adverse party and what reaction will he or she have? Will he or she refuse to approve distributions post-divorce?
- State and local taxes: Might the loss of the full deduction for state and local taxes for a high-income spouse in a high-tax state have sufficient economic impact to create a financial hardship for a divorced client who faces a substantial tax increase? This might be particularly a concern for a professional in such a high-tax state who is subject to the limitation of being in a specified service trade or business and cannot avail himself or herself of the 20% Sec. 199A deduction. Might the SALT changes depress property values upsetting the intended implications of a negotiated settlement?
- Reliance on marital bequest: Many commentators are suggesting that a qualified terminable interest trust (QTIP) or other marital bequest is preferable to a credit shelter trust because assets receive a second basis step-up on the surviving spouse’s death. The reasoning for this is that the estate tax exemption is so high that there is no worry about aggregating all assets of the marriage in the survivor’s estate, i.e., there is no negative cost to a basis step-up. While there can be merit to this planning in some instances, its use could change the dynamic post-divorce. Many credit shelter trusts include the children of the marriage as beneficiaries whereas a QTIP cannot. If one spouse dies and the survivor remarries, there will be less or even no flexibility to get distributions to the children of that prior marriage if the assets are held in a QTIP. How might this affect future divorce planning?
- Changing prenuptial and divorce settlement agreements: You might consider suggesting that the client consult an attorney to reopen an existing divorce arrangement for changed circumstances. Might that succeed? If a prenuptial agreement already in place provides for a certain level of alimony (when it was anticipated it would be deductible under Sec. 215), would a court permit it to be modified now that, if the divorce occurs after 2018, it will no longer be deductible? To set aside a prenuptial or other marital agreement, the client might have to prove fraud, duress, overreaching, or unconscionability. Likewise, for reformation or rescission of a divorce agreement, including its property settlement terms, certain contract principles may apply, including mutual mistake and unjust enrichment. It remains to be seen whether the new issues that arise by virtue of the TCJA will constitute enough of a change in circumstances or other basis to warrant a modification in court.
The TCJA dramatically changed tax planning related to marriage and divorce in many ways — often indirect and unexpected — that could have varied and adverse impact on different clients.
Travel Hack Like a Pro
Travel hacking is a virtually no-brainer for consumers with higher income and strong credit. Travel hacking has obvious benefits. What are the limited downside considerations? Time and learning. Credit score is only slightly impacted and can expect to maintain your score 800+ with proper credit oversight.
In my opinion travel hacking includes the following buckets: Churning credit cards, manufactured spending, booking award travel efficiently and travel hacking without a credit card. Let’s break down these buckets in greater detail to help you plan your first travel hacking experience.
1) Churning Credit Cards
What is churning credit cards? Credit card churning is the act of repeatedly opening credit cards solely for the welcome bonus. The welcome bonus is usually the crux of receiving a large lump sum of airline miles or rewards points. For example, I recently opened the Chase Ink Preferred Card for the 100,000 Ultimate Rewards points after hitting the minimum spend. This is worth nearly $1,250 of travel rewards. I think I could find a destination for that.
2) Manufactured Spending
Manufactured spending is a loophole for generating more points using ‘artificial spending’ to turn credit card spending into cash. This cash, in turn, is used to pay off your credit card leading to $0 in net spend. You do manufactured spending for two primary reasons:
1) Meet the minimum spending requirements to meet the signup bonus without buying extra items.
2) Generate significant rewards points without actually buying anything.
How do you do manufactured spending? There are plenty of ways to do it and it is ever-changing, so stay nimble. However, there are some commonly known ways to participate in manufactured spending:
1) Funding bank accounts is the easiest manufactured spending method out available. It is fast and safe. You can only do this so often so choose your spots wisely. Doctor of Credit has a pretty comprehensive list of bank accounts (https://www.doctorofcredit.com/does-funding-a-bank-account-with-a-credit-card-count-as-a-purchase-or-cash-advance/) that can be funded with a credit card, including the limits and which credit cards have been reported to treat these as a cash advance.
2) Using your rewards card for all of your purchases and bills is another way to increase your spending on the card. With services like Plastiq, you can even pay your mortgage, rent and other major expenses with a credit card. The payment times lag, so you need to plan accordingly.
3) Purchase virtual gift cards and convert them into money orders.
This popular manufactured spending method of buying Visa, Mastercard or Amex gift cards has two steps: find a place to buy a gift card, then find a way to liquidate it. While most gift cards have activation fees, these can be offset by buying them at a store that qualifies for a category bonus on your credit card (e.g. such as a location offering the Chase Freedom 5% cash back categories). One-time promotions can make the deal even better. Often times, around Christmas, Simon Mall offers discounts on gift cards. Even if your credit card does not have any category bonus, some places sell gift cards with low activation fees that should easily be offset by whatever rewards you’ll get from the transaction. Simon malls are a popular example as most of them sell $500 Visa gift cards with a $3.95 activation fee. That equates to less than 1%, so if you are getting 3x points or even 2% cash back you are instantly coming out ahead.
Here are a few popular ways to liquidate gift cards with a PIN:
Buy money orders. Some grocery stores will allow you to buy a money order using a debit card (in your case, a Visa gift card) for a nominal fee, which you can then deposit in your bank account. Not all grocery stores will allow this and you need to do research or find data points reflecting what grocery stores will work. Not all grocery stores will allow this and you’ll need to do some online research then field testing to find one that will work. Please not that some banks do not like frequent money order deposits. Do not deposit money orders in to your personal bank account; set up a separate account.
Load your gift cards onto reloadable prepaid cards such as Amex Serve (https://www.serve.com/). If you receive a money order or check from manufactured spending, you can cash the check instantly.
3) Booking Award Travel Efficiently
An underrated component of travel hacking is booking your award travel efficiently. Travel hacking is solely a numbers game. Once you have amassed a large fortune of awards points, you need to deploy them in an efficient manner similar to how you would with spending or investing.
Some important definitions to consider include the following:
1) Cents per point – To calculate, you take the cost of the flight or hotel stay divided by the points redemption. For example, if you could pay $2,000 for a flight or redeem for 60,000 miles, your cents per point would equate to 3.33x. That is a very good redemption. Try to target anything above 1.5x. These are great ways to book award travel.
2) Transferability – The crown jewel rewards programs are typically the programs that offer the most flexibility with the rewards points. Rewards programs such as Chase Ultimate Rewards or American Express Membership Rewards offer maximum transferability. These programs have partnerships with virtually every airline imaginable, so you can transfer your point dollar for dollar to other airline programs for maximum redemption value. Additionally, they even offer flexible options to redeem for gift cards at your favorite stores. I would advise against this, however, since the redemption value is lower than travel. Organization is key here. Track all of your rewards programs in a simple document.
4) Travel Hacking Without a Credit Card
There is always a consideration to be made with travel hacking beyond credit cards. Far too many people believe that travel hacking only means opening a significant amount of credit cards. There is so much more that you can do other than solely just credit card reward bonuses.
Things that help with travel hacking without credit cards include:
1) Be cognizant of where you stay relative to the location – Staying in an American branded hotel in a foreign country (even it if it considered a 3-star hotel in America) may be viewed as a luxury hotel in a different country.
2) Find those hidden deal – Oftentimes, traveling via train/bus in foreign countries have opportunities for amazing deals. Hidden deals are hidden for a reason, so you must do your own research in certain cities. 3) Make sure you are earning rewards for anything that you do while traveling (especially work travel).
3) Oh, keep an eye out for bonuses too – Oftentimes these rewards programs offer bonuses like a free night for staying 2 nights over the course of a few months. Try creating a dummy email account where you can scrap the benefits for these various bonus options and avoid a bunch of promotional emails. However, if you can get on all these email lists, you will likely get targeted for special promotions.
In order to travel hack without a credit card, you need to travel and act like a pro. Are you going to be staying in a big city that you will spend most of your time outside exploring all of the landmarks? Well, why should you spend all your money on a luxurious hotel? There is a learning curve. This may be stressful for a rookie, so taking things very slowly will help you understand how the game works, and lets you get your feet wet. Also, it’s very important to always have a backup plan. Opening a number of different travel rewards programs takes some time and monitoring. It’s not easy. However, there are limited downside risks to travel hacking. It just takes some time and organization. I don’t know about you, but generating free money and rewards is highly attractive to me.