Loving Without a License By Peggy R. Hoyt and Candace M. Pollock

Loving Without a License
©
2007 P.R. Hoyt and C.M. Pollock
By Peggy R. Hoyt and Candace M. Pollock
This article addresses areas of estate planning
vulnerability faced by committed, unmarried couples
who either cannot marry or choose not to, whether
they are of the same or opposite gender. It also
addresses risks faced by married same-gender couples.
The authors’ intent is to show how standard estate
planning tools can have undesirable outcomes or
provide useful solutions for unmarried couples and
married same-gender couples.
The Times, They Are
A-Changin’
The last four decades have seen tremendous changes in how we define families.
Today, the so-called traditional family
consisting of husband, wife and children
Peggy R. Hoyt, Esq., and Candace M. Pollock,
Esq., are estate planning attorneys and authors of
LOVING WITHOUT A LICENSE—AN ESTATE PLANNING
SURVIVAL GUIDE FOR UNMARRIED COUPLES AND
SAME SEX PARTNERS (www.LovingWithoutALicense.com). Ms. Hoyt and Ms. Pollock are national
and local speakers on planning for unmarried
partners and other estate planning topics. Ms.
Hoyt practices in the Central Florida area and Ms.
Pollock has a practice in Cleveland, Ohio. You
may reach Ms. Hoyt at [email protected] and
Ms. Pollock at [email protected].
©2007
of that union seems to be in the minority while families consisting of single
parents, or unmarried but committed
opposite or same-gender partners, with
or without children, are in the majority.
Some of these new family configurations
are so prevalent that we refer to them
by acronyms such as “DINK” (dual income-no kids) or “POSSLQ” (partner of
opposite sex, same living quarters).
The past five-plus years have also been
witness to turmoil regarding the status of
unmarried but committed couples of the
opposite or same gender. A number of
corporations now extend company benefits to an employees’ unmarried partner
and laws in some jurisdictions authorize
same-sex marriage or civil unions, pro-
CCH. All Rights Reserved
23
Editor's Choice
viding some legal standing and rights where none
previously existed for same-gender couples.
At the same time, federal and some state legislation has
been passed to define “marriage” and limit the definition
of “spouse” to a person of the opposite gender who is a
husband or wife.1 These opposing forces underscore the
fact that until the status of unmarried couples and married same-gender couples is settled, significant gaps will
remain regarding the legal protections and opportunities
available to these committed partners.
Unmarried couples are particularly vulnerable
in the area of estate planning, a subject transecting
numerous areas of the law. Some particular areas of
concern include the following:
State default laws that determine preference for
fiduciary or surrogacy roles such as personal
representatives/executors and health care agents
favor blood relatives, not partners. This can leave
unmarried individuals vulnerable during periods
of disability or after death if the partners have not
executed written legal directives to authorize the
partners to act on behalf of each other.
The surviving partner’s income can be inadequate to
cover household expenses when a partner dies due
to limited survivor benefits for unmarried couples.
The lack of the unlimited marital deduction can
affect
transfer of assets during one’s lifetime
aff
fect the
t ttr
and
after
death. Consequently,
unmarried partan
d af
fter d
dea
onseq ently, u
ners
have fewer
assets available to the
ne
rs may
m h
hav
we net as
surviving
partner aas a result
sur
rviving p
pa
par
su of the double bite
from
estate
taxes.
fro
om gift
g aand
nd
d ees
te taxes
Finally,
Fin
nally
y, many
ma couples fail to consider the need to
protect assets in the event that
hat one partner requires
long-term care. Medicaid
cai laws
aws do not
no offer unmarried couples as many
optionss to keep
y op
ee and transfer
assets as are available to married couples.2
The need to create a good sound foundation for
planning is certainly not unique to unmarried partners. However, failure to take proper planning steps
to protect unmarried clients can expose them to
unnecessary emotional and financial hardship and
prevent them from taking advantage of opportunities
to maximize their assets and protections. The need
to create special directives for the unique needs of
unmarried partners requires the special attention of
advisors in the estate planning community.
Defining the Family
It is important to emphasize that this discussion
addresses both unmarried opposite-gender couples
24
©2007
and same-gender couples, and, to a degree, married same-gender couples. There are a number
of terms or phrases used to describe unmarried,
committed couples. We have coined the term, “life
alliance partner,” or life partner, as a neutral label
to describe committed unmarried couples of the
same or opposite-gender to make sure a distinction
exists from commonly used labels with meanings
we do not intend.
Periodically, we will need to make distinctions between opposite-gender and same-gender couples, for
a couple of reasons. In talking with a variety of advisors and clients, we often experience two things:
1. When the term “domestic partner” is used,
many opposite-gender, unmarried partners tend
to think it only refers to same-gender couples
and fail to appreciate that they need to pay attention to the discussion for themselves.
2. While same-gender couples and opposite-gender couples have many needs and concerns in
common, same-gender partners obviously have
needs and concerns unique to them. Therefore,
it is important to be able to distinguish between
these groups so we can point out where samegender couples need to give extra attention to
maximize their protections.
The State of the Union
According to the 2000 census data, there were 4.86
million unmarried couples in the United States, an
increase from the 1990 census data.3 There was a
nine-fold increase in opposite-gender couples since
1970.4 Of the unmarried couples, approximately
600,000 were same-gender couples with no prior
data for comparative purposes.5 During the same time
period, the number of married couples decreased by
52 percent.6
There has been a 73-percent increase in unmarried couples over age 65 with anecdotal information
showing an increase in professionals in both groups
as the social stigma associated with unmarried cohabitation has relaxed.7 Statisticians predict that the
aging Baby Boomer generation will cause this percentage to increase as they turn 65.8 Many of these
couples are widows and widowers or are divorced
and choose to cohabitate rather than remarry to avoid
losing the former spouse’s pension, Social Security
or medical insurance.
Despite the growing number of unmarried couples
and other nontraditional families, most private com-
CCH. All Rights Reserved
August–September 2007
panies, courts and legislatures have been reluctant
to recognize cohabiting unmarried adults as a family unit. And, just because some states recognize
same-gender marriage, civil unions and domestic
partnerships, such legal relationships do not give
these couples the same rights and responsibilities as
married opposite-gender persons.
same-gender marriages validly performed in other
states.10 Therefore, a same-gender couple’s marriage
isn’t freely “portable” from state to state.
Additionally, there can be unintended consequences
of DOMA-like laws that can inadvertently place an
unmarried couple in jeopardy. Ohio, for instance,
passed a constitutional amendment that prohibits state
or political subdivisions from creating or recognizing
a legal status for relations of unmarried couples that
The Automatic Wedding Gift
approximates marriage.11 Ohio’s domestic violence
statute covers assaults against “a person living as a
A General Accounting Office memo regarding the
spouse”12 and thus, it has been argued, cannot be
Defense of Marriage Act of 1996 (DOMA) estimated
that approximately 1,000 potential benefits are auenforced against an unmarried partner.
tomatically available to a couple when they marry.9
The bottom line is that unmarried, committed couples
must take active steps to
Most of these benefits are
create protections and optied to survivor rights, such
The bottom line is that unmarried, portunities the law does not
as assumption of penprovide for them. However,
sions and Social Security
committed couples must take
without professional guidbenefits, and special tax
active steps to create protections
ance they are unlikely to
elections and deferrals that
and opportunities the law does not know when or why they
maximize assets available
are vulnerable and what
to the surviving spouse.
provide for them.
remedies to use.
The benefits include the
following:
Property rights such as dower and curtesy, tenLimited Experience,
ancy by the entirety property ownership
Understanding and Skill Within
Inheritance rights like the spousal elective share
to prevent intentional or unintentional disinherithe Advisor Community
tance of a spouse
Preferences under surrogacy and probate laws
Unfortunately, the professional estate planning comRights to claim loss of consortium or wrongful
munity will find little in the way of formal training
death
or material dealing with the unique needs of unmarSpousal privileges regarding communication and
rieds. Most estate and financial
planning
reference
a
n
testimony
books do not hav
have
section
specifi
ve a se
on sp
ecificcally
a y aaddressing
ddre
essing
Adoptions
the needs of “unmarried
partners.”
u ma r
par
ners ” Instead,
nstead tthe
he inn
Common law marriage (still available in some
dex will refer readers to the section for planning for
states)
“single” clients.
Potential property settlement and support payAlthough unmarrieds are technically single in the
ments via divorce
eyes of the law, “single” does not represent their
Currently, no laws automatically permit unmarried
unique relationship or planning needs. Planning as if
partners to achieve comparable protections and benunmarrieds were composed of two single persons will
efits or standing in the eyes of the law. In fact, as long as
not address areas where they are specifically vulnerDOMA and similar state laws exist, even same-gender
able. Planning as if they were married is not possible
partners who can marry under state law, for instance,
due to techniques available only to married people.
cannot count on having all of the benefits available to
Planning for unmarrieds in committed relationships
married, opposite-gender partners. Opposite-gender
requires more than the standard approaches offer.
partners can marry in any state while same-gender
And, sadly, if clients do not raise certain issues or
couples cannot. DOMA states with constitutional
planners are unskilled at soliciting necessary informaamendments or laws that mimic DOMA limit the
tion, the planner can make inappropriate assumptions
definition of “married” to persons of opposite gender
that may produce a plan that is not a good fit for the
and provide that states are not required to recognize
couple. Because estate planning decisions straddle
JOURNAL OF PRACTICAL ESTATE PLANNING
25
Editor's Choice
legal, financial and other advisor categories, expertise
across planning disciplines is necessary to successfully advise the unmarried client market.
Ethical and Practical
Considerations
All advisors, but especially attorneys, must address their
ethical duties to each partner.13 Before an advisor can
undertake to advise a client, the advisor needs to identify whether any conflicts of interest exist regarding the
client’s interests and the advisor’s interests or those of
the advisor’s other clients. If conflicts exist, the advisor
is required to advise the potential client of the conflict
and either withdraw from the relationship or give the
potential client the option of making an informed waiver
of the conflict. Some conflicts cannot be waived.
These considerations also exist with married
couples but, absent unusual circumstances, many
advisors dispense with the conversation about the
potential for conflicts of interests between spouses,
and the “couple” becomes the client.
Consideration of the advisor’s ethical obligations
should include the following:
Whose interests the advisor represents
How the advisor will present options when these
might
mi
ght give
e an advantage to one partner at the
expense
the other
exp
pensse off th
er
Who
the advisor
W
ho pays
p
th
vis
What
happens
conflict of interW
hat happ
h
pe if an unresolved
pen
so
occurs
estt occ
curs
scope
The sc
ope and
d manner of disclosure of information to other advisors and to the partners
Whether the partnerss should
represh d havee separate
s
sentation if the partners
unequal
positions
ners are of u
e
in terms of financial status, sophistication or
experience
Also, implicit in the advisor’s relationship with
unmarried couples is an understanding of the family
dynamics for both partners and how those dynamics might affect the partners’ plan. Do children
from prior relationships frown upon this unmarried
relationship? Do family members of a gay or lesbian couple disapprove of the relationship to the
degree that the partners are estranged from family
members? Factors such as these can make some
planning options impractical and may require extra
precautions to withstand potential challenges by
disgruntled blood relatives.
Finally, if any area of planning requires resisting the
impulse to provide strategies rather than solutions, it
26
©2007
is planning for unmarried partners. This means that
the “product approach” to planning will generally
not produce good results. Planning for unmarried
partners should involve a holistic approach with advisors from other planning disciplines so each can bring
their unique planning perspective to the table.
Alive and Well
The unmarried but committed relationship can appeal to many couples because of its seeming lack of
entanglements beyond the decision to live together.
Some evolve without conscious thought about legal
and financial consequences. Others involve conscious decisions and legal and financial directives
to protect the partners’ commitment. Either way,
few have professional input or understand the legal
consequences of their decisions. Unlike marriage,
living together as life alliance partners, in and of itself, does not create a legal contractual relationship.
It does not entitle the partners to a property settlement if the relationship ends or a partner becomes
disabled and can’t work or dies. If problems about
money or property arise, the couple can reach an
understanding, compromise or fight.
If they resort to court, most courts will attempt
to identify the couple’s original agreement about
the property in dispute and will divide the property
accordingly. A cohabitation, domestic partner ship
agreement, or “life alliance agreement” can give a
better alternative to resolving such issues.
The Life Alliance Agreement™
g
A “life alliance agreement” is a contract between
unmarried partners designed to specifically set out
the terms and conditions of the unmarried partnership—similar to a prenuptial agreement, sans
nuptials. It identifies the couple’s intent regarding
their rights to property both during the relationship
and at its end. The agreement can be made any time
during the relationship but it is advisable to create it
at the beginning of cohabitation.
A life alliance agreement should:
list the assets, income and debt each partner is
bringing to the relationship and the rights each
will have regarding these items;
identify how the partners will handle income,
property and debts acquired before and during
the relationship, including periods when a partner
is disabled or unemployed;
CCH. All Rights Reserved
August–September 2007
describe how finances will be managed, distributed or divided if the relationship ends due to
death or otherwise, and what constitutes termination of the relationship or grounds for the terms
of the contract to be invoked; and
ascertain whether special provisions should be
considered for business interests and creative
property such as art, writing, inventions and similar
items that may not have realized their true market
value until much later in the relationship.
is a better strategy to memorialize the couple’s intent
about division of property and other details involved
in terminating a relationship.
Marital Status and Taxes
U.S. citizen married couples are considered an economic unit for transfer tax purposes, which means
they can transfer unlimited amounts to each other
during lifetime and at death without triggering gift
or estate taxes. They can also “split” gifts when one
spouse gives assets to a nonspouse, permitting them
The Unmarried “Divorce”
to treat a gift from one spouse as if one-half of the
gift came from the other spouse. Gift-splitting permits
When an unmarried relationship ends, there are no
spouses to leverage tax-free gifts for estate tax planbuilt-in state domestic relations laws to assist the
ning purposes. Unmarried couples do no have this
couple in this process. A life alliance agreement
unlimited gift or gift-splitting option.
may be the only resource partners have to be clear
Married couples are able
about how they will disto avoid the recognition of
entangle their fi nancial
A “life alliance agreement” is
capital gains up to $500,000
and legal commitments.
on the sale of their personal
However, an agreement
a contract between unmarried
residence whereas unmarmight not be valid if there
partners
designed
to
specifi
cally
set
ried partners, treated as a
was:
out the terms and conditions of the single person in the eyes of
no full disclosure of
all material facts;
unmarried partnership—similar to a the law, must recognize any
gain over $250,000. These
undue pressure to sign
prenuptial
agreement,
sans
nuptials.
rules provide more flexit; or
ibility for married couples
unequal or unfair
in transferring assets with fewer tax consequences. The
bargaining positions of the parties (e.g., sophistinet result is more net assets available for the surviving
cation, financial position or professional input).
spouse as compared to a surviving, unmarried partner
Therefore, both partners should get independent
given transfers of the same monetary amounts.
legal advice before signing and involve financial and
Married couples have an exclusion
tax advisors to ensure tax-efficient and wise decisions
n from taxable
income for employer-provided
health
forr a
about co-mingling property. At a minimum, if court
mplo
oyer pr ided he
alth iinsurance
surance fo
spouse and, until
Pension
Protection
Act of 200
2006,
action is required, the agreement can create some
ti the P
on Prot
ect on Ac
06
the rollover of a retirement plan for a nonspouse
evidence of the couple’s intent regarding their rights
had less advantageous payout timeframes than for
and obligations to each other.
spouses.16 However, the ability to transfer a qualified
Until the seminal case, Marvin v. Marvin, 14
(de)parting unmarried partners could not expect the
plan interest upon the termination of a marital relaequivalent of alimony or a property settlement availtionship under a qualified domestic relations order
able to divorcing married couples. The Marvin court
(QDRO) is unique to married couples. No parallel
relied on the doctrine of implied contract to infer a
technique is available to unmarried couples.
legally enforceable agreement from the parties’ daily
Unmarried couples do have some advantages over
dealings even though there was no written agreemarried couples in terms of income tax treatment,
ment.15 It awarded Marvin’s partner compensation,
however. For instance, there is no marriage penalty in
income tax rates or earned income tax credits. Unmarcalled “palimony” instead of alimony, for having
ried couples are single under IRS income tax rules,
forfeited her career to support his.
which means that their income is not combined to
Such court decisions are not predictable, however,
calculate the ceiling on the amount of losses a property
and few people would find it practical to go to court
owner can claim. There are potential additional advanto have their legal position endorsed when their untages regarding Social Security benefits due to taxable
married relationship ends. A life alliance agreement
JOURNAL OF PRACTICAL ESTATE PLANNING
27
Editor's Choice
income thresholds for individuals and income is not
consolidated for phase-outs of the child and dependent
care credit. Unmarrieds may also have higher income
thresholds for traditional and Roth IRA contributions.
Asset Ownership and
Unintended Consequences
Joint Ownership of Property
Property held as “joint tenants with rights of survivorship” (JTWROS or JTROS) provides a good example
of how marital status can trigger different tax consequences for unmarried couples. If one partner
owns a house and adds a partner’s name to the title
without the second partner contributing to the cost of
the property, the first partner has made a potentially
taxable gift to the other partner in the eyes of the IRS.
Gifts over the annual gift exclusion amount, currently
$12,000 per year per grantee, must be reported on
a gift tax return (Form 709) and reduce the donor’s
lifetime gift exclusion (currently $1 million). If gifts
exceed the lifetime gift exclusion amount, gift taxes
will be due. If a nonspouse is more than 37.5 years
younger than the donor, the gift may also have generation-skipping
tax consequences.
p
Married
U.S.
M
Marr
ried U.S
U
S. citizens do not have to be concerned
about
annual
exclusion
ab
out the ann
nua gift exclus
on or tthe lifetime gift
exclusion,
there iss n
no limit
ex
clusion, as tthe
it tto the amounts they
can
transfer
each oth
other.
ca
n tra
ansfe
er to
o ea
property
produce
other unintended
JJTWROS
TWROSS pro
p operty
rt can
an pro
uce oth
consequences,
nseq
quen
nces too. First, the property is an available
resource to satisfy the creditors
ors of all of the joint
owners. Second, for real
property
ownership,
state
al p
perty o
w
law may require the signature
all jo
joint owners to
nat
of al
avoid a severance of the survivorship feature of the
property. The disability of a joint owner may require a
court-administered guardianship if the couple wishes
to sell the property. A disagreement between joint
owners might dictate a partition action requiring legal
fees and court intervention.
Upon the death of a JTWROS owner, ownership
vests immediately in the surviving owner. The survivor
is not required to take any additional steps, except
providing proof of death. Some states or title companies may require an “affidavit of survivorship” to
provide evidence of a clear chain of title where real
property is concerned.
If the surviving joint owner is under a disability
(legal incompetence), subject to bad decisions or
exploitation by others, facing large debts such as
28
©2007
long-term care costs, there is no legal mechanism
for the property to be held in trust for the benefit of
the survivor. Similarly, JTWROS property does not
have a built-in mechanism to satisfy a joint owner’s
desire to direct the disposition of the property at
death to anyone other than the other joint owner. By
operation of law, the property automatically passes
to the surviving joint owner. Promises between
joint owners to honor the deceased owner’s wishes
to provide for others are not legally enforceable.
The survivor can choose to comply or fail, due to
incompetence or other reasons, to honor the deceased owner’s wishes. Instructions in a will do not
control the transfer of JTWROS property.
Joint Credit and Debt Issues
Joint credit and joint debt can also pose legal issues
and consequences when the relationship ends, and
it is important that credit accounts and other debts
in the names of both partners be resolved at the
termination of the relationship. Each partner should
agree to a division of the partners’ property as well
as the debts. As an added precaution, the partners
should contact their creditors to ensure that after the
debts are divided, only the indebted partner’s name
remains on that account.
Transfer on Death Designations and
Deeds with a Retained Life Estate
or Remainder
Transfer on death designations (TOD) or deeds with
a retained life estate permit a person to own property
in their individual name during life while naming
a beneficiary(s) at death. Legal remainder interests
vest immediately in the name of the survivor upon
the owner’s death.
TOD assets have advantages over JTWROS property in terms of potential tax issues or being subject
to the joint owners’ creditors or control. However,
TOD ownership has some disadvantages of its own,
as follows:
The entire value of the asset is included in the
deceased owner’s gross estate for purposes of calculating federal and state, if any, estate taxes.
The asset is available to the owner’s creditors
during life and may need to be liquidated to
cover the cost if the owner requires long-term
care. The surviving partner-beneficiary might
be displaced or might not have sufficient liquid
assets to pay obligations including the mortgage,
CCH. All Rights Reserved
August–September 2007
real property or other taxes, if any, associated
with the property.
There is no mechanism to hold the asset in trust
for the benefit of a disabled partner.
The survivor-beneficiary has full and unrestricted
control over the asset at the owner’s death and
can dispose of it or direct it to whomever he or
she wants regardless of prior agreement with the
original owner.
The survivor-beneficiary might not have funds to
pay capital gains taxes if the property is sold long
after the original owner’s death.
Alive and Not So Well
Life partners can face serious difficulty if they have
not prepared legal directives that identify their agents/
surrogates and instructions regarding healthcare and
financial decisions. If no legal directives are in place,
a partner may be required to seek legal authority from
the probate court under the state’s guardianship laws,
to act for his or her partner. However, probate laws
give priority to blood relatives. This means that blood
relatives could potentially challenge the life partner’s
right to act on behalf of his or her partner. Therefore,
if life partners want to minimize the likelihood that
Contractual Property Rights
family could intervene, they should make sure they
have validly executed health care proxies and duContracts, in this context, meaning the ability to
rable financial powers of
name a beneficiary at
attorneys.
death, can entitle partners
Unlike a will, the mechanism for
The healthcare proxies
to immediate benefits
should include a Living
when a partner dies.
contesting trusts is more difficult,
Will, Durable HealthThese can include insurreducing the ability of hostile
care Power of Attorney
ance policies, retirement
family members to intervene.
or Healthcare Surrogate,
accounts, annuities, payAuthorization under the
able-on-death accounts
Health Information Portaand trusts.
bility and Accountability Act (HIPAA), and instructions
Some advantages of contracts follow:
regarding visitation at healthcare facilities.
No need to probate contract assets if beneficiaries
The financial proxy should include a Durable Fiare properly designated
nancial Power of Attorney. Decisions associated with
No costs associated with the creation of a benthis directive should include:
eficiary designation
whether the agent will be allowed to “self-gift”
The transfer process at the owner’s death is private
assets belonging to the agent. This may be useful
and not part of a court record
in the context of conserving assets when facing
Some benefits are not considered income to the
nursing home costs orr reducing as
assets or equalbeneficiary(s)
izing estates
purposes.
Trusts can be named beneficiary for most contract
es for
f esta
eestate tax pu
po e .
whether the
effecassets to avoid issues associated with outright
e agent’s
gent power
ower is immediately
mm
mediately effe
ec
tive upon the execution of the document or only
distribution to surviving partners
when the power-giver suffers a period of mental
Disadvantages include the following:
incapacity.
Assets are available to the owner’s creditors
An in-depth analysis of the arguments for and
during life and may have been expended,
against these features is beyond the scope of this
leaving little to support survivors at owner’s
article. However, it is important that the power of
death
attorney include broad powers to permit the agent
Assets will be included in the owner’s gross taxsufficient legal authority to act for the disabled partner.
able estate
It is also recommended that a draft of the directive be
No mechanism for holding the asset for a disabled
submitted to the custodian of the partner’s retirement
survivor’s benefit
accounts and brokerage accounts to find out before
Unmarried contract owners may change the
the directive is needed whether such institutions rebeneficiary(s) at any time prior to death or inquire language not contained in the directive.
capacity without the consent of the survivor;
Partners can nominate a guardian for themselves in
married couples cannot change the beneficiary
advance of need, sometimes called a Pre-Need Guardian
on retirement accounts without the other spouse’s
Declaration. Although the probate court is not obligated
consent17
JOURNAL OF PRACTICAL ESTATE PLANNING
29
Editor's Choice
to honor nominations for guardian, most courts will
honor the nomination absent evidence that the nominee
is inappropriate or unqualified. The court can also insist
that the guardian post bond to protect the financial assets
from loss due to the guardian’s errors or misdeeds. The
nomination form can specify the nominator’s concerns
about appointment of specific blood relatives if he or she
has concerns about interference by such family members
at the expense of the partner. This can, arguably, provide
a reviewing court some evidence upon which to determine the nominator’s intent and best interests.
When Death Happens
Whether married or unmarried, three things occur at
death: (1) final arrangements for the deceased’s physical
remains are made; (2) the estate is settled or administered; and (3) loved ones and friends carry on.
A long-standing statistic reveals that more than half
the population (married or unmarried) does not have
even basic wills. More than half have college degrees.
This means that even educated people fail to protect
themselves with basic estate planning directives.
Some statistics report that out of the people who do
have wills, more than 40 percent of those wills are
greater than 10 years old. An outdated will may not
accurately
ccuraately
y refl
flect
e client wishes. The survivor of a
married
couple
has many
legal protec
protections when the
ma
arrieed co
ouple
eh
any leg
spouse
dies,
even
spouse failed to
spo
ousee die
es, ev
ven when
en a deceased
cea
execute
appropriate
Unmarried indiexe
ecutte ap
pprop
pri legal
eg directives.
ct
viduals
same
protections.
vid
duals do
o nott eenjoy
njo
jo the
he sam
e legal p
topic
of final arrangements does not receive
The topi
co
much attention in most discussions
ssions on estate planning. State law identifies who
w o has legal
eg priority to
make these decisions if the deceased
person has not
ease p
made his or her wishes known. Surviving spouses and
next of kin have priority under state probate laws and
unmarried partners are not on the list. It is even possible the law could support the next of kin’s decision
to exclude a life partner from the deceased partner’s
service. Therefore, life partners should make sure they
have made their wishes known, either in writing or
by making pre-need arrangements with a reputable
funeral home. However, the partners must be mindful
that most pre-paid funeral plans are not transferable
should the partners move to another state.
Estate Planning Options
The basic rules about how assets are transferred at death
are the same for married and unmarried couples. How-
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ever, state laws and other rules create legal safety nets for
married couples to prevent a spouse from intentionally or
unintentionally disinheriting the surviving spouse. Time
will tell whether these legal safety nets can be invalidated
via challenges to same-gender marriages under DOMA
and state laws and amendments that prohibit samegender marriages. In the meantime, life partners should
coordinate their legal directives that transfer assets at
death, to achieve their estate planning goals.
Wills
A will can provide for the orderly administration of
an estate so that all taxes, claims and expenses are
properly paid, beneficiaries receive intended distributions and trusted persons are named to carry out these
fiduciary responsibilities. In the absence of a will, state
intestacy laws will dictate the process and procedure
for the administration of a deceased’s estate. However,
it is important for partners to understand the role a will
might play or fail to play in their overall estate plan.
In this age of “payable on death” accounts, “transfer
on death” designations, and beneficiary provisions
under contracts, owning property in an individual
name, without a beneficiary designation component,
is less and less common. Consequently, a will potentially controls less than it did historically. It remains
an important “safety net” to direct assets when other
designations are not enforceable. However, clients may
have a misplaced sense of security that their wishes in
a “last will and testament” will prevail.
The couple is not in a position to know whether
planning gaps and conflicts exist regarding their
beneficiary designations and other legal directives.
The advisor who fails to account for and coordinate
the directives for every asset the couple owns to
achieve their estate planning goals arguably commits
malpractice. Married, opposite-gender couples have
legal protections to help them avoid or minimize bad
outcomes from planning gaps and conflicts. Such
protections are not available to unmarried couples,
or to married same-gender couples, if DOMA-type
laws are held to be valid.
Wills require probate. Probate involves filing fees,
attorney and, possibly, accounting and other fees. A
surviving spouse can receive limited funds to live on
while probate is pending. There are no similar provisions for surviving partners. Therefore, it is important
for life partners to plan for the support of the survivor
while probate is pending.
Disgruntled heirs can challenge a will in court if
they can show the testator was under duress or undue
CCH. All Rights Reserved
August–September 2007
influence, lacked legal capacity or other factors. A
judge finding grounds to support the challenge can
invalidate portions or the entire will. If challenges by
heirs are a concern, it is prudent to consider inclusion
of an “anti-contest” clause where the challenger would
forfeit a bequest under the will if they challenge the
provisions of the will. The attorney-advisor should also
take extra steps to ensure that claims of undue influence and duress will not be successful. For example,
the partner can execute his or her directives on different days or over the course of several days.
Trusts
There are many basic and advanced trust-based
planning techniques that can be used to address
the unique planning challenges faced by unmarried
couples and married, same-gender couples. The flexibility trusts provide regarding the “who,” “what,”
“when” and “how” of managing or distributing a
person’s assets during disability or at death makes
them an attractive planning tool for these couples.
Indeed, trusts are probably one of the best planning
vehicles with the following advantages:
Trust management is private during life and at the
trustmaker’s death.
Provisions can be included to manage assets
during the trustmaker’s legal incapacity and for
maintaining family members, including pets, during a partner’s disability and at death.
Assets can be held for the beneficiary(s) without
placing assets in the beneficiary’s direct name.
Depending on the trust’s distribution standards,
trust assets can be protected from the beneficiary’s bad decisions or exploitation and maintain
eligibility for public assistance benefits.
The trust can authorize creation of a “partner’s trust”
for the surviving partner’s lifetime, with eventual
disposition to other beneficiaries of the trustmaker’s
choosing at the surviving partner’s death. Mimicking
standard A-B, marital and family trust strategies used
for married couples, a partner’s trust can keep assets
outside of the partner’s taxable estate and protect
the trustmaker’s assets from the partner’s creditors. It
can also address the competing interests and needs
of the partner and children from prior relationships
and keep the trustmaker’s assets out of the hands of
the partner’s later partners.
Gift tax consequences can be minimized and
estate tax exclusions maximized for assets remaining in trust rather than distributed outright.
Assets in trust can provide a mechanism to man-
JOURNAL OF PRACTICAL ESTATE PLANNING
age assets while the survivor is coping with the
grieving process and to avoid making the partner
vulnerable to exploitation by later partners after
the trustmaker’s death.
Unlike a will, the mechanism for contesting trusts
is more difficult, reducing the ability of hostile
family members to intervene.
Special Consideration for Life
Alliance Partners
Life alliance partners and their advisors must also
consider the following in the planning process:
How to provide for an unmarried survivor who
does not work outside of the home and doesn’t
have comparable retirement funds
Whether partners want to equalize their assets
and how this will be accomplished with minimum gift tax consequences
How partners will provide for the competing
interests of the surviving partner and contingent
beneficiaries
How estate taxes will be paid if there is a taxable
estate at the federal or state levels
Whether the survivor will have sufficient liquid assets to cover the cost of living, mortgage and other
expenses if the household income is reduced when
the other partner dies. Consideration should be
given to whether mortgages include “due on sale”
clauses and whether the partner can cover the cost
of capital gains on the later sale of the home
Whether the partners can establish insurable interests for purposes of p
purchasing
g life insurance.
Are business
legal
good
solution
ess lega
al sstructures
uctures a go
od so
lution for
or
creating such
uc interest
inte t or other
other mechanisms
mechanisms of
“relatedness”?
How partners will, in life and in a business, provide
for the surviving partner at the death of a partner,
especially if both are actively employed by the
business they own. The financial and logistical
settlement of the business and personal holdings
are inter-related and can be vulnerable if insufficient liquid assets are available to the survivor
How to quantify and protect the value of a
partner’s creative works that may increase in
value over time
The Paper Trail
Unmarried couples need to maintain adequate records of their transactions for purposes of showing
31
Editor's Choice
ownership, gifts made during the relationship and
the tax basis of assets. The IRS has its own timetables
for authority to challenge tax returns. Medicaid law
changes now have a potential five year financial
reporting period where financial transactions can be
scrutinized before granting benefits.18
Both partners should be named on property and
casualty insurance policies to make sure the partner’s
property is covered should a property loss occur at a
location owned and insured by one partner. Property
insurance issues should be discussed with a knowledgeable professional to avoid exclusions of coverage.
Plan Maintenance,
Updating and Education
All financial and estate planning should be reviewed periodically to ensure it remains a good
fit as changes in personal circumstances, laws
and advisor strategies occur over time. Unmarried
couples must be particularly attentive to keeping
their plans current or they risk being vulnerable
and missing out on opportunities to maximize
their protections.
Conclusion
Unmarried couples bring unique and interesting
planning challenges for the estate planning community. Clearly, the issues presented here raise
concerns that cannot be addressed by simply treating unmarrieds as singles. The law in this area is in
a constant state of change requiring diligence on the
part of the estate planner to stay current regarding
how these changes affect the needs and concerns of
their unmarried clients.
ENDNOTES
1
2
USC §7 and 28 USC §1738C. For example,
The Defense of Marriage Act (DOMA) states,
“In determining the meaning of any Act of
Congress, or of any ruling, regulation, or
interpretation of the various administrative
bureaus and agencies of the United States,
the word ‘marriage’ means only a legal
union
ion betw
between
ween one man and one woman
as
a hus
h
husband
b d and
band
dw
wi
wife, and the word ‘spouse’
refers
r
only to a person
pers of thee opposite
p
oppos sex
who
wh iss a hu
h
husband
usband
b do
or a wife.”
e.” T
The bill is aan
exercise
e
exerci
ise off Congress’s
Con
ngre
power
ow underr the
“Effect”
“
“Effect
t” cla
clause
ause o
of A
Article IV, section 1 of
the
the Constitution
Co
onstitu
ution (the
(t e Full
FFu Faith
aith and Credit
edit
Clause)
lause
e) to allow
a
each State (or other political jurisdiction) to decide for itself whether
it wants to grant legal status to same-sex
s e-sex
“marriage.”
See Title XIX of Social Security Act
Act, 42 USC
S
§1396–1396s, 42 CFR §430, et seq., and
20 CFR §416, et seq., and state Medicaid
regulations. Federal Medicaid laws allow
married couples to retain between $1,500
to $2,200, depending on state figures, for
the institutionalized spouse plus specified
exempt assets and the “community spouse
3
4
5
6
resource allowance” of between $20,328
to $101,640 of financial and other assets
(as of 2007). A Medicaid applicant who is
an unmarried couple relationship is considered a “single” person Under Medicaid
law. A single person may not possess more
than $1,500 to $2,200, depending on state
figures, plus exempt assets of personal
possessions of reasonable value and an irrevocable burial contract. The community
spouse resource allowance is not available
to single Medicaid applicants. Therefore, assets in excess of the $1,500 to $2,200 must
be expended before the applicant would be
eligible for nursing home Medicaid coverage. These figures represent ranges since
the Medicaid program is authorized under
federal law but administered by the states.
See www.census.gov. See American Community Survey Table B11009; Census 2000
Table PCT14 and Special Report, MarriedCouple and Unmarried Partner Households:
2000.
Id.
Id.
Id.
7
8
9
10
11
12
13
14
15
16
17
18
Linda Greider, Unmarried Together, AARP
Bulletin, Oct. 2004.
Paul Takayanagi, ELDER JOURNAL (2003), San
Francisco State University, Gerontology
Dept. and member, American Society on
Aging.
U.S. General Accounting Office report
GAO/OGC-97-16 Defense of Marriage
Act.
As of 2007, Massachusetts, New Jersey, New
Mexico, New York and Rhode Island are the
only states that do not have constitutional
amendments or statutes prohibiting samegender marriage.
Article XV, Section II of the Ohio Constitution.
Ohio Revised Code 2919.25.
Refer to the applicable rules of professional
responsibility for area of planning licensure.
18 Cal. 3d 660 (Cal. 1976).
Id.
H.R. 4, P.L. 109-280.
Dower & curtesy rights apply for married
couples.
Deficit Reduction Act of 2005, S.1932.
This article is reprinted with the publisher’s permission from the JOURNAL OF PRACTICAL ESTATE
PLANNING, a bi-monthly journal published by CCH, a Wolters Kluwer business. Copying or
distribution without the publisher’s permission is prohibited. To subscribe to the JOURNAL OF
PRACTICAL ESTATE PLANNING or other CCH Journals please call 800-449-8114 or visit
www.CCHGroup.com. All views expressed in the articles and columns are those of the
author and not necessarily those of CCH.
32
©2007
CCH. All Rights Reserved