Broker Check

Estate Planning for Lifetime Partners

There have been some distinct changes in the American cultural and sociological landscape in recent years. Among them is the increasing number of unmarried couples living together. This trend has spawned some difficult and complex estate planning challenges for the individuals involved. This article provides a brief look at some of the more common estate planning issues affecting these individuals.

A Family Affair?

The rules governing the ultimate disposition of assets are generally unfavorable for individuals who are not legally married or biologically related. If an individual dies without a will (intestate), state intestacy law will determine the disposition of the decedent’s assets. Although these rules vary from state to state, they generally dispose of assets through bloodlines. Thus, as in the case of unmarried lifetime partners, assets may not be distributed according to the decedent’s wishes.

A last will and testament generally protects against intestacy and allows an individual to specify who will receive assets upon death. However, a will alone may not be immune to challenges made by the decedent’s family members who may have benefited from intestacy law if a will was not accepted by the local probate court. Therefore, it is essential that a will be drafted and executed when an individual is fully competent; it may also be important that the individual’s partner does not serve as a witness to the execution of the will. In addition, if certain family members or relatives are to be disinherited, the will should include a list and an explanation of why such decisions were made.

Although a will can express a lifetime partner’s wishes for the disposition of assets upon death, it does not provide any contingency arrangement for the management of assets or medical decisions if the individual is incapacitated. Therefore, a general durable power of attorney and a health care proxy can allow an individual to predetermine who will make such decisions. Due to varying state laws, it may be necessary to specify powers in detail. Even then, some third parties may not accept a durable power of attorney and may require the use of their own forms. In the case of a health care proxy, it is also possible for a physician to be hesitant to follow the decisions of an agent who is not legally related, especially if family members object. Therefore, it may be prudent for an individual to provide additional proof of his or her intentions (i.e., in the form of a written letter accompanying the health care proxy).

The addition of a revocable trust can further solidify an estate plan and help protect individuals from some of the planning problems related to wills and powers of attorney. The privacy associated with revocable trusts creates immediate appeal for lifetime partners, as does the ability to transfer assets. Such an instrument allows the grantor to make him or herself the trustee and elect his or her partner as the successor trustee. In the event of death, the successor trustee will have full control over assets held in trust. However, even with a revocable trust, it is prudent to provide a written confirmation of the grantor’s wishes to be made part of the trust document, so any potential family challenges may be avoided.

Transfer and Estate Taxes

Another challenge facing lifetime partners is the issue of transfer taxes. Lifetime partners do not qualify for the unlimited marital deduction between spouses. Thus, the value of the transferred assets that exceeds the annual gift tax exclusion will be subject to gift taxes. In this respect, the retitling of assets in joint tenancy with rights of survivorship may also create taxable situations.

For some individuals, estate taxation may be a concern due to having substantial assets. Usually, if one partner has more assets than the other, or is much older than his or her partner, the use of the annual gift tax exclusion ($14,000 for single filers in 2014) may assist in the gradual transfer of assets to a lifetime partner. However, the annual gift tax exclusion may not be a sufficient mechanism for the timely transfer of large assets. In this respect, planning for the use of the $5.34 million lifetime gift exemption (sometimes called the applicable exclusion amount) in 2014 may serve as an opportunity to gift substantial assets, such as real estate or investments, to a lifetime partner.

For planning purposes, the use of life insurance may ultimately serve as one of the more valuable tools for ensuring the financial future of a surviving lifetime partner beneficiary. A life insurance policy can help the insured partner circumnavigate potential future family contestation by possibly providing the surviving partner with a death benefit commensurate with the size of the insured’s estate. In addition, life insurance can also play an instrumental role in the funding of a future estate tax liability. Generally, the life insurance policy is purchased either by a lifetime partner or an irrevocable life insurance trust (ILIT) that is written for the benefit of a lifetime partner.

Final Thoughts

Estate planning for lifetime partners is filled with many complexities and challenges. The individuals involved need to be aware of the potential familial and tax issues they may face. This unique area of estate planning remains complex, and great care must be taken to help ensure that planning is in accord with a couple’s objectives. As is the case with all estate planning matters, it is important to consult with qualified tax, legal, and financial professionals before taking action.