As many of my readers know, I have been teaching the CFP® curriculum to those preparing for the exam for several years now. Most are experienced professionals; all must have at least a bachelor’s degree; many have advanced degrees or are practicing attorneys or CPAs. In other words, it is my privilege to teach la crème de la crème. Still, it surprises me sometimes that even amongst this group, there is so little understanding of the financial benefits of legal marriage. So I thought I’d blog about it.
Lucy and Ricky Ricardo slept in twin beds. So did Rob and Laura Petrie. (I Love Lucy and the Dick VanDyke Show references, for my young readers). My my my how times have changed! Now people hook up on television. Who even needs a bed? Maybe there’s a vacant stairwell, or there’s always the back seat. Nevertheless, my point here isn’t to moralize: I leave that to other professions. I only want to point out that there remain some significant financial benefits for both spouses in a legal marriage.
In Florida, as in 15 other states, a legally married couple can register their brokerage account as a Tenancy by the Entireties. This gives significant creditor protection: the account cannot be touched by either spouse’s separate creditors. This is unlike a joint tenancy, where assets of both tenants can be attached by a creditor of one of the joint tenants. If this is an option – a benefit – why not use it? Still – only available to legally married couples.
ERISA is the Employee Retirement Income Security Act. ERISA legislation regulates much of the retirement investment world, under the auspices of the Department of Labor. Retirement accounts which fall under the ERISA purview include both defined benefit plans (aka pensions), and defined contribution plans (profit sharing, 401K, money purchase, target benefit). Under ERISA rules, a surviving spouse is usually the automatic beneficiary of the account. If the account owner wants anyone other than his/her spouse to be the beneficiary, then that spouse must consent in writing. This is some very strong protection that is afforded only to the legal spouse.
IRAs do not include the same protections for the spouse. If, for example, I separate from my employer’s service, and roll my 401K into an IRA, I can choose anyone I want to be the IRA beneficiary. Some IRA custodians will still, however, require spousal consent in this circumstance.
This is huge. In Florida, if you try to disinherit your surviving spouse, that spouse can go to probate court and elect against the will for 30% of your estate. That is, the State of Florida automatically grants 30% of any decedent’s estate to his or her legal spouse. The only way around election against the will is if both spouses have signed a prenuptial arrangement.
You may have heard election against the will spoken of as the dower and curtesy statutes, which are those originating in English Common law. These speak to the same issue: a portion of a decedent’s estate is reserved for a surviving spouse to keep that spouse from falling into poverty. The percentage varies among the states, though generally in the 30% to 50% range. Some states require the marriage to have been of a certain duration or may even consider the financial need of the surviving spouse.
Election against the will is found in the states where the legal system is descended from English common law. Other states have community property among married people: all earnings and accumulation that took place during the marriage is deemed to have been equally accrued and therefore equally owned. Consequently, each spouse needs a will to pass marital property to the surviving spouse. There 9 community property states, the largest of which are California and Texas.
Eventually the first of two spouses will die. That's a certainty. The Social Security system provides a spousal benefit for a surviving spouse, as well as for surviving minor children of that marriage. In terms of retirement benefits, the surviving spouse has a choice between his or her own benefit, and that of the deceased spouse - whichever is higher. This is not an option for couples not legally married. For more information on Social Security, please see my blog post, Social Security Benefits.
This list is, I’m sure, not comprehensive. And I must add here that I’m not giving any legal advice. I am pointing out that when couples choose not to marry, they are leaving significant legal protections on the table. All decisions have consequences, and here I point out some of the unintended.