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As the real-estate market continues to rebound, many are finding that it’s cheaper to buy a home than to rent one. But before you and your partner/spouse run out and start making offers, you should consider some basic protections.
While your home will certainly be a significant asset, your most important asset is your ability to earn income. That’s why protecting your income with disability insurance is essential. With this type of coverage, if you suffer a qualifying illness or injury and are unable to work, the policy will pay out regular income.
And in the event of an unexpected death, couples should also determine whether the surviving partner/spouse would be able to afford the mortgage payments. Although having two incomes may allow a couple to qualify for a larger mortgage, it can also put a surviving spouse/partner in jeopardy of losing the home.
With that in mind, one strategy that couples should consider is taking out life insurance on each other. Typically, a basic “term” policy (one without any cash value buildup) will be the most affordable, and you can correlate the length of the coverage with the number of years until your mortgage is paid off.
In addition to life insurance, be sure to have legal documentation to protect a surviving spouse/partner. Without this documentation, the deceased’s home could go to the next of kin, which is dictated by the state. The next of kin may be parents or other blood relatives. In this case, the surviving spouse/partner may or may not be able to continue living in the home.
Another important consideration is the manner in which you and your spouse/partner title your home, or the form of ownership you choose.
If you go with “tenancy in common,” each of you will own a set percentage interest. It doesn’t have to be 50/50, so you can choose 80/20 or any other percentage. With this type of ownership, each spouse/partner can choose how to transfer their portion of the asset.
If one spouse/partner purchases the home on their own, a “fee simple,” or “sole ownership,” structure would give that person complete control over what happens with the property. With this structure, the home may be subject to the probate process if the owner passes away, which puts it at risk of going to the next of kin.
With a “joint tenancy with right of survivorship” ownership structure, each spouse/partner owns the entire property. If one spouse/partner passes away, the survivor automatically inherits the deceased owner’s portion.
Although many couples purchase their first home together, in some cases one or both spouses/partners already own homes prior to the relationship. It’s also possible that each has been able to claim the homestead exemption.
To ensure that both spouses or partners are treated fairly in terms of homestead exemptions, it’s important to set up a legal agreement that covers three areas: waiver of homestead exemption rights, income from the sale of separate property, and what happens to property at divorce or death.
Finally, if your relationship doesn’t work out after you and your spouse/partner purchase a home together, how can you both move forward without having to give up too much?
In a “community property” state such as Texas, assets—including homes—purchased during a marriage are considered to belong to both spouses. This means each spouse is allowed to keep their portion of the property when the marriage ends.
Therefore, you should have an agreement drawn up that establishes who will stay in the home, as well as what percentage of the home’s value goes to the partner who moves out.
Although it can be somewhat uncomfortable to talk about—especially during the happy times—this type of agreement can give both of you the peace of mind that things will go amicably down the road.
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly. Yung can be reached at [email protected]