Growing Ranks of Non-Traditional Couples Face Uncertainty, Expensive Rules

Taxes, estate planning, and other financial issues are becoming increasingly complex for both gay and straight unmarried couples

By Ben Steverma -

For decades, gay and lesbian couples have known the financial difficulties of living together without the protection of an official marriage. If the government doesn't recognize a relationship, taxes, estate planning, buying property, and dividing assets after a breakup all get messier—and pricier.
The number of unmarried cohabiting couples has surged, meaning millions more Americans, gay and straight, are facing these issues. New laws and court rulings are increasingly recognizing the rights of live-in couples, but so much rapid change is also making the legal and financial status of couples more confusing. The U.S. Census Bureau estimates 7.5 million heterosexual couples and 620,000 same-sex couples lived together in 2010, compared with 6.7 million heterosexual couples and 476,000 same-sex couples in 2009. The total number of cohabiting couples in legally unrecognized relationships rose 14 percent since 2009, a trend Census analysts attributed partly to the weak economy. Disputes between these nontraditional couples are also on the rise. A survey of the 1,600-member American Academy of Matrimonial Lawyers found 48 percent of the divorce attorneys have detected more court battles between live-in couples in the past five years.
"One of the greatest benefits of marriage is divorce," says Richard Wilson, an attorney at Grund & Leavitt in Chicago. State laws prescribe how a married couple's assets should be split, usually with protections for the poorer member of the couple. Without such guidelines, untangling a couple's finances can be tricky. Even if people maintain separate bank accounts, couples are increasingly relying on each other's credit, says Margaret Hickey, an attorney at Becker, Hickey & Poster in Milwaukee. For example, she says, one member of a couple with a better credit score might buy a car, but the other partner might be the one driving it and making payments on the loan: Who should keep the car in a breakup?
Erika Karp married her wife, Sari Kessler, on a spring day 12 years ago in New York City's Central Park. Because the marriage isn't recognized by state or federal law, Karp has spent "tens of thousands of dollars" on lawyers and financial advisers who specialize in gay and lesbian couples. Karp, 47, took out life insurance policies to pay estate taxes because in an unrecognized couple her estate wouldn't transfer tax-free to her spouse, which is opposite the case with traditional married couples. She wanted to ensure that the 45-year-old Kessler, a jazz singer, and their three daughters ages 3, 6, and 9 could afford to stay in their Manhattan home if Karp died. "It's extraordinarily expensive," says Karp, head of global sector research at investment bank UBS (UBS). "I am fortunate to have had the wherewithal and resources to do it."

Complicated Planning

Legal and financial planning for unrecognized couples may be more costly than for traditional couples because the issues are so complicated. Adoptions of children and cohabitation agreements, for example, must hold up even when families cross state lines. To hold shared assets like real estate, a couple can set up a trust, which ensures inheritance rights while minimizing income and estate taxes, according to Jane King, president of Fairfield Financial Advisors in Wellesley, Mass. "There is no gay economic advantage that makes up for those extra fees people need to pay to lawyers and planners," says Lee Badgett, who has studied the issue as an economics professor at the University of Massachusetts at Amherst and as research director of the Williams Institute on Sexual Orientation Law and Public Policy in Los Angeles. It's dangerous to leave matters like custody of your children or holding on to your home to nonspecialists, says Howard Forman, an attorney at Turkel, Forman & de la Vega in New York. "It's heart-wrenching when you see people who think they are protected and they're not."

Judges and politicians in a growing number of states are beginning to recognize the rights of gay couples and unmarried straight couples. A law that takes effect June 1 in Illinois grants civil unions to both gay and unmarried straight couples, offering them many of the same rights as marriage. A similar law takes effect in Hawaii at the beginning of 2012, while Delaware's legislature on Apr. 14 approved a civil union bill, which the governor says he will sign, that is restricted to same-sex couples. On Apr. 5, Washington State, which already offers domestic partnerships, recognized same-sex marriages performed outside the state. Other states, including Maryland, Colorado, and New York, are debating civil union or same-sex marriage laws.
Judges in both federal and state court are wrestling with similar issues. The Obama Administration is no longer defending the federal Defense of Marriage Act, under which same-sex couples cannot access more than 1,000 federal marriage benefits, from immigration to taxes, and states can ignore same-sex marriages performed by other states. Among the first cases affected is the lawsuit of an 81-year-old woman who is fighting the payment of $363,000 in estate taxes after the death of her wife. In the past year, judges in New York granted a divorce to a lesbian couple married in Vermont and recognized the inheritance rights of a man who married his husband in Canada.

Anti-Rights Moves

Not every jurisdiction has granted more rights to unofficial couples. In Indiana, the legislature on Mar. 29 took the first step toward a constitutional amendment banning same-sex marriage. Constitutions in 29 states already restrict marriage to one man and one woman, and 18 of those states do so in ways that could also be interpreted as banning civil unions or domestic partnerships, according to a tally by gay rights advocacy group Human Rights Campaign.
Conservative judges are taking a harder line on the rights of unmarried straight couples amid concern over setting precedents that could later be applied to gay couples, says Linda Lea Viken, an attorney in Rapid City, S.D., who is president of the American Academy of Matrimonial Lawyers. "It's a changing area of the law," Viken says. "Some places are becoming more hostile to same-sex relationships. Others are becoming more liberal." A civil union or domestic partnership can complicate rather than simplify legal matters. After the Illinois civil union law takes effect, Wilson, the Chicago attorney, says he will "still encourage people to do all the things they always do" to protect themselves, from adopting children to assigning powers of attorney to partners in case of hospitalization. That's because civil union rules generally don't cross state lines. Unlike marriages, civil unions represent "political compromises," Wilson says.
Domestic partnerships and civil unions don't give couples the same breaks on federal taxes traditional couples receive. Without a federally recognized marriage, any asset transferred from one member of a couple to the other, whether after a death, a breakup, or even just adding a partner's name to the title on a home, may be considered a gift by the Internal Revenue Service and can trigger a tax bill, Wilson says. Because the laws affecting her relationship remain in flux, Karp says she worries daily that she might not have done enough to cover every eventuality. "It shouldn't be a privilege for me to be able to protect my family and my home," she says.

Steverman is a reporter for Businessweek.com's Finance channel.