The number of unmarried couples living together in the United States has been rapidly increasing and married couples are now in the minority; yet, financial and inheritance laws continue to favor the traditional family structure. Cohabitation laws vary from one state to another, so unmarried cohabitants must be familiar with the laws that apply in their jurisdiction and take extra steps to ensure that their partners inherit their estates.
Cohabitation and Common Law Marriage
The law generally treats unmarried cohabitating couples in the same manner as unrelated people sharing living quarters, such as housemates or friends who might share an apartment to save on expenses. Living together does not establish a legal connection between the two people and does not give either party any right of inheritance – or any responsibility for the other's debts or other legal obligations. An exception to this arises in the nine states that recognize common law marriage. In those states, if all the statutory requirements are met, couples who are married at common law may have the same inheritance rights as those who were married in a legal ceremony.
When a person dies intestate, meaning without a will and with assets that must be distributed through probate, state law dictates who will receive those assets. Laws of intestacy look first to the decedent's lawful spouse, and then to the closest blood relatives such as children, parents and siblings. If there are no close relatives, the probate court will look further afield to locate the nearest blood relative. If no relatives can be found, the decedent's estate passes to the state. Unless there is a will, a partner's estate will not pass to a cohabitant.
Wills and Estate Taxes
Unmarried individuals can leave their property to cohabitation partners or anyone else they choose in their wills. Family members may challenge a will's validity, but a properly executed will is legally binding and usually honored by probate courts. The inheritance may be subject to state and federal inheritance taxes, however. Lawfully married spouses are exempt from most estate taxes on property they inherit from their partners, but unmarried cohabitants don't qualify for this favorable estate tax treatment. Careful estate planning can help minimize tax liabilities for unmarried cohabitants.
Trusts and Joint Ownership
Naming your unmarried partner as a beneficiary on your life insurance and any inheritable bank or investment accounts is one way to pass assets at death without going through probate and subjecting the transfer to potential challenges from contentious heirs. Placing assets in joint ownership with rights of survivorship, or placing property in a trust in which your cohabitant is named as beneficiary, are other ways to transfer assets to an unmarried partner. Even when these steps are taken, however, unmarried cohabitants will typically incur income and transfer taxes, cautions the Credit Union National Association. Obtain up-to-date information on state and federal transfer tax provisions before planning these transfers to minimize taxes.