Without
Benefit of Marriage
Chances are quite good that you know couples who are living
together without the benefit of marriage. And the U.S. Census Bureau
confirms what you already may suspect: More people are cohabitating in
lieu of marriage these days. In fact, the number of unmarried couples
increased from 3.2 million to 5.5 million between 1990 and 2000. [Note:
The number of married couples was 54.5 million in 2000.]*
At present, the cohabitation of unmarried couples
is prohibited by the laws of seven states.** But even in the majority of
states, where cohabitation is not a violation of state law, unmarried
cohabitants face unique estate planning challenges regarding incapacity,
inheritance and estate taxation. In this article we will review these
challenges and some of the potential problems they can cause.
Incapacity Challenges
Unlike their married counterparts, unmarried cohabitants may not be able
to make fundamental health care and financial decisions for one another in
the event of incapacity. Absent prior legal planning or specific statutory
authority, they have no legal relationship that would give them
preferential legal standing in court over blood relatives. For example,
John and Jane are unmarried cohabitants when a severe automobile accident
leaves Jane in a coma. If John and Jane's parents square off in a court
of law seeking to be her guardian, Jane's parents will be given preference. In addition, if
Jane's parents do not like John, then they may legally bar him from
visiting her. Jane's parents would even have the authority to make
end-of-life decisions for Jane without John's input.
Similarly, John would not be able to manage
Jane's finances for her. Her parents likely would be appointed as the conservator
of her financial affairs by the court to pay her bills, make her
investment decisions and file her tax return.
Inheritance Challenges
Absent prior legal planning, state intestate succession laws (i.e. state
laws that determine the distribution of the assets of a decedent who dies
without an estate plan) may leave a surviving cohabitant out on the
street. For example, Jane and John reside in a home titled in Jane's
name alone. If Jane dies, then her parents may inherit the home and could
force John to leave as a trespasser. If Jane and John had children
together, then the children would inherit the home, not Jane's parents.
But what if the children are minors? As the surviving parent, John may be
responsible for maintaining the home for the children or selling it on
behalf of the children. When the children reach the age of majority (i.e.
age 18 in most states), John may be required to turn the home or the sale
proceeds over to the children with no further guidance or control.
Estate Tax Challenges
The unlimited marital deduction
is just that: a deduction for estate tax purposes, but only for transfers
between spouses. For example, Jane's IRA is worth $3 million and she has
designated John as her primary beneficiary. Upon her death, only $1.5
million of the IRA is sheltered from federal estate taxation. What about
the remaining $1.5 million? Jane's estate will pay more than $500,000 in
federal estate taxes. In addition, as a non-spouse, John will not be able
to defer withdrawals from the inherited IRA and must begin taking minimum
distributions. Contrast this result with Bob and Barbara who are married
and make their home in the next cul-de-sac. Assume that they present the
same facts.
Bob will inherit Barbara's full $3 million IRA
without any reduction for estate taxes upon transfer. This is because the
unlimited marital deduction allows spouses to give during life or leave
upon death an unlimited amount of assets without transfer taxation.
Moreover, Bob will be able to defer withdrawals on the IRA until he must
begin taking minimum distributions (i.e. generally speaking after he turns
age 70½). This permits additional time for the IRA to grow with
tax-deferred compounding and can result in a substantially larger nest egg
for retirement.
Summary
Unmarried cohabitants face unique estate planning challenges that can
negatively impact their relationships and assets. Appropriate planning in
advance can significantly minimize, if not eliminate, some of these
challenges. Many of the same estate planning tools and techniques employed
for married couples are useful for unmarried cohabitants.
* Source:
U.S. Census Bureau, Married-Couple and Unmarried-Partner Households: 2000
(Census 2000 Special Reports).
** Florida,
Michigan, Mississippi, North Carolina, North Dakota, Virginia and West
Virginia each have laws against cohabitation.
Post
Nuptial Protocol
Whether you have just tied the knot or just celebrated your Golden
Anniversary, it is never too soon (or never too late) to get your legal
house in order as a couple. In this article we will review several
fundamental legal tools and techniques that are must-haves for every
married couple.
Durable Powers of Attorney
Many married couples mistakenly believe that upon exchanging vows they are
granted blanket legal authority to carry out their mutual pledges to care
for one another in sickness and in health. Unfortunately, the law requires
further and more specific written legal authority. If one spouse is
incapacitated due to an illness or an injury, then this may become
painfully apparent.
Each individual American is responsible for
making his or her own personal, health care and financial decisions. That
responsibility does not end when incapacity strikes, but transfers to
someone else to act on behalf of the incapacitated person. Bottom line: It
will either be someone you appoint in advance, or someone appointed for
you by a judge who does not even know you. Hint: Hiring an attorney now to
prepare a durable power of attorney
to appoint your spouse as your agent may be much less expensive than going
through a court process later.
A durable power of attorney may be prepared to
cover both financial and health care matters in one document.
Alternatively, separate documents may be created with one for financial
and the other for health care. While you are at it, remember to prepare a living
will or health care treatment
directive to provide clear and
convincing proof of your end-of-life treatment wishes.
Wills &
Trusts
Once you have made arrangements to care for each other in the event of
incapacity, make arrangements for the transfer of your assets to one
another upon death. These transfers may be outright or in trust. And do
not forget to make arrangements for any eventual inheritance that may be
left to your children. Sometimes it is wise to protect an inheritance both
from and for your children. Testamentary
trusts, whether established under a last will and testament or under a
revocable living trust, can provide considerable inheritance protection
for your children from potential divorces, lawsuits and bankruptcies.
Estate Tax Savings
Properly drafted credit shelter
trusts can save more than $500,000 in unnecessary federal estate
taxes. The emphasis is on the word unnecessary.
Most of us would prefer that our families receive the benefit of our
life's work before the IRS.
Fortunately, the Internal Revenue Code authorizes each person to exempt up
to $1.5 million from federal estate taxes. However, this tax exemption is
not automatic. Many couples fail to protect the full $3 million allowed
because they overuse the unlimited
marital deduction by leaving everything outright to the surviving
spouse. Because careful planning is required to fully maximize federal
estate tax savings, consult qualified legal counsel for advice regarding
your options.
Copyright © 2005 Integrity Marketing Solutions. All rights
reserved. Some artwork provided under license agreement. This
publication does not constitute legal, accounting or other professional
advice. Although it is intended to be accurate, neither the publisher
nor any other party assumes liability for loss or damage due to reliance
on this material.
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