Outside legal marriage, there are significant retirement and estate planning challenges for couples to consider.
Unlike married couples, when one unmarried partner dies, the survivor does not receive any automatic legal right to their deceased partner’s assets. Indeed, within the context of a legal marriage, there are numerous default legal protections that many couples simply take for granted.
Without such default laws in place, unmarried partners must engage in formal estate planning to avoid serious unintended consequences in the event of incapacity or death. Potential solutions to some of the most common challenges include:
1) Your unmarried partner will not be your executor, conservator or your beneficiary (unless appointed in your estate planning documents),
2) In most states, one’s married spouse has default rights to serve as conservator in the event of incapacity, as executor of the estate in the event of death, and at least as a partial beneficiary of the deceased’s assets, and
3) In the absence of such default protections, the surviving partner could have their entire life impacted in extremely negative ways (for example, relatives of the deceased partner could take control of the process and assert their rights to possession of real property and distribution of all assets)
To avoid such problems, unmarried partners should seriously consider consulting with an attorney to put legal appointments in place, such as naming each other in wills, trusts and powers of attorney, in addition to titling assets in joint name with rights of survivorship in those states where that asset titling is available.
UNMARRIED COUPLES FACE RETIREMENT & ESTATE PLANNING CHALLENGES
Unmarried couples owning real property together should take additional action to protect their respective interests.
Best practices include “property co-ownership agreements” that document an agreement between the parties on subjects such as:
1) who contributed how much to the down payment, to mortgage payments and to ongoing maintenance and improvements,
2) how to allocate income tax deductions such as mortgage interest,
3) setting a minimum holding periods for the property (typically 2 years minimum to permit maximum capital gains exclusion), and
4) procedures for buying out a partner who wishes to sell and on what terms such as assumption of loans and appraisal procedures
Agreeing in writing, in advance, on all of these topics sets the “rules of the road” and minimizes the risk of costly and time-consuming litigation in the future.
Breaking up is always hard to do - but the common view is that it is easier for an unmarried couple to end their relationship.
While divorce is always difficult and frequently hard-fought and expensive, there are well established laws in each state that govern the process of legally ending a marriage, including division of assets and providing for the ongoing care and support of children.
When an unmarried couple ends their relationship, there is no single set of laws upon which the couple could rely to assist in the process. In the absence of mutual agreement, the couple has no recourse but to sue each other in civil court under a variety of legal theories, none of which are fast or inexpensive, even when compared to divorce.
For example, if assets are commingled, or both partners want the family home, or if custody or support of children is disputed, the process of ending the relationship will become at least as difficult if not more so than a formal divorce.
RECOMMENDATION
Unmarried couples should strongly consider working with an attorney to establish a “cohabitation agreement” (in lieu of a prenuptial agreement), again to set “rules of the road” agreed to at the inception of the relationship contemplating a specific set of processes for the orderly untangling of the couple’s lives and finances in the event the relationship does not last permanently.
These couples should also consider “alternative dispute resolution” procedures such as mediation or binding arbitration that could permit faster, less expensive resolution of disputes short of court-based litigation.
In addition to the financial benefits of marriage, spouses are often given the benefit of the doubt if decisions need to be made about health care or end-of-life choices.
For example, many doctors and hospitals will take instruction from a spouse even in the absence of a formal health care power of attorney. The same is not true for non-spouses— health care professionals will almost always require a document to allow unrelated individuals to make health care decisions for someone.
Without a formal health care proxy or health care power of attorney, health care providers may rely on the next of kin to make those decisions.
RECOMMENDATION
Unmarried couples who want to be able to make health care decisions for each other should strongly consider working with an attorney to establish health care powers of attorney naming each other as the decisionmaker.
The health care power of attorney could include language allowing the partner to receive health information (HIPAA waiver), and the couple should also speak with their attorney about signing living wills or advance directives describing for the health care proxy their wishes for end-of-life care.
Regardless of planning, some rights and benefits of marriage simply cannot be replicated through planning.
Unlike married couples, Social Security spousal and/or survivor’s benefits are not available to unmarried partners. This difference alone can amount to hundreds of thousands of dollars in lost benefits to the unmarried partner of a deceased person who was eligible for benefits.
Marriage creates valuable income tax benefits when inheriting tax-deferred retirement assets. Unlike married couples, an unmarried partner inheriting the retirement assets of her partner cannot benefit from the preferential tax deferral a surviving spouse enjoys.
An unmarried partner may only transfer the assets to an inherited IRA, must take required minimum distributions each year and, most critically, must have all inherited assets distributed out of the tax-deferred account by the end of the 10th year following the death of the account owner. A surviving spouse is not subject to this 10-year rule and may roll over the inherited assets into a new or existing IRA in the surviving spouse’s own name (and thus delay taking RMDs until the surviving spouse reaches age 73 or can elect to transfer the assets to an inherited IRA.
Unmarried partners may face significant surprise estate or gift tax liability after the death of their wealthy partner.
Married spouses enjoy an unlimited marital deduction for gift and estate tax purposes, i.e., the spouses can transfer to each other unlimited amounts of money during life or at death while incurring no gift or estate tax.
Unmarried wealthy partners often find themselves shocked at the impact not being married can have on estate taxes. Any assets of the deceased partner more than the estate tax exemption ($13.61million per person in 2024) would be taxed at 40%.
No clever estate planning can re-create the unique benefits of the unlimited marital deduction.
Common law marriage is relatively uncommon and should not be relied upon. Many partners who are not legally married a specific time frame for the marriage to be frequently operate under the misconception that they considered legal.13 To minimize the risk of serious are considered spouses under “common law.” The problems, couples who desire to avail themselves of frequently repeated myth is that after seven years of the rights and benefits of legal marriage should get cohabitation, a couple is legally married. In reality, formally married and not rely upon common law only a few jurisdictions recognize the concept of a theories.
With the trend towards unmarried partners only accelerating, it becomes more and more important for persons in such relationships to examine their own personal financial and life circumstances and consult with their CPA and estate planning attorney to discuss their specific situation, understand their options and take action to minimize risks from not being legally married to avoid what could otherwise be exceptional unexpected surprises in the future.
If you and your partner have no intention of getting married, and would value discussing how your status as an unmarried couple may impact the surviving partner, and steps you can take now to ensure your wishes and intentions are fulfilled, reach out to get our conversation started. We can help.
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We are here to help. If you have questions and would value professional insight and guidance regarding 2024 year-end tax planning, efficiently filing your 2024 individual, business or trust tax returns and 2025 - 2026 tax planning, give our office a call or send an email to napapgni@cobaltpacwestadvisors.com to schedule a complimentary consultation.
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