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Unmarried couples face a quagmire of legal and financial issues. Throw in some bad credit and unemployment, and the complications multiply.
That's the situation faced by Jeffrey Saadeh and Michael Puig, a gay couple in Los Angeles who have put off financial planning rather than deal with many difficult issues.
It's time to face reality, advised Los Angeles financial planner Margie Mullen, who reviewed the couple's finances for The Times.
Married couples may get away with putting off writing a will, designating beneficiaries or planning for incapacity because the law gives spouses definite, automatic rights. Even saving for retirement can be easier, thanks to California's community property and inheritance laws.
Unmarried couples, on the other hand, "have to think about bad things happening and plan for them," Mullen said.
Until now, spending money and enjoying their leisure time has been far more important to Saadeh and Puig than planning for the future, and it shows in their finances, Saadeh said. Saadeh, 39, is a manager for Telecordia Technologies in Los Angeles; Puig, his partner of four years, is a former business school administrator who is currently unemployed. The couple live on Saadeh's salary, now $113,700, which may be supplemented by $20,000 annual incentive pay.
"We tend to spend a great deal on dining and entertainment, and we also like to travel for pleasure, including international travel," Saadeh said. "This has caused us to live paycheck to paycheck, except for 401(k) savings."
The pair initially expressed a desire to retire in 11 years, when Saadeh will be 50 and Puig 43. But Mullen said the couple haven't made the goal enough of a priority to make it a possibility.
Although Saadeh is contributing the pretax maximum of $10,500 this year to his 401(k), he has just $65,000 saved so far in retirement funds, while Puig has $26,705. That's not nearly enough to sustain them through 40 or more years of retirement, Mullen said.
Mullen said the men could move closer to their dream if Puig were to return to work and contribute the maximum to his 401(k) while Saadeh saved an additional 6% in after-tax contributions to his 401(k). Even then, they would probably have to work past age 50 to assure themselves a comfortable retirement.
"They would need to save like heck in order to retire early," Mullen said. "If they were serious about early retirement, they would be doing more now."
Another dream that may need to take a lower priority is the couple's desire to make improvements on their Los Angeles home. They had earmarked for that purpose a one-time, $25,000 bonus that Saadeh expects to receive in July, but Mullen said they would be far better off using it to pay down their $16,000 in credit card debt.
The men said they're willing to pay off the debt, and then save up and pay cash for future improvements. "We wanted to retire our credit card debt anyway," Saadeh said.
Saadeh should also set up an automatic transfer from his checking account to a tax-free money market account until the couple has emergency savings equal to at least three months' worth of expenses.
The men could free up even more money if they were taking advantage of a mortgage interest deduction that is currently going to waste because of their confusion over what the tax law allows. Such uncertainty is common among unmarried couples and even among tax preparers and other experts, Mullen said.
The mortgage is in Puig's name, while Saadeh is paying the bills. Saadeh lost a previous home to foreclosure during the California real estate recession of the early 1990s. That black mark on his credit made it difficult for Saadeh to qualify for a home mortgage in his own name. So the couple decided to use only Puig's income--he was employed at the time--and Puig's credit record to purchase their home.
Puig did add Saadeh to the title after the loan closed, however, and the tax law is clear that Saadeh is entitled to write off at least part of the mortgage interest payments he makes if his name is on title, said Philip Holthouse, a certified public accountant and attorney with Holthouse Carlin & Van Trigt in West Los Angeles. Saadeh's name does not have to be on the loan in order to be able to take the deduction.
But Saadeh is more likely to be audited if he takes the deduction, because the 1098 tax form that shows mortgage interest would be issued under Puig's Social Security number; Saadeh would have to explain to the IRS that he was indeed entitled to the deduction, Holthouse said.
How much of a deduction Saadeh can take is less clear because the IRS has never specifically addressed this issue.
Some CPAs insist the tax code allows unmarried couples to take only a 50-50 split--reflecting the 50-50 split of joint tenancy on a property title--while others say an unmarried couple can make an agreement to split the deduction according to who contributes what. In that case, Saadeh could take 100% of the deduction, because he pays 100% of the mortgage.
Even the issue of adding Saadeh to the title is fraught with controversy. Puig may face gift tax issues if Saadeh's name joins his on the title; technically, the IRS could view it as a gift of half the equity. However, unmarried couples in similar situations have successfully argued that both members were equal economic owners of the property, and it is unlikely that Puig or Saadeh would face an audit over the issue, Holthouse said.
All these issues would be moot if Saadeh and Puig were a married couple. Gifts between spouses are not taxed, and married couples can file a joint return and claim the mortgage interest deduction together.
Puig's unemployment raises other issues, especially if it continues. Unlike a married spouse, Puig is not entitled by law to a share of Saadeh's retirement earnings. And although Saadeh has named Puig as his 401(k) beneficiary, Puig is not eligible for survivor benefits from Saadeh's pension, which is expected to pay more than $4,000 a month in retirement. Most pensions with a spouse-survivor benefit option allow the recipient to opt to take a reduced amount that would pay until both spouses died.
Although the couple expect to remain together, it is important for Puig to continue contributing to his own retirement funds so that he has something to fall back on in case the relationship doesn't last, Mullen said.
Saadeh and Puig also need to draft wills and durable powers of attorney for health and for finances. The durable powers of attorney are especially crucial, because without these documents a court might have to appoint a conservator to take over financial affairs and health decisions if either became incapacitated, Mullen said. If Saadeh wants Puig to take over and vice versa, they need to spell that out in writing, she said.
Likewise, they need to explain in writing how they want their possessions and money distributed when one of them dies. While spouses are guaranteed an inheritance by state law, even without a will, unmarried partners have no such rights.
No one likes to plan for unpleasant contingencies, such as sickness or death, but taking care of these issues can give couples--married or otherwise--a greater sense of security, Mullen said.
Saadeh and Puig said they're ready to begin planning for the future.
"What she said makes sense," Saadeh said. "We'll be doing a lot of the things she suggested."