How alternative households can financially prepare for life changes

By Calvin Goetz

Financial planning is not a set and forget activity. On the contrary, it is constantly changing according to your changing life circumstances.

Priorities and financial goals may change when a person enters an alternative lifestyle. Adults in non-traditional households face financial planning challenges, questions and decisions that may differ from those in traditional families. Non-traditional families—households such as single-parent families, cohabitants, or same-sex couples—have increased dramatically in recent years. the 2019 US Census Bureau American Community Survey showed that only 19% of family households had a “traditional family”, defined as a married couple living with children. Number of unmarried partners in the United States has nearly tripled over the past two decades.

Many rules related to income tax, inheritance tax, retirement and insurance generally provide protection to married couples, including in terms of property rights, legal rights, wealth transfer and medical decisions. Non-traditional households, on the other hand, do not receive these benefits. But there are strategies that non-traditional households can use to overcome these limitations and adjust their financial plans wisely.

Single parents

Income taxes. If you are newly divorced, assess the impact of your new tax status, including the possible decrease in deductions. The IRS only allows one parent to report a particular child on their tax return for a given year. But single parents can reduce their taxable income by declaring themselves the head of the family. To qualify, the parent must pay more than 50% of household expenses, be single on the last day of the tax year, and have their child live with them for more than six months of the year.

The Child Tax Credit has been increased for the 2021 tax year by the US bailout. It is now $3,600 for eligible children under age 6 and $3,000 for eligible children ages 6 to 17. The U.S. bailout also made changes for 2021 to the Child and Dependent Care Credit, through which single parents can claim a percentage of child care expenses for children 12 and under. . The amount of eligible expenses increases from $3,000 to $8,000 per eligible person.

Planning for retirement and college education. Taking full advantage of 401(k) and 403(b) plans can be essential for a single parent building their retirement nest egg, thanks to matching contributions provided by many employers. The tax benefits associated with these accounts, meanwhile, can help fund your child’s education savings. Contributions to business accounts like a 401(k) or 403(b) are deducted from your salary before income tax is calculated, reducing your overall tax liability. This income tax savings shows up in your paycheck, money that can be directed to a child’s college savings account.

Another option for saving for your child’s college education and your retirement at the same time is a Roth IRA. You can use the money paid to your Roth for qualifying education expenses tax-free. For retirement purposes, money is tax-free when withdrawn after age 59½ and when the account holder has had the Roth for at least five years.

Estate planning. A single parent’s first concern in estate planning is the protection of children. A last will allows a single parent to choose a guardian for their child after the parent’s death. It also describes the child’s financial support, inheritance and living arrangements if they are under 18. A trust will not allow the single parent to choose a guardian, but it will allow the beneficiaries of the parent’s estate immediate access to those assets. The trust allows a trustee to protect a parent’s assets for the needs of their child.

Purchasing supplemental life insurance is another option to ensure that the children of a single parent are taken care of if the parent dies. An estate planning attorney can create a strategy to minimize taxes and protect life insurance money for several years after the parent’s death.

Unmarried partners

Income taxes. Unmarried couples cannot file joint tax returns like married couples do, and they cannot declare their partner as a dependent. Married couples enjoy a number of federal tax benefits that do not apply to unmarried couples. Unmarried couples may face tax reporting issues, such as who can claim certain deductions, but it may also be possible to transfer taxable assets to the partner in the lower tax bracket. So, it might be a good idea to have separate bank accounts in order to register each partner’s base for property tax purposes.

If the partners own a home together and are both listed on the mortgage, they can choose to split the mortgage interest deduction or allocate it to the partner listed as the primary borrower. If they are selling a home they own together, another tax reduction strategy for an unmarried couple is to split the gains. As single filers, they are allowed to exclude up to $250,000 of gain on the sale of a principal residence from their income.

Retirement planning. Like married couples, unmarried couples should work together when planning for retirement. Before doing so, they should be aware that neither of them will be able to collect Social Security survivor benefits if the other dies. An alternative is that each person can purchase a life insurance policy and name the other as the primary beneficiary of the policy. In addition, both partners could contribute regularly to a joint savings account in order to build up a shared retirement nest egg. If each is aggressive about saving, the amount of funds available to the surviving partner could approach what they would have received from Social Security survivor benefits.

Another option is that each partner can list the other as the primary beneficiary on their 401(k), 403(b), IRA, or other type of retirement account. It is important to check with the plan administrator first to make sure they can designate an unmarried partner as the primary beneficiary.

Estate planning. Unmarried couples do not enjoy the same protection as married couples when it comes to housing and medical decision-making. If, for example, you and your spouse are co-owners of the accommodation and he dies, depending on the form of co-ownership you have concluded, it is possible that the property or part of it will revert to the closest to the deceased person . close. You could be legally forced to move, and the same could happen if the property was never in your name. And if you’re unmarried and your partner falls seriously ill and is unable to make their own medical decisions, you won’t be able to legally step in unless your partner appoints you as proxy first.

To avoid these scenarios, one solution is to create a durable power of attorney agreement, which appoints your partner as your personal representative in case you are unable to make your own medical decisions. Additionally, you can create a will stating what you want your partner to have. And you can write a domestic partnership agreement to support the statements in your will and declare that your partner has the legal right to co-ownership.

Remember this when it comes to estate and inheritance tax: married couples enjoy an unlimited spousal deduction – their estates are usually not taxed until after the death of the second spouse. But this spousal deduction is not available for unmarried couples. Thus, it is essential that unmarried couples develop a comprehensive estate plan that establishes inheritance, protects assets and minimizes the impact of estate taxes.

A non-traditional family structure can complicate financial planning strategies, so advice from a financial advisor can be invaluable. Regardless of where you are in your journey, it’s important to review your financial plan at least once a year, or whenever you encounter a major change in your life that alters your priorities.

About Calvin Goetz

Calvin Goetz is founder and president of Financial Group Strategy, a Phoenix-based investment advisor and insurance planning group. This article is intended for general educational purposes and does not constitute investment advice. Goetz is the author of two books, Climb the mountain of retirement and The retirement roadmap. He is a member of the National Association of Insurance and Financial Advisors (NAIFA) and Ed Slott’s Elite IRA Advisor Group™.

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