TRUST & ESTATE PLANNING

Estate Planning for Unmarried Couples

06.16.2021 - Theresa A. McGinley, Director of Trust Administration and Trust Counsel

Over the past two decades, the number of unmarried cohabitating couples in the US has nearly tripled—from 6 million to 17 million. Demographic data from the US Census Bureau shows unmarried partners today are generally older, more highly educated, racially diverse, and earn more on average than their counterparts 20 years ago.1

Yet laws and regulations still tend to focus primarily on addressing and protecting the interests of married spouses. There simply aren’t a lot of legal guardrails in place to protect unmarried couples. This is particularly the case in estate planning—where financial complexity and challenges often abound.

  • Estate Tax: While married spouses aren’t generally required to pay estate taxes on any assets transferred to them from their deceased spouse’s estate, unmarried couples don’t receive the benefit of a marital deduction for estate tax purposes. Instead, estate taxes are due upon the first partner’s death (rather than being delayed until the second partner dies).
  • Gift Tax: Spouses can make unlimited gifts to each other during their lives—simplifying the process of equalizing estates for planning purposes. But gift tax rules apply to any asset transfers between unmarried couples. Gifts need to be kept below the annual exclusion amount ($15,000 in 2021) or they will reduce the individual’s lifetime gift and estate tax exemption.
  • Rights to Inheritance: Assuming there is no waiver of rights in a prenuptial or postnuptial agreement, state laws typically afford a surviving spouse certain rights if he or she is omitted from an estate plan. Unmarried partners, however, have no assumed rights to each other’s assets if someone else is named as the beneficiary of those assets.
  • Healthcare and financial decisions: Without documentation in place, it’s often easier for spouses to make healthcare decisions and financial decisions for an incapacitated spouse. Conversely, without a power of attorney or medical directive in place, an unmarried partner’s legal next of kin will likely be the person to make healthcare and financial decisions on their behalf if incapacitated
How to make sure your wishes are carried out

For unmarried couples, there’s no presumption that your estate will pass to your partner. In fact, if you don’t have a will or a trust when you die, the law generally favors your next of kin to receive your assets.

In addition, even if you have documents, not being married can raise a greater potential for litigation surrounding the distribution of your estate assets—especially if there is any animosity toward your partner or other conflict among family members. Therefore, it’s essential for unmarried partners to think through their estate plan on a regular basis and ensure their documents are clear and up to date.

Protect yourself and your partner with these essential estate planning documents

The following important legal documents identify one or more specific individuals and give them the authority to manage your affairs in an emergency:

  1. Advanced healthcare directiveOften referred to as a ‘health care proxy,’ this document designates individuals you entrust to make all medical decisions on your behalf if you are ever incapacitated. In this document, you can list specific health care wishes that your representative will implement during your incapacity.
  2. Durable power of attorneyThis document provides a trusted individual of your choosing with the authority to handle your financial affairs such as filing tax returns, accessing savings and paying bills if you’re incapacitated. If you and your partner have separate accounts, you’ll both need a power of attorney to access the other’s finances.
  3. Will: Establishes who inherits any assets in your individual name as well as who should serve as the guardian of any minor children upon your death.

Additionally, unmarried partners might want to consider transferring ownership of some or all their assets to individual revocable trusts. Each of you can name yourself as trustee and retain complete control over your affairs if you’re able. If, however, either of you become incapacitated, your successor trustee (the person you designate to oversee the trust if you are unable) would then be able to step in and automatically assume the management of your property.

Often, a revocable trust can serve as the document through which you articulate your wishes for how and to whom your wealth should be transferred at death. And if properly funded, it can help protect your assets from having to go through the probate process.

How you title your accounts determines how you and your partner inherit joint assets   

Unmarried couples should pay close attention to how they title any joint assets—either as ‘joint tenants with rights of survivorship’ or ‘tenants in common.’ Titling ultimately depends on whether each partner intends for the other to inherit his or her share of the asset after death.

Any assets held as joint tenants with rights of survivorship will automatically pass to the other partner. Assets held as tenants in common will pass according to the terms of your will. Tenants in common have no rights of survivorship. So, unless your will specifies that your ownership interest should transfer to the surviving owner (or you had previously placed your ownership interest into a revocable living trust), it becomes part of your probate estate.

For retirement accounts, beneficiary designations supersede your will—so make sure they’re current

Typically, who you list as the beneficiary of your retirement account will supersede the provisions of your will, so it’s important to make sure your named beneficiaries are correct. If you originally named a parent or sibling as your IRA or 401k beneficiary when you first opened the account but now want that asset to go to your partner, you’ll need to update your beneficiary. For most accounts it’s a quick and easy process which can be done online.

We recommend reviewing the beneficiaries listed on your accounts at least every couple of years or anytime an important life event (birth, death, marriage, divorce) occurs.

Clear communication can minimize future conflict

Communication about your wishes regarding healthcare decisions, the disposition of your assets and other financial matters is a critical part of the planning process. This involves communication between you and your partner and clear communication of your intentions and desires to your children or other family members—especially if you anticipate that what’s laid out in your estate planning documents may not align with your family’s expectations.

This can be particularly important in situations where potential beneficiaries may have competing interests or strong beliefs about who the rightful inheritors should be. While these may be difficult conversations, getting everything out in the open and your wishes clearly articulated and discussed can make things immensely easier on your partner.

For unmarried couples, estate planning can be a somewhat more complicated and nuanced undertaking. But with proper planning, both you and your partner can better ensure that both your individual and joint assets are ultimately distributed appropriately and efficiently according to your wishes.

 

1 U.S. Census Bureau, September 2019




This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

 

TRUST & ESTATE PLANNING

Should You Convert Your IRA to a Roth?

06.30.2021 Nicole Bennett Price, Senior Trust Officer

Should You Convert Your IRA to a Roth?NEXT POST

TRUST & ESTATE PLANNING

Is Something Missing from Your Estate Plan? How to Keep 'Digital Assets' in the Family

06.15.2021 Brian Conboy, Director of Estate Administration, Trust Counsel

Is Something Missing from Your Estate Plan? How to Keep 'Digital Assets' in the FamilyPREVIOUS POST