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By Calvin Goetz

Financial planning is not a set-it-and-forget-it activity. Rather, it is ever-evolving based on your changing life circumstances.

Financial priorities and goals can shift when one enters an alternative living arrangement. Adults in non-traditional households face financial-planning challenges, questions, and decisions that can differ from those in traditional family settings. Non-traditional families — households such as those with single parents, cohabitants, or same-sex couples — have increased substantially in recent years. The U.S. Census Bureau’s American Community 2019 Survey showed that only 19% of family households had a “traditional family,” defined as a married couple living with children. The number of unmarried partners in the U.S. has nearly tripled in the last two decades.

Numerous rules related to income taxes, estate taxes, retirement and insurance generally provide protection for married couples, especially in terms of property rights, legal rights, wealth transfer and medical decisions. Non-traditional households, on the other hand, don’t receive those provisions. But there are strategies that non-traditional households can use to address those limitations and wisely adjust their financial plans.

Single parents

Income taxes. If newly divorced, assess the impact of your new tax filing status, including the possible decrease in deductions. The IRS allows only one parent to claim a particular child on their tax return in a given year. But single parents can reduce their taxable income by filing as head of household. To qualify, the parent must pay more than 50% of the household expenses, be unmarried 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 was raised for the 2021 tax year by the American Rescue Plan. It’s now $3,600 for qualifying children under the age of 6 and $3,000 for qualifying children 6-17. The American Rescue Plan also brought changes for 2021 to the Child and Dependent Care Credit, by which single parents can claim a percentage of child care expenses for children 12 and younger. The amount of qualifying expenses increases from $3,000 to $8,000 per qualifying person.

Retirement and college planning. Taking full advantage of 401(k) and 403(b) plans can be critical to a single parent building their retirement nest egg, thanks to the matching contributions provided by many employers. The tax benefits associated with these accounts, meanwhile, can help you fund your child's college savings. Contributions to workplace accounts like a 401(k), or a 403(b) are taken from your salary before income taxes are calculated, thus reducing your overall tax burden. That income tax savings shows up in your paycheck, money that can be directed into 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 contributed to your Roth for qualified education expenses tax-free. For retirement purposes, the money is tax-free when withdrawn after the age of 59 ½ 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 protection of the children. A last will and testament allows a single parent to choose the guardian of their child after the parent’s death. It also outlines the child’s financial support, inheritance, and living arrangements if they are under 18 years of age. A trust won’t 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 enables a trustee to protect a parent’s assets for their child’s needs.

Purchasing additional life insurance is another option to ensure a single parent’s children are cared for if the parent dies. An estate planning lawyer can create a strategy to minimize taxes and safeguard the life insurance money for several years after the parent’s death.

Unmarried partners

Income taxes. Unmarried couples can’t file a joint tax return as married couples do, and they can’t declare their partner as a dependent. Married couples are offered a number of federal tax benefits that don’t apply to unmarried couples. Unmarried couples may face income tax-filing issues, such as who gets to claim certain deductions, but there also may be an opportunity to shift taxable assets to the partner in the lower tax bracket. Thus, it could make sense to have separate bank accounts in order to record each partner’s basis for tax purposes on property.

If the partners own a home together and are both listed on the mortgage, they can choose whether to split the mortgage interest deduction or allocate it to the partner listed as the primary borrower. If selling a home they own together, another tax reduction strategy for an unmarried couple is to split the gains. As single income tax filers, they’re allowed to exclude up to $250,000 of gain on the sale of a primary 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 receive survivors benefits from Social Security if the other passes away. One alternative is each person can take out a life insurance policy and designate the other as the policy’s primary beneficiary. Also, both partners could regularly contribute to a joint savings account in order to build a shared retirement nest egg. If each is aggressive about saving, the amount of funds available to the surviving partner could come close to what he or she would have received from Social Security survivor benefits.

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

Estate planning. Unmarried couples don’t have the same protection as married couples regarding housing and medical decison-making. If, for example, you and your partner co-own the home and he or she passes away, depending on the form of co-ownership you entered into, it’s possible for the property or part of it to fall to the deceased person’s next of kin. You could be legally forced to move out, and the same could happen if the property was never in your name. And if you’re unmarried and your partner becomes seriously ill and unable to make their own medical decisions, you won’t legally be able to step in unless your partner previously designated you as their power of attorney.

To avoid these scenarios, one way is to create a durable power of attorney agreement, which names your partner as your personal representative in case you are unable to make your own medical decisions. Also, you can create a will showing what you want your partner to have. And you can draw up a domestic partnership agreement to support the declarations in your will and declare that your partner has the legal right to co-owned property.

Remember this in regard to inheritance and estate taxes: Married couples benefit from an unlimited marital deduction – their estates are generally not taxed until after the second spouse dies. But this marital deduction is not available to unmarried couples. Thus, it’s critical 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 bring complexities in financial planning strategies, so the advice of a financial advisor can be valuable. Whatever point you’re at in your journey, it’s important to revisit your financial plan yearly at a minimum, or any time you experience a major life change that shifts your priorities.

About Calvin Goetz

Calvin Goetz is founder and president of Strategy Financial Group, an investment adviser and insurance planning group based in Phoenix. This article is intended for general educational purposes and does not constitute investment advice. Goetz has authored two books, Climbing the Retirement Mountain 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™.