(MONEY Magazine) – The pizza is an hour late and Rhiannon Mercer, dressed in a gauzy, white Cinderella gown and sparkling tiara, is crying. The occasion is her third birthday, and from her standpoint the party isn't going well: She has an earache, she wants to open her presents, she wants to eat her cake now--but her parents are making her wait. They take turns trying to soothe their daughter while trying to keep the party going. One holds Rhiannon while the other helps the guests make magic wands. The pizza finally arrives and they switch roles; when it's time to light the candles, they swap places again. It's an ordinary slice of life, familiar to any couple who have ever tried to placate a fractious three-year-old. Except for one small detail: Rhiannon's parents are both women.

They may not be Ward and June Cleaver--okay, they're not remotely like Ward and June Cleaver--but in many respects, Jennifer Mercer, 33, and Jennifer Smoot-Mercer, 28, are a pretty typical American family. A couple for seven years, they discovered early in their relationship that they shared the same basic goals: to get married, have kids and live in a house full of pets. And that's what they've done. In 2000 they cemented their relationship with a civil union ceremony in Vermont (though their home state of Maryland doesn't recognize the union). Last year they moved into a four-bedroom, custom-built home outside of Baltimore, which they share with Rhiannon, two dogs, three cats and three goldfish. Family, friends and co-workers know about and accept the relationship. Says Mercer: "Neither of us has ever felt the need to hide."

But they do feel the need--an urgent need, in fact--to protect themselves from the many financial problems they could face because of their precarious status as domestic partners. Because however committed they may be as a couple, Mercer and Smoot-Mercer by law have no more rights or responsibilities in regard to each other's health and financial well-being than passers-by in the street. They can't transfer property to each other, as married people can, without paying gift tax on amounts over $12,000 (in 2006). One can't collect the other's Social Security benefits. And unless they have drafted ironclad legal documents, if one of them becomes ill, the other will not be allowed to make medical and financial decisions on her behalf.

It's those "what ifs" that haunt both women. What would happen if those legal t's weren't properly crossed and one of them became incapacitated? Doctors would bypass the wishes of her partner, turning instead to her parents or siblings for decisions on her money and medical care, including such emotional issues as whether to keep her on life support. What if one of them dies? The survivor might have to pay hefty estate taxes (married couples, by contrast, can leave any amount to each other tax-free) or, worse, lose everything that was once shared.

These concerns are likely familiar to many of the 5.5 million unmarried couples who currently live together in the U.S., a 58% increase since 1990. Nearly a fourth of these households are raising children. Most--4.9 million--are heterosexuals who choose not to marry for a variety of reasons. Some may not believe in the institution of marriage. Others do but want to test-drive the relationship first. Still others are trying to preserve Social Security and pension benefits they collect from a former spouse or protect themselves from their partner's debts. Regardless of motive, they have something crucial in common with Mercer and Smoot-Mercer: Since the law offers them little or no financial protection, they need to create those safeguards on their own.

The Jenns, as friends call them, met through mutual acquaintances in 1999. They became good friends, and when, a few months later, Smoot-Mercer's rent went up and her air conditioning down, she asked Mercer ("Little Jenn" to their friends) if she could move in. Only after they became roommates did they fall in love. Says Smoot-Mercer ("Big Jenn"), laughing: "All our friends knew before we did."

From the start, managing their daily finances was easy for them, with virtually no discussion about who should pick up the tab for what. "We'd just pay the bills from wherever we could pull the money," says Smoot-Mercer. Within a year they opened a joint checking account, never talking about what the move implied about their deepening commitment. A big disparity in their incomes has never been an issue either. Mercer, a senior account executive for Qwest, averages $90,000 a year, nearly twice what Smoot-Mercer earns as an executive assistant at Guardian Services Group, which moves and stores household items, mostly for the military. "My salary is steady, so we can count on it for daily things," says Smoot-Mercer. "Since Jenn works on commission, we use hers for the big stuff."

That's exactly how they were able to buy their first home. In 2001, after Mercer landed a big deal, the couple made a $15,000 down payment on a $180,000 townhouse in Owings Mills, Md. They put both names on the deed and mortgage, listing Mercer's first. That's because gains and losses, as well as property taxes and interest payments, are reported to the IRS under the Social Security number of the name that appears on the top line of the document. Since the two women can't file joint tax returns and Mercer earns more, she can use the deductions more effectively.

This commingling of funds and property feels like the most natural way to manage money to the two women, but it's not necessarily the wisest approach. No matter how committed they may feel now, unmarried couples do split more often than married couples--about 62% break up after 10 years vs. 33% of married people. While those married couples can count on the law to help guide a fair division of property should they divorce or die, domestic partners in most states can't. Unless they've drafted their own detailed agreements--and Mercer and Smoot-Mercer have not--they face the possibility of a lengthy court battle to figure out who's entitled to what.

For the Jenns, nothing has driven home the need to create their own legal protections more than the birth of Rhiannon. Mercer, through artificial insemination, is the girl's biological mother; Smoot-Mercer, through an adoption process that took eight months, is what's legally known as her co-parent. "If anything had happened to me in those eight months," Mercer says bleakly, "Rhiannon would not have gone to Jenn."

Instead, the courts most likely would have awarded custody to one of Mercer's relatives--her parents, for example, or possibly a sibling. While both women's families are involved in Rhiannon's life--Smoot-Mercer's father regularly contributes to a 529 college savings account for his grandchild, for instance--the Jenns can't really envision their daughter with any one of them. Mercer's family lives far away. Smoot-Mercer's parents are nearing retirement, and her sister, with two small children, has plenty to handle with her own family.

Their first move in trying to create a safety net was to draw up durable powers of attorney, giving each the legal authority to make financial and medical decisions for the other as needed. Financial advisers counsel married couples to do this as well. But if married people don't have these documents and something happens to one of them, the law presumes the incapacitated spouse would want the other to speak for him. The courts, however, don't automatically extend the same treatment to domestic partners, giving preference to the wishes of parents and siblings on questions about how property is divided or whether to extend life support.

Their next step turned out to be a misstep. Shortly after Rhiannon was born, Mercer signed up for domestic-partner benefits at MCI, where she was then working, certain they'd save money on health care. But the coverage ended up costing about $100 more a month than if she and Smoot-Mercer had gotten separate coverage. Why? Unlike spousal benefits, domestic-partner benefits count as part of the employee's income and are taxed. So Mercer owed the IRS more than usual, wiping out any financial advantage.

There was no step three. They haven't written their wills, for instance, nor have they chosen a guardian for Rhiannon. The sticking point: While they have opinions as to who should not get custody, they haven't decided who should. So they just skirt the issue for now and hope for the best.

The women have been distracted lately by other financial challenges. Last August they sold their Owings Mills townhouse for $300,000 and bought a bigger home in nearby Essex for $397,000. They went all out, furnishing a home that is twice the size of their old one and buying new curtains, a new couch, shelving and a Hello Kitty bedroom set for Rhiannon's bedroom. They put it all on plastic and ended the year with $13,400 in credit-card debt, more than doubling their outstanding balances in just 12 months.

One of the few advantages that domestic partners have over married couples is that their credit ratings remain separate. It doesn't help in Mercer and Smoot-Mercer's case because both have low scores, around 600. As a result, they're paying a higher rate on their mortgage (8.6%) than the going rate in their area (5.9%), which translates to nearly $8,000 more a year in mortgage payments than they would otherwise have to pay.

Neither Jennifer is too worried, though. While they're committed to paying down their debt, they've got other priorities on their minds right now. Chief among them: They're hoping Smoot-Mercer will get pregnant this year, giving Rhiannon a baby sister or brother.

The Advice

To help Mercer and Smoot-Mercer figure out their next best moves, MONEY consulted Jeffrey Berman, a financial planner with KBST&M, and his brother Craig Berman, an attorney with his own practice. Here are their suggestions.

• RECONSIDER HOW YOU OWN STUFF The Jenns have been careful to put both of their names on documents of ownership for their home, bank accounts and other assets. That's good, says Berman the lawyer. But they're listed as tenants in common rather than joint tenants with rights of survivorship. That's bad. With joint tenancy, if one partner dies, the property is transferred directly to the surviving owner, bypassing probate. With tenants in common, the transfer has to go through the courts. Worse, the partner's share does not automatically go to the survivor, unless she is named as beneficiary in a will. Without a will, the courts get to name the heir--typically a parent, sibling or other relative.

• ABOUT THOSE WILLS... These inheritance laws underscore how vital it is for Mercer and Smoot-Mercer to buckle down and write them. Even more important, no matter how tough the decision may be, they must choose a guardian for Rhiannon, especially if they're uncomfortable with the idea of either of their families gaining custody.

• CONSIDER A TRUST Lawyer Berman also urges the women to think about setting up a revocable living trust. By transferring ownership of their assets into such a trust, they would create a stronger legal safeguard to ensure that the surviving partner does indeed inherit that property and avoid probate. But they'd still be able to use the assets as if they were owned under their names. The lawyer also suggests the couple draw up a domestic-partnership agreement spelling out how they would divide their assets if they were to break up. But both summarily dismissed this suggestion. "You don't get what amounts to a prenup five years into your marriage," protests Mercer. "It's ridiculous."

• ATTACK DEBT Berman the planner recommends that the Jenns take advantage of a quick rise in the value of their new home to do a cashback refinancing, taking out enough money to pay off their credit cards in full. Three months after the Jenns paid $397,000 for their home, a comparable house across the street was selling for $489,000. The rate on the refinance should be much lower than their credit-card rates--and the interest payments will be tax deductible.

• BEEF UP SAVINGS Once the debt is paid off, planner Berman urges Smoot-Mercer to start funding her 401(k). He also suggests the women open their own 529 college account for Rhiannon, even if they can put in only $50 a month at first.

The Jenns are confident they can erase their debt and start building a secure future for Rhiannon (and her sibling). They just feel that they have to fight a little harder than some to get there.

The Bottom Line First priority for the Jenns: paying off the plastic. Only then can they start to save in earnest for college and retirement.

Building Protection from Scratch

With few laws on the books governing the finances of unmarried couples, it pays to create your own legal safeguards. Below are some suggestions.

PUT IT IN WRITING

A domestic-partnership agreement is like a prenup without the nup. In addition to spelling out who gets what if you break up, it should cover how you'll manage your finances while you're together. How will you split expenses? Who'll be responsible for which debts? Once you've agreed on the details, get the agreement signed and dated in front of a witness.

EMPOWER EACH OTHER

A durable power of attorney will give your partner the legal authority to make financial decisions on your behalf if you become incapacitated. A medical power of attorney will allow him or her to make health-care decisions on your behalf if you're too ill to speak for yourself. Without these documents, the decision-making power will likely go to your closest blood relative.

CREATE AN ESTATE PLAN

At the least, you need a will to spell out what you want your partner to inherit. Otherwise your parents or siblings will get first dibs. Also consider setting up a revocable living trust, which offers stronger protection against disputes than a will and avoids probate altogether. Although you transfer ownership of your assets to the trust, you still retain control over them.