Estate Planning for the Unmarried Couple

Unmarried couples have many options available for their use that an astute estate planner may leverage for their benefit. With goals established, an astute estate planner can leverage many of the tools used to benefit married couples in planning for unmarried couples. Such tools include: Powers of Attorney, Wills, Revocable Living Trusts, Joint Ownership of Property, Life Insurance, Irrevocable Life Insurance Trusts, Sales of Assets and other estate freeze techniques, Grantor Retained Annuity or Income Trusts, Charitable Income or Remainder Trusts, Business Entities (LLCs and FLPs) and general planning under the Tax Code.

Marriage confers certain health care and retirement benefits. Additionally, there are a myriad of tax benefits to which spouses are entitled. An astute estate planner may be able to replicate many of these benefits for the partner of an unmarried individual. What follows is a very general checklist of items to consider when planning for the unmarried adult:

Goal Setting: Many unmarried individuals and couples do not have children. This means that there may be no obvious heirs for estate planning purposes. Therefore, wishes for the distribution of assets at death may require more reflection than with families with children. An estate plan can not be put into place if it is not known what the plan is intended to do.

Financial Durable Power of Attorney for Asset Management: A Financial Power of Attorney allows a designated agent to manage assets owned by the maker of the Power of Attorney should that maker become disabled. It is especially important that this document be drafted as a Durable Power so that it will remain in effect upon the disability of the maker.

Medical Durable Power of Attorney for Health Care: Like a Financial Durable Power of Attorney, a Medical Durable Power of Attorney allows an individual to name an agent to make decisions should they become disabled. However, as the name implies, a Medical Durable Power of Attorney allows the agent to speak for the maker of the Power with respect to medical decisions. Without a Power of Attorney, a close relative will be the most likely candidate to make medical decisions for a disabled individual. A partner of a disabled individual usually has no initial legal standing to be involved in the medical decision making process without a Power of Attorney being in effect.

Living Will (Declaration as to Medical and Surgical Treatment / Directives to Physicians): A Living Will is an important part of an estate plan for everyone. When a catastrophic disability affects an individual, if the agent under the Durable Medical Power of Attorney is unavailable to act (or if no Medical Durable Power of Attorney is in place), a Living Will speaks for the disabled individual with respect to that person’s wishes for the provision of or restriction of life sustaining procedures.

Wills: Unmarried couples should always have valid and up-to-date Wills (irrespective of the financial situation of the couple). A partner of a decedent will receive nothing through the laws of intestacy. Additionally, if an individual wants his or her partner to be the Personal Representative of the estate (known also as an Executor in many states), the individual needs to establish this wish in the Will. Further, if it is intended for a partner to be included in any burial or funeral ceremonies, instructions to this effect should be drafted as part of a comprehensive estate plan. Powers of Attorney expire at death. Therefore, a Power of Attorney will be of no use for funeral and memorial plans.

Will Contests: Provisions in an estate plan for the partner of an unmarried individual may be more likely to be challenged by family members. Therefore, the execution of the estate planning documents for unmarried couples requires special consideration. Many planners suggest taking special measures such as excluding the partner from the execution process (to avoid future claims of duress of undue influence). Additionally, it is often worth discussing whether each partner has someone outside the relationship who could act as a Personal Representative (to avoid future claims of conflict of interest if the partner is both the Personal Representative and a beneficiary under a Will or other testamentary document).

Joint Ownership of Property: Property owned in Joint Ownership becomes the property of the surviving joint owner upon the death of the other joint owner. This transfer of ownership happens by operation of law and is very attractive as a planning matter for unmarried couples.

Revocable Living Trusts: Because Revocable Living Trusts are such flexible planning tools, these documents should always be discussed for use with unmarried couples. These documents are not filed at death like Wills and therefore enables the couple to keep their estate planning private. Many planners are of the opinion that Revocable Living Trusts, especially those that have been in effect for some period of time during the life of the deceased, are more difficult for family members to challenge than Wills.

Life Insurance: Life Insurance payable to a partner is an attractive way to leave a gift to a partner in an unmarried relationship. Depending on the value of the potential estate and the value of the insurance, an Irrevocable Life Insurance Trust should be considered.

Potential Tax Benefits: Although married couples enjoy many benefits under the tax code, unmarried couples do have some benefits that should be discussed, such as: the reduced need to plan for the use of both lifetime estate and gift tax credits; with respect to trusts, the Qualified Terminable Interest Property rules do not apply; partners are not considered members of the family for purposes of discounting techniques; and incidents of ownership in assets are not attributed to a partner as they may be to a spouse.

Annual Gift Tax Exclusion: Spouses may move assets between them during life or after death without incurring any gift or estate tax due to the unlimited marital deduction. However, no such rule is available for unmarried couples. Therefore, use of the annual gift tax exclusion, available to all individuals, requires consideration. Currently, any individual can gift assets worth up to $11,000 to any other individual without gift tax consequences. This exclusion can be used to replicate the benefits of the marital deduction, but only for amounts up to the exclusion amount (which is indexed for inflation and, as mentioned, is $11,000 in 2005). If one partner has assets worth more than the lifetime estate and gift tax exemption and the other partner does not have this value of assets, the annual gift tax exclusion may be used to equalize the amount each partner will have in their taxable estate.

Medical and Educational Expense Deductions: Another way to equalize the taxable estates of unmarried couples is for the partner with a greater amount of assets to pay any medical and educational expenses of the other that would qualify for the medical and educational expense deduction.

Moving Assets to Younger Generations at Death: If there are individuals that the unmarried couple wishes to benefit as part of a testamentary plan and if these individuals are younger than the unmarried couple, it may make sense to move assets directly to them at death instead of leaving all the assets of one partner to the other. If this transfer makes economic sense, it will avoid the inclusion of the value of the assets in both partners’ taxable estates.

Outright Sales: In some situations, a sale of an asset expected to appreciate will enable one partner to freeze the includible amount in that partner’s estate. This technique works well when the partners are of significantly different ages and the older partner sells a business interest (or other asset expected to appreciate greatly between the time of sale and death) to the younger partner. In effect, the future appreciation of the asset is moved out of the older partner’s taxable estate. The income tax effects of such a transaction must be closely analyzed in this situation. For instance, if there is a great amount of gain built into the asset to be sold (for instance, the older partner created the business from the ground up and has a very low basis in it), the planned sale may be for an installment note instead of cash. Alternatively, a devise called a Defective Grantor Trust could be used to eliminate the income tax implications while still enabling the asset to be removed from the older partner’s taxable estate. This type of planning involves drafting an irrevocable trust that enables the older partner to be considered the owner for income tax purposes, but not for estate tax purposes. Therefore, for income tax purposes, the sale is not recognized as a third-party transaction and built in gains on the asset are not triggered.

Irrevocable, Wealth Transfer Trusts: For unmarried couples with large estates, using irrevocable trusts such as a Grantor Retained Annuity Trust or a Grantor Retained Income Trust to move wealth to individuals within or outside the relationship is a great way to move wealth out of a potentially taxable estate at a substantial discount. These strategies have inherent risk, such as the risk that the grantor will not outlive the term of the trust, in which case the value of the assets will be included in the taxable estate at death. Qualified Personal Residence Trusts can also be used with similar benefits.

Charitable Trusts: Two forms of charitable trusts which are often used in estate planning are the Charitable Remainder Trust and the Charitable Lead Trust. The Charitable Remainder Trust enables an individual to move assets to charity at death while retaining an income stream for life from those assets. A primary benefit of the Charitable Remainder Trust can be seen in its ability to dispose of highly appreciated assets while smoothing out the inclusion of the capital gain to the individual over many years. The individual contributing assets to this trust will receive an income tax deduction in the year of the contribution for the calculated value of the assets passing to charity at death. A Charitable Lead Trust may be used as a device to replicate the benefits of the unlimited marital deduction (which does not apply to unmarried couples). The individual establishing the trust would lose the income from the assets for a period of years (or for life) but the partner could then take the assets after the term has expired with a relatively low tax cost.

Wealth Transfer Using Business Entities: Family Limited Liability Companies and Family Limited Partnerships may be used to move wealth to partners at a significant discount (sometimes up to a 50% discount of value where interests of the entity are gifted to a partner). This area of planning is one that works especially well for partners that have a need to establish a business entity to manage their assets and risk.

Self Canceling Installment Notes (or SCINs): A SCIN is a note (a debt instrument) that is cancelled by the terms of such note at the death of the maker. When the note is canceled, the remaining note balance is also canceled. This planning technique may make sense for a partner with a large potentially taxable estate and a short life expectancy. The note must reflect the risk premium of cancellation for it to be recognized by the Internal Revenue Service.

A myriad of options are available for estate planning for unmarried couples. These options do not fully replicate the legal benefits of marriage, but, with astute planning, unmarried couples have viable options for benefiting each other during life or at death.