Gregory S. DuPont
Estate Planning Challenges for Unmarried Couples
Although current legislation may challenge the estate planning practices of unmarried couples, preparing in advance may help alleviate any potential opposition from family or other relatives, as well as reduce the estate and gift tax burden. A financial service professional can provide knowledge and assistance in drafting an estate plan that is legally binding, and that will help achieve a couple’s goals and objectives.
For unmarried partners, more creative estate planning strategies will be the key to counteracting restrictions imposed by laws that favor legally married couples.
This article offers an overview of some issues regarding the disposition of assets and other property that may potentially impact estate planning for unmarried couples.
With or Without a Will
If an individual dies intestate, i.e., without a will, state intestacy laws dictate the disposition of the decedent’s assets and property. Although these laws vary by state, a decedent’s estate usually passes to a spouse or biological relatives. Therefore, property of an unmarried partner may fall to individuals other than the surviving partner—which may not follow the decedent’s wishes.
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, and 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
A Willl 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, respectively. 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 lending institutions may only accept a durable power of attorney if it is documented on specific company forms. Additionally, a physician may be hesitant to follow the instructions of anyone other than a biological relative because of potential family objections. 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 TaxesA revocable trust can further enhance an estate plan and protect individuals from loopholes associated with wills and advance directives by enabling unmarried partners to transfer assets between them. This instrument allows one partner—the grantor or trustee—to elect the second partner as successor trustee and transfer control of trust assets upon death. Written confirmation of the grantor’s/trustee’s intentions should be incorporated with the trust agreement to help diffuse any potential 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 2015). 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.