Unmarried partners may name each other as beneficiaries for retirement plans, although the survivor cannot roll over the benefits into his or her own plan the way a spouse can. Many partners also rely on life insurance to provide for each other as well as their family members. Russell P. Love, a partner in the Atlanta offices of McKenna Long & Aldrich, describes naming one another as life insurance beneficiaries—an all-around simple way of transferring assets—as "the great equalizer."

TOP VIEW Unmarried partners who live together must draft their estate plans carefully if they wish to leave their wealth and property to each other without creating a huge estate tax burden. Breakups can pose an even greater threat to individuals’ and families’ wealth in states that view such unions as common-law marriage. Advisors urge couples and families to tackle these thorny planning issues before relationships end.

Trusts provide yet another planning alternative. Bypass and life estate trusts move property into an irrevocable trust upon the first partner’s death, and the survivor lives off the property’s income. Under this arrangement, each partner’s personal $2 million estate tax limit applies, and the property can then go to another beneficiary—the first partner’s children, for instance—when the companion dies. However, these agreements can cause discord, because the family members who stand to ultimately inherit from their parents and grandparents may object when someone from outside of the family benefits from its wealth.

"Children get cranky if they can’t get their trust," observes Diane Kelly, a CPA and certified management accountant in Carmel, Calif.

Animosity may build, especially if the deceased individual tries to leave ownership in a family business to an unmarried companion. "Joe’s family is not going to be inclined to let Mary take Joe’s interest in the business—that’s just not going to happen," Padilla says. "They’re also not going to be too happy to give her money in order to purchase his interest to keep the business in the family."

Families can avoid potential friction by talking about estate plans, says Debra Neiman, a Massachusetts-based financial advisor and a coauthor of Money Without Matrimony: The Unmarried Couple’s Guide to Financial Security. "Communication is your first line of defense," she says.

Marking Boundaries
Real estate typically represents the largest and often most complex asset cohabitants share. Wealth advisors recommend discussing details such as what names appear on the title, who owns the property, who bears responsibility for property liens, and what happens if the relationship dissolves or one partner dies. For couples purchasing a home together and intending that the survivor own the property after the first partner dies, both names should appear on the title as joint tenants with the right of survivorship.

Palimony cases may occur infrequently, but when they arise, they pose a huge burden.

"If you don’t have those magic words," Padilla says, "it is deemed to be a tenancy in common, and half of that asset will pass through the estate of the deceased." Lacking a proper plan, the survivor could own a home with any other person who inherits major assets from the deceased partner.

Property ownership that is unclear provokes some of the more fractious breakups. "The call I get several times a week is ‘My girlfriend and I bought this house’ or ‘My boyfriend and I bought this house,’ " says Jared Laskin, an attorney in Southern California who specializes in cohabitation and palimony issues. Frequently the partner with poor credit is not listed on the title, yet helped pay the mortgage. Following a split-up, that person may not have a legal claim to the home.

"Never, never put money or effort into a house that is not in your name, unless you have some written agreement," Laskin says. "People just go in blindly. Even if you trust your partner—and everyone trusts their partner until the relationship goes sour—he could get hit by a bus tomorrow, and if there’s no will, you have no interest in the house."

Legal statutes specify the financial rights and responsibilities of couples who are wed, which means "married people can’t pull the same scams that unmarried people can," says Frederick Hertz, a lawyer in Oakland, Calif., and a coauthor of Living Together: A Legal Guide for Unmarried Couples.

Hertz often sees unmarried couples apply for loans or credit cards, with the intention of helping the partner with poor credit. When love fades, though, the cosigner alone will owe any remaining debt. Similarly, shared business, property or vehicle ownership requires paperwork specifying that ownership. "What’s on paper should match what’s in your heart," Hertz points out.

Jill Duman is a freelance writer based in Davis, Calif.

Relationship Rules

Contracts lack romance, but they can protect both parties. Prudent unmarried partners should specify everything, including inheritance, property ownership, retirement benefits and rights to earned income.

• Seek separate legal representation for each partner.
• Decide who owns which property or assets.
• Establish terms for providing for a partner after a breakup.
• Draft estate plans and decide how assets will be divided among a partner and family members.
• Consider making a partner the beneficiary of a life insurance policy or retirement benefits.
• Choose joint or separate banking accounts carefully. Joint accounts may, in some states, create an implied contract to share assets.
• Exclude the details of sexual relationships from written agreements, or risk negating those contracts.

Common-Law Risks

Couples in common-law states must take precautions to avoid unintentionally creating such unions.

"If you are a different-sex couple in Texas, you live together, and you consider yourself married, or you represent to other people that you are married—if you do all those things, you are common-law married," explains Michael Kaufman, a partner in the Dallas-based offices of Jackson Walker. "If you say you are not in an informal marriage, and then you take this person home and say, ‘Hello everyone, this is my wife,’ that is not going to help."

Legal disputes sometimes arise after relationships end and one party claims rights to money or property. Attorney Marvin Mitchelson won a landmark palimony case in California in 1979 for his client Michelle Triola Marvin, the live-in lover of actor Lee Marvin. Although Triola Marvin’s claim was ultimately denied, the case established a precedent for looking at whether an implied contract might exist between cohabiting partners that could affect the distribution of assets or property acquired during the relationship.

Palimony cases may occur infrequently, but when they arise, they pose a huge burden. Defendants will endure high legal fees, court costs and possibly bad publicity, while plaintiffs risk losing everything, says Jared Laskin, a palimony expert in Orange, Calif., who represents both plaintiffs and defendants in lawsuits that surface when cohabitation agreements sour. "I tell my clients to look at it like a salvage operation," Laskin says. "They’re going to salvage what they can."

Proceed with care in these common-law jurisdictions:

Alabama
Colorado
Iowa
Kansas
Montana
New Hampshire*
Oklahoma
Rhode Island
South Carolina
Texas
Utah
Washington, D.C.

* For inheritance purposes only