Millennials take a different view of marriage than those that came before them. They are waiting longer to get married and in some cases deciding not to marry at all. In recent years, marriage rates among millennials have dropped to 70%, well below rates for boomers 91%, late boomers 87%, and Gen Xers 82%. The top reasons reported by millennials for not getting married include; not transfer their student loans and medical debt onto their partner, to avoid the marriage tax, a belief that traditional marriage is an outdated establishment, or simply a lack of a solid economic foundation they feel is needed to start a family. Rather than tie the knot, some couples are forming domestic partnerships or cohabitation agreements.
A growing number of millennials have started replacing marriage with cohabitation agreement, which is a formal contract for couples choosing to live together, but without an intention to marry. It attempts to establish the economic and legal status of their relationship. The idea is to use property law and contract law to mimic family law as much as possible.
Benefits of having a Cohabitation Agreement.
In some cases, a cohabitation agreement can help high earning couples save money when making a large purchase. When purchasing a home, for instance, sometimes not being married has a benefit, (i.e., not getting hit with the “marriage penalty tax,” where two high-income earners pay more taxes than if they had both filed as single), but tracing deductions and determining the proper partner entitled to the deduction may not be so easy. For example, if one partner owns the house the couple lives in, but the other partner pays the real estate taxes, no one is entitled to the real estate tax deduction. The Internal Revenue Code provides that, in order to deduct real estate, you must be an owner of the property and be the party that actually paid the real estate tax bill. Additionally, if only one partner provides the down payment for a home purchase, but if the home is titled in both names, the down payment may be treated as a gift, whether that is the intent or not. Having an agreement in place and reviewing these items with your accountant is the best way to avoid increasing your income tax liability and gift tax exposure before it is too late.
A cohabitation agreement allows the couple the ability to customize the terms of the relationship. For example, a couple could jointly hold a title to real estate, sign a lease together, define who pays what rent and what utility, or share a bank account. In addition, they might decide to enter into a contract to hold certain items of personal property together or to customize mutual wills or trusts. While there are still numerous advantages afforded to married couples (e.g., tax breaks, inheritances), non-married couples can use relationship contracts to design a customized contract based on their particular needs.
Is a cohabitation agreement right for you?
If you plan to live with someone, buy property together, or start a family and do not wish to get married, then we highly recommend establishing a legal relationship contract. With a cohabitation agreement, both be able to negotiate terms, such as what percentage of the home each of you owns or who gets to reside in the property, and who can buy the other out. Having a detailed agreement on what happens if you separate can help avoid expensive litigation and the drama of family court.
Be sure to research your individual state’s rules and procedures regarding cohabitation agreements. If you have a question about whether a relationship contract is best for you, feel free to reach out to Herman & Company – Accounting & Consulting for more information.