Unmarried Couples–Estate Planning Challenges
In the modern era, people are getting married later in life. Living together is considered the next step before getting engaged for many couples. By cohabiting these couples are starting their lives together before tying the knot.
The financial side of starting a life together is a bit skewed, however. Because living together will lead to the accumulation of “stuff” before marriage, who owns what? More importantly to me, what happens if someone dies! Now I am not telling you to tie the knot merely because of financial concern but I am telling you, you should be aware of the pitfalls of not legally joining forces!
One of the hidden financial fears of couples, especially unwed parents, is estate planning. Federal and state laws are always behind on social changes.If you’re not cautious your loved ones might end up getting the short end of the stick: losing not only you but also their home.
So what’s the solution? More creative es
tate planning strategies will be the key to counteracting restrictions imposed by laws that favor legally married couples. This post offers an overview of some issues regarding the transfer of assets and other property that may potentially impact estate planning for unmarried couples.
Without a Will
Dying without a will is more common than you might expect, this is called “intestate”. If an individual dies intestate, i.e., without a will, state intestacy laws control the transfer of the decedent’s assets and property. Although these laws vary by state, a decedent’s(person who passed away) estate usually passes to a spouse or biological relatives. Therefore, a biological relative might inherit property and assets rather than the surviving partner—which may not follow the decedent’s wishes. In the olden days this would be a male relative, but now it’s determined by closeness of relationship in many states.
With a Will
A last will and testament generally protects against intestacy by allowing an individual to specify who will receive assets of an estate upon death. However, the decedent’s family or other relatives who may benefit from intestacy law may contest the legality of a will. To alleviate any potential controversy, a will should be drafted and executed when that individual is fully competent. This should include a written statement to substantiate its content, such as a decision to disinherit specific family members. Likewise, it is advisable that an impartial individual, e.g., someone other than the surviving partner or a family member, witness the execution of the will.
Plan Ahead with Advance Directives
The myth is that a will is sufficient to determine what happens with an individual’s estate but this is not always the case. A will can express an unmarried partner’s wishes for the disposition of assets upon death. But it is absent of instructions for the management of assets or medical and health decisions upon physical or mental incapacity. Such advance directives enable an individual to predetermine this authority by establishing a durable power of attorney and a health care proxy.
An unmarried partner should specify these instructions prudently to avoid contingencies in state laws or stipulations by third parties involved in disbursing estate assets. For example, investment companies and banks occasionally only accept a durable power of attorney if it is documented on specific company forms. Additionally, a physician will not follow the instructions of anyone other than a biological relative because of potential family objections.
I’ve seen this go wrong firsthand, and it creates an incredibly sad situation for all parties. Unfortunately, grief sometimes is misdirected against as blame towards the significant other of the deceased. As a precautionary measure, an individual may want to consider validating the intent of each advance directive with additional documentation, such as via a letter or an affidavit.
Trusts, Transfers, and Taxes
There’s one other option, all unwed couples should consider. A revocable trust (Revocable Trusts 101)can further enhance an estate plan and protect individuals from loopholes associated with wills and advance directives.This type of trust enables unmarried partners to transfer property and money between them. This trust allows one partner—the grantor or trustee—to elect the second partner as successor trustee and transfer control of his or her assets upon death. Written confirmation of the grantor’s/trustee’s intentions must be incorporated with the trust agreement to stop challenges made by opposing family members or relatives.
Transfer taxes are another problem facing unmarried partners because the unlimited marital deduction is only available for legally married couples. Although married individuals may make unlimited transfers of assets without incurring gift and estate taxes, unmarried partners are subject to a gift tax liability equal to the value of transferred assets net the annual gift tax exclusion (currently $14,000 per donor for 2016). Accordingly, re-titling assets in joint tenancy with rights of survivorship may also create a taxable situation.
Use of the applicable gift tax exclusion allows an unmarried individual to transfer assets to a partner, but only gradually. Therefore, this exclusion may be an ineffective planning tool for sizable estates or estates in which a considerable age gap exists between partners. Instead, unmarried individuals may want to consider the applicable exclusion amount (currently $5.43 million for 2015) when gifting substantial assets to a partner, such as real estate.
Teaming Up for Success
Although current legislation presents challenges for the estate planning of unmarried couples, preparing in advance will alleviate any potential opposition from family or other relatives, as well as reduce the estate gift tax burden. Just because you’re not ready to say “till death do us part,” doesn’t mean death might not intervene. While this may be frightening and unromantic, it’s a reality we all need to prepare for.
The best time to do planning is when things are going well. Everyone can think clearly and make sound decisions.
As always, it’s smart to consult your financial advisor,attorney and tax consultant before drawing up any legal documents. The more you know and the more questions you ask, the better off you’ll be.
