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Planning for
Unmarried Couples
The 2000 census
counted nearly 5.5 million U.S. unmarried couples sharing
the same household, almost 8 times the number counted in
1970 and nearly 10% of the 60 million U.S. couple households
counted. Of these, many are widows and widowers who choose
not to marry for various reasons, and approximately 1% of
these unmarried couples are same-gender partners.
Because U.S. and most state laws afford special benefits for
those married to a person of the opposite gender, many
common planning techniques that take advantage of those
benefits simply do not work for unmarried or same-gender
couples. As a consequence, the planning needs of the
unmarried or same-gender couple is often far greater than
that for a married opposite-gender couple with equivalent
assets. This issue of The Wealth Counselor examines many of
the unique planning needs of unmarried and same-gender
couples and the opportunities that exist for all members of
the planning team in working with these clients.
Unmarried and Same-Gender Couples
Some couples choose not to marry, for example, because of
the risk to one partner's assets if the other needs
long-term care, the loss of alimony, or the loss of Military
retiree health and other benefits.
Other couples cannot legally marry under the law of their
domicile, particularly same-gender couples. While some
states (e.g., Massachusetts) and foreign countries (e.g.,
Canada) recognize and legalize such same-gender unions, U.S.
federal law and the laws of many states do not recognize
these unions. The federal Defense of Marriage Act ("DOMA"),
signed into law in 1996, provides that, for purposes of
federal law, marriage is "a legal union between one man and
one woman as husband-and-wife" and a "spouse" is defined as
referring "only to a person of the opposite sex who is a
husband or wife."
State and Federal Law Considerations
Many state and federal laws clearly favor and provide
special priority or benefit to the opposite-gender spouse
and blood relatives. Those who are outside those categories
have neither rights nor recognition under these laws.
Therefore, unmarried and same-gender couples are very
unlikely to accomplish their planning goals without
knowledgeable professional assistance and counseling.
Examples of where state law generally will produce an
undesired result in the absence of planning are:
- Who will be able to make health-care decisions in
the event of incapacity?
- Who will be chosen as a partner's guardian if one
should be needed?
- Who may take custody of the deceased partner's body?
- Who may direct the burial or cremation and
disposition of remains?
- Who will receive the deceased partner's assets?
- Who will get what assets in the event of the
dissolution of the partnership?
In addition,
unmarried couples without children may have different
contingent beneficiaries, which also may necessitate more
complex planning.
Planning Tip: Proactive planning is essential
to accomplish even the most basic goals of unmarried and
same-gender couples because the law's default provisions
generally do not recognize their relationship.
Joint Tenants with Right of Survivorship
Many unmarried and same-gender couples want to leave
everything to the surviving partner. Without competent
advice, many opt for the apparent simplicity of titling
assets in Joint Tenancy with Right of Survivorship (JTROS)
to accomplish their objective. JTROS also provides the
satisfaction of being similar to ownership by a heterosexual
married couple. But, for the unmarried and same-gender
couple, titling assets in JTROS has significant pitfalls,
risks, and disadvantages.
First, there are the estate tax problems. The law treats a
heterosexual married couple as owning JTROS assets 50/50 for
purposes of estate taxes, such that only 50% of the value of
a JTROS asset is included in the estate of the first spouse
to die. In stark contrast, when an unmarried couple own
property as JTROS, the law puts 100% of each JTROS asset's
value in the estate of the first to die; the survivor has
the burden of proving his or her contribution to the equity
of the asset. Not only that, unless the partners' deaths are
within a few years of each other, all of the property will
be subject to estate tax, and at full value, in both
partners' estates!
Gift taxes, too, may present a problem. Depending upon the
type of property and the applicable state law, changing how
property is held may be deemed to be a gift subject to
federal and state gift taxes.
Planning Tip: Unmarried and same-gender couples
can create significant federal and state estate and gift
tax liability inadvertently by adding a partner to an
asset as joint tenant with rights of survivorship.
No Marital Deduction or Marital Gift Tax Exemption
Using the federal marital estate tax deduction, a married
person can transfer an unlimited amount of property to his
or her spouse upon death. This is the common "A/B" planning
used to delay imposition of federal estate tax until the
death of the surviving spouse. Such planning is not
available for unmarried couples because there is no spouse.
With a same-gender couple, DOMA bars even those who are
legally married from using this planning technique.
Therefore, unmarried and same-gender couples must plan to
avoid imposition of estate tax upon the death of the first
partner to die.
Likewise there is also no unlimited gift tax exemption for
lifetime transfers to anyone but an opposite-gender spouse.
Unmarried and same-gender couples cannot transfer assets
between themselves to equalize their estates like
heterosexual married couples can, because transfers in
excess of the annual gift exemption ($12,000 per person per
year in 2008) are subject to federal gift tax and must be
reported to the IRS. Gift splitting is also unavailable to
unmarried and same-gender couples.
Retirement Benefits & Social Security
A surviving partner has no survivor benefit under the
deceased unmarried or same-gender partner's social security.
Further, most private retirement plans will not allow a
joint retirement annuity with anyone other than an
opposite-gender spouse and many will only allow participants
to name an opposite-gender spouse or blood relative as a
beneficiary. And only surviving spouses can "roll over" an
IRA or qualified plan to their own non-inherited IRA.
Planning Tip: It is critical that the advisor
review the retirement plans of each partner's employer
to determine the options available to the partners. This
information is necessary to ensure an accurate
determination as to not only the planning options
available, but also the capital needs of the survivor.
Life insurance can replace retirement benefits and
social security that are unavailable to a surviving
unmarried or same-gender partner.
Generation-Skipping Transfer (GST) Tax Issues
The GST tax is an onerous tax that applies at the maximum
federal estate tax rate (currently 45%). If one partner is
more than 37 1/2 years younger than the other, that younger
partner is a GST "skip" person relative to the older. That
means that transfers from the older to the younger partner
during lifetime and at death in excess of the annual
exclusion will result in the automatic allocation of GST
exemption unless an appropriate option exercise is made on
the older partner's gift or estate tax return. Transfers in
excess of the exemption and exclusion will be subject to the
GST tax. In addition, one partner's children who are more
than 37 1/2 years younger than the other partner are GST
"skip" persons for gifts and bequests from that other
partner.
Other Considerations
Unlike an opposite-gender surviving spouse, a surviving
unmarried or same-gender partner cannot disclaim assets into
a trust for his or her benefit. Therefore, an unmarried or
same-gender couple must be very careful in planning for the
possible use of disclaimers. Also, unlike in divorce, there
is no tax-free transfer of asset interests upon the
dissolution of the relationship between unmarried and
same-gender couples.
Planning Tip: Disability insurance is often a
critical component of any plan for unmarried or
same-gender partners because of the statutory bias
against those who are not opposite-gender spouses.
How to Plan for Unmarried Couples
Revocable Trusts
Revocable trusts are an excellent tool when planning for
unmarried and same-gender couples because these trusts can
solve many of the planning dilemmas discussed above. If the
trust maker funds his or her assets to the trust during
lifetime, those assets are available to care for the trust
maker and/or the partner, as the trust specifies, upon the
trust maker's disability during his or her lifetime.
If drafted correctly using a support or "HEMS" (Health,
Education, Maintenance and Support) provision, upon the
trust maker's death the surviving partner can access the
trust's assets without subjecting them to additional estate
tax at his or her death. Also, the trust maker can determine
the ultimate distribution of the trust assets following the
death of the surviving partner and even revoke the trust if
there is a change in planning goals and objectives. A
revocable trust also provides the added benefit of privacy
as to the trust maker's beneficiaries.
Living trusts also avoid automatic court involvement during
disability and death. This is important because, as
discussed above, there are statutory preferences in any
court proceeding for blood relatives, whether or not they
share the unmarried couple's views of their relationship.
Moreover, a judge may be biased against unmarried and
same-gender couples. A will-based plan opens the couple to
court involvement in their affairs, for instance to appoint
a guardian or conservator for an incapacitated partner, and
typically it is the non-incapacitated partner who has to
start the court proceedings. With living trusts, on the
other hand, the non-incapacitated partner can be the
successor trustee, and the burden will then be on the
incapacitated partner's family to bear the costs and
expenses if they want to challenge the incapacitated
partner's planning and trust documents.
Planning Tip: Properly drafted revocable trusts
can ensure that unmarried and same-gender partners'
goals and objectives are met, both in case of disability
and after death. With revocable trusts, the burden is on
disgruntled blood relatives of the trust maker to sue to
set aside the trust, which is usually a difficult and
expensive undertaking.
Planning Tip: A will-based plan virtually
guarantees the involvement of the courts, where personal
prejudices and statutory preferences may disadvantage
the surviving or non-incapacitated partner vis-a-vis the
disabled/deceased partner's blood relatives. Often, a
will-based plan will require that the surviving or
non-incapacitated partner be the one who begins the
court case.
Life Insurance
Life insurance is a particularly useful and often critically
important planning tool for unmarried and same-gender
couples. In addition to providing income replacement and
even wealth creation for the surviving partner, life
insurance can provide the liquidity necessary to pay estate
taxes, including those that result from there being no
marital deduction for such a couple.
If a partner has children, life insurance also can provide
funds for distributions to them without diminishing the
desired asset transfer to the surviving partner, such as the
deceased partner's interest in the couple's home. Life
insurance can also be used to make sure that the survivor
has the cash needed to pay off any liens against those
assets.
Planning Tip: State law determines whether one
unmarried or same-gender partner has an insurable
interest in the other, but most jurisdictions now
recognize an insurable interest with these types of
relationships.
Planning Tip: Life insurance, particularly if
owned by an Irrevocable Trust, can help preserve
confidentiality by giving blood relatives neither the
right nor the opportunity to learn of the existence of
the insurance or the amount of policy proceeds received.
Conclusion
Due to the numerous statutory provisions favoring
opposite-gender spouses and blood relatives, the planning
needs of unmarried and same-gender couples are often far
greater than the needs of similar married opposite-gender
couples. By working together, the planning team can ensure
that unmarried and same-gender couples achieve their unique
goals and objectives, both during lifetime and after death.
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