ESTATE PLANNING FOR LIFETIME PARTNERS

There have been some distinct changes in the American cultural and sociological landscape in recent decades. Among them is the increasing number of unmarried couples living together as lifetime partners. This trend has created estate planning challenges for the individuals involved.

Here are a few of the more common estate planning issues that may affect unmarried couples:

Family Ties

In general, the rules governing the ultimate disposition of assets are not as favorable for individuals who are not legally married as they are for those who are married. If an individual dies without a will (intestate), state intestacy law will determine the disposition of the decedent’s assets. Although these rules vary from state to state, they typically dispose of assets through bloodlines or marriage. So, in the case of unmarried lifetime partners, assets may not be distributed according to the decedent’s wishes.

A last will and testament is designed to protect against the undesirable effects of intestacy by allowing an individual to specify who is to receive probate assets upon death. However, a will may not be immune to challenges made by the decedent’s family members who may have benefited from intestacy law if a will was not accepted by the local probate court. Therefore, it is essential that a will be drafted and executed when an individual is fully competent; it may also be important that the individual’s partner does not serve as a witness to the execution of the will. In addition, if certain family members or relatives are to be disinherited, it may be advisable to include a list and an explanation of why such decisions were made in the will.

Although a will can express a lifetime partner’s wishes for the disposition of assets upon death, it does not provide any contingency arrangement for the management of assets or medical decisions if the individual becomes incapacitated due to an accident or illness. But, a general durable power of attorney and a health care proxy can allow an individual to determine who will make such decisions. Due to varying state laws, it may be necessary to specify powers in detail. Even then, some third parties may not accept a durable power of attorney and may require the use of their own forms. In the case of a health care proxy, a physician may be hesitant to follow the decisions of an agent who is not legally related, especially if family members object. Therefore, it may be prudent for an individual to provide additional proof of his or her intentions (i.e., in the form of a written letter accompanying the health care proxy).

The addition of a revocable trust can further solidify an estate plan and help protect individuals from some of the planning problems related to wills and powers of attorney. Privacy and the ability to transfer assets associated with revocable trusts can be attractive estate planning components for lifetime partners. A revocable trust allows the grantor to make him or herself the trustee and elect his or her partner as the successor trustee. In the event of death, the successor trustee has control over assets held in trust. However, even with a revocable trust, it may be advisable to provide a written confirmation of the grantor’s wishes to be made part of the trust document, so any potential challenges by family members may be avoided.

Federal Transfer and Estate Taxes

Another challenge facing unmarried couples is the possibility of Federal transfer taxes. Lifetime partners do not qualify for the unlimited marital deduction, which allows spouses to pass an unlimited amount of assets between them without incurring a tax. The value of the transferred assets that exceeds the gift tax exclusion and the lifetime gift exemption is therefore subject to gift taxes. Also, the retitling of assets in joint tenancy with rights of survivorship could create taxable situations.

For some individuals, estate taxation may be a concern due to having substantial assets. Usually, if one partner has more assets than the other, or is much older than his or her partner, the use of the annual gift tax exclusion ($14,000 for single filers in 2013) may assist in the gradual transfer of assets to a lifetime partner. However, the annual gift tax exclusion may not be a sufficient mechanism for the timely transfer of large assets. In this respect, planning for the use of the $5.25 million lifetime gift exemption (sometimes called the applicable exclusion amount) may serve as an opportunity to gift substantial assets, such as real estate or investments, to a lifetime partner.

For planning purposes, the use of life insurance may be a valuable tool for helping to protect the financial future of the surviving lifetime partner. Life insurance may help the insured partner circumvent any potential future family contestation by possibly providing the surviving partner with a death benefit equal to the size of the insured’s estate. In addition, life insurance can play an instrumental role in helping to pay for any estate tax liability. Normally, the life insurance policy is purchased by the lifetime partner or by an irrevocable life insurance trust (ILIT) that is for the benefit of the lifetime partner.

Final Thoughts

While estate planning for lifetime partners can be complicated, unmarried couples need to carefully consider the potential familial and tax issues. It is important to consult with qualified tax, legal, and financial professionals before taking action to help ensure that overall estate planning objectives will be met.