Which planning strategies should unmarried couples implement? – Insight on Estate Planning April/May 2012

Married couples have available to them greater (and more advantageous) estate planning options than unmarried couples. Yet unmarried couples face many of the same estate planning concerns as married couples. So they must engage in special planning to ensure that their decisions regarding asset distribution and health care are carried out per their wishes.

Employing workarounds

Because, depending on the state, state intestacy laws may 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.

In addition, federal law and the laws of many states don’t recognize same-sex marriage. Plus, even if a couple lives in a state that recognizes same-sex marriage, they may own property in a state that doesn’t recognize their marriage. Or, they may move to such a state. So married same-sex couples need to plan accordingly. That is, when considering the tax implications, they should plan as if they were unmarried — at least for federal purposes.

There are several estate planning challenges that unmarried couples must plan around, such as:

The 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 $13,000 per recipient annual gift tax exclusion.

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 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.

Unmarried couples should consider reducing the risk of such challenges by ensuring that their wills are carefully worded and properly executed. They also should consider using separate attorneys, which can help refute charges of undue influence or fraud.

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 living will 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.

Using a GRIT

There is one significant estate planning opportunity that gives unmarried couples an edge over married couples: a grantor retained income trust (GRIT). With a GRIT, one partner transfers assets to an irrevocable trust for the other’s benefit. By retaining income and certain other interests in the trust 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 1980s to eliminate these tax benefits for intrafamily transfers. But unmarried couples and other “nonfamily” members can still take advantage of this powerful estate planning strategy.

Achieving your estate planning goals

If you and your partner are in a long-term relationship but don’t plan to marry or your marriage isn’t legally recognized, there are specific strategies you can use to achieve your estate planning objectives. Your estate planning advisor can help you identify and implement those strategies. •