For unmarried couples, estate planning is indispensable
When married couples neglect to prepare an estate plan, state intestacy law provides one for them. It may not be the plan they would have designed, but at least it offers some measure of financial security for a surviving spouse. Unmarried couples, however, have no backup plan. Unless they carefully spell out how they wish to distribute their wealth, a surviving life partner may end up with nothing. This newsletter describes the estate planning advantages that married couples enjoy, and how unmarried couples can reduce their risks. It also describes one strategy in which unmarried couples have an edge: a grantor retained income trust (GRIT).
Marriage has its advantages
Because intestacy laws offer no protection to an unmarried person who wishes to provide for his or her partner, it’s essential for unmarried couples at minimum to employ a will or living trust. But marriage offers several additional estate planning advantages that unmarried couples must plan around, such as:
Marital deduction. Estate planning for married couples often centers on the marital deduction, which allows one spouse to make unlimited gifts to the other spouse free of gift or estate taxes. Unmarried couples don’t enjoy this advantage; thus, lifetime gift planning is critical so they can make the most of the lifetime gift tax exemption and the $14,000 per recipient annual gift tax exclusion.
Unmarried couples also should pay close attention to transactions that may inadvertently trigger gift taxes, such as payment of a partner’s living expenses.
Tenancy by the entirety. Married and unmarried couples alike often hold real estate or other assets as joint tenants with rights of survivorship. When one owner dies, title automatically passes to the survivor. In many non-community property states, a special form of joint ownership — tenancy by the entirety — is available only to married couples.
In addition to survivorship rights, tenancy by the entirety offers protection against claims by the spouse’s individual creditors. Unmarried couples who seek greater protection against creditor claims should consider placing assets in a trust.
Will contests. Married or not, anyone’s will is subject to challenge as improperly executed, or on grounds of lack of testamentary capacity, undue influence or fraud. For some unmarried couples, however, family members may be more likely to challenge a will simply because they disapprove of the relationship.
Here are steps unmarried couples should consider to reduce the risk of such challenges:
- Be sure that the will is carefully worded and properly executed.
- Use separate attorneys, which can help refute charges of undue influence or fraud.
- Include a “no contest” clause, which disinherits anyone who challenges the will and loses.
- Explain in the will the reasons for favoring one’s partner over other relatives.
- Use asset-transfer tools that are more difficult to challenge, such as joint ownership, beneficiary designations or trusts.
Health care decisions. A married person generally can make health care decisions on behalf of a spouse who has become incapacitated by illness or injury. Unmarried partners cannot do so without a written authorization, such as a medical directive or health care power of attorney. A durable power of attorney for property may also be desirable, allowing a partner to manage the other’s assets during a period of incapacity.
Turning the tables
By transferring assets to an irrevocable trust, a wealthy partner (grantor) can provide for the less wealthy partner in the form of distributions of trust income and/or principal as needed. The grantor can determine to whom the trust property will pass in the event of the death of the beneficiary or dissolution of the relationship.
Advanced Gifting Strategy: Grantor Retained Income Trust (GRIT)
Although married couples enjoy several estate planning advantages over their unmarried counterparts, there are a few situations in which unmarried couples have an edge. A GRIT gives the grantor (wealthy partner) the option of transferring assets to a trust while keeping the right to receive all of the net income from the trust for a fixed term of years. The remaining trust principal is either distributed to the remainder beneficiary (the less wealthy partner) or held in trust for the benefit of the less wealthy partner. By retaining income and certain other interests in the trust, however, the grantor minimizes its value for gift tax purposes.
So long as the grantor survives the trust term, a GRIT has the potential to transfer substantial amounts of wealth tax free, which led Congress in the late 1990s to eliminate these tax benefits for intra-family transfers. But unmarried couples and other “non-family” members can still take advantage of this powerful estate planning strategy.
Careful planning required
If you’re unmarried but wish to provide for a life partner, be sure to consult an estate planning advisor to discuss potential strategies. You can achieve many of the same estate planning objectives as married couples, but only with careful planning and thorough documentation.
If you would like further information or assistance with pursuing a guardianship over an adult or child, please contact Euless Estate Planning and Elder Law Attorney, Antoinette Bone, at (817) 462-5454 or email [email protected].
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.
Nothing in this message is intended to provide legal advice. This message is for educational purposes only.