Unmarried couples are widespread in our society; they are as broad as widows, unmarried individuals living together, divorced, and same-sex relationships. These couples, whether gay or heterosexual, face important issues that their married partners don’t know about. Unfortunately, many of these issues, if left unattended, can have a dramatic negative impact on health care decisions, income taxes, property taxes, and retirement planning. If you are not married and are in a committed relationship with a life partner, keep reading! You can’t ignore the financial and legal challenges that you and your partner face.
The US Census Bureau reports that the once dominant “married couple” household has slumped from nearly 80% in the 1950s to just 50.7% today. Nearly 42% of the US workforce is made up of unmarried individuals. The decision not to marry can stem from a variety of reasons including the possible loss of a deceased or divorced spouse’s benefits to impenetrable legal barriers for same-sex couples. In fact, many widows and divorcees, even though they have found love again, are unable to remarry for fear of losing health benefits, pensions, or social security.
Real World Challenge
Retirement benefits
One of the benefits of an eligible retirement plan is the ability to defer income taxes until forced distribution begins at age 70, for both the account holder and their surviving spouse. The deferred benefit, however, does not apply equally to non-spouse beneficiaries. Here’s how:
For eligible plans (i.e. 401k, 403b, unless the results are annualized over the life of the beneficiary starting within one year of death, they must be included as taxable income within five years of death (the surviving spouse is allowed to defer proceeds and taxes until the age of 70 1/ 2) It shrinks the pot and potential money growth eligible for the surviving partner (assuming the partner is the beneficiary).
IRA accounts offer a bit more flexibility. Inheriting an IRA from a spouse allows you to place an IRA in your name or roll funds into an IRA that you have set up. The IRS will treat this as if the inherited IRA assets were yours all along. In contrast, non-spouse heirs have no option to treat the inherited IRA as your own. This does not mean that the money is not yours; it just means that you can’t make any contributions to that IRA or turn it over to another IRA. If the deceased person is 70 or older (and took the distribution from the IRA when he died), then
You can start taking money using the same distribution method. If the beneficiary is younger than the person who died, this option is usually not recommended, unless you are in urgent need of money as it will accelerate your income and taxes. Another alternative is to take the required distribution in annual installments over the lifetime of the beneficiary, and based on the life expectancy of the beneficiary (not the deceased).
If the deceased has not yet issued distributions from an IRA, you have two IRA distribution options:
o All interest from the IRA must be distributed to you by December 31 of the fifth year following the year the person died, (not the best option) OR
o All flowers must be distributed during your life expectancy (preferred option)
Government and corporate pensions are the least flexible. In an employer-sponsored retirement plan, the surviving spouse may not be entitled to any survivor benefits. It is recommended that you confirm whether this is available or not with your HR manager. Social Security spouse benefits are simply not available to non-spouse – period. Consequently, your spouse will be forced to raise more funds to ensure a comfortable retirement after you leave.
Tax
Unmarried couples are also negatively affected with respect to property taxes. There is a special provision in the tax law that allows a married couple to defer land taxes until after the second spouse dies. Unmarried couples do not benefit from this unlimited marriage reduction. So any assets (including houses, cars, savings, retirement accounts, collectibles, etc.) over $2,000,000 are subject to tax rates as high as 47%!
Asset Transfer
As an unmarried couple, dying without a will and other related inheritance planning documents is a recipe for disaster. Without a clear will, your spouse may inadvertently lose his inheritance rights. Unlike the married couple, the surviving spouse does not automatically have a share in the inheritance. If you die in a will (without a will), the estate will be legalized under state will succession laws and inherited assets, including possibly your primary home, will most likely be transferred to a blood relative (living parent, sibling, etc)!
Basic Solution for Asset Transfer at Death
One of the best ways to ensure the efficient transfer of assets from one unmarried couple to another is through a combination of wills, substitute wills, and trusts. Failure to plan for this means planning to fail.
Will
The most widely recognized way to transfer wealth at the time of death is by using a will. Without knowing the exact details of what happened, most people know that a will must be submitted to a local probate court. If the will does not properly dispose of the assets of a deceased individual, then probate courts are involved in distributing the assets of that person, a process that can be both costly and time consuming.
Will Replace
A substitute will has the advantage of avoiding the probate process and the associated costs, delays, and potential publicity. It also has the advantage of allowing the current owner of the property to name the person or persons who will receive the owner’s interest at the time of his death. In lieu of wills are revocable and include common forms of ownership such as “together with the right to survive”, designation of beneficiary (for retirement accounts), transfer death clause (for investment or brokerage accounts), payable death clause (for bank accounts) and can be canceled life trust. It is always best to consult a qualified professional for any giveaway or tax consequences that this strategy may entail.
Life Trust
A revocable living trust is almost always established for two reasons: (1) to avoid probate; and (2) handle the financial affairs of the grantor in the event that the grantor is unable. Because such trusts cannot achieve any tax purposes and do not provide asset protection, income from trust assets is taxed to the grantor under the grantor’s trust rules. There is no gift tax payable at the time of funding the trust because a retained right to revoke prevents a completed prize. Similarly, a retained right to revoke also means that the property of the trust is included in the gross estate of the grantor.
Life Insurance Trust
A life insurance policy for the benefit of a surviving spouse can help supplement future income lost from forced distribution of an eligible plan, inability to receive spouse social security benefits and retirement benefits.
Furthermore, using an irrevocable life insurance trust (ILIT) can remove the life insurance policy from the estate. You have to make sure you don’t have a policy when you die. Proceeds can go to the same beneficiary but the policy must be owned by the trust. If the policy is transferred, the transfer must be made within three years of death. ILITs can also help provide the liquidity needed to help pay land taxes and settlement costs incurred by the deceased spouse’s estate.
Health Planning Needs
Finally, the non-spouse, in the event of a disability or disability, does not have an automatic entitlement to the care and finances of the disabled spouse. The following are some “must haves” to ensure that you and your partner can make medical and financial decisions for each other.
Life Will
Livelihood will determine which life-saving medical procedures you want or don’t want if you are physically or mentally incapacitated. The case of Terry Schiavo highlights this controversial issue. If you and your partner have an understanding of what your end-of-life medical planning should be, it should be enshrined in a legal document. Otherwise, your spouse’s wishes may be overridden by his family, as you do not have a legal relationship with your spouse.
Medical Power of Attorney
A medical power of attorney designates someone with the power to make medical decisions on your behalf. What are the consequences of not having this document? Let’s say your spouse has been hospitalized for ten years, as a “non-family” reminder you may not be able to visit your partner or discuss your partner’s medical condition with their healthcare professional. Instead, a close family member such as a parent or sibling may be the only one privy to discussing medical information with your doctor—not your partner.
Financial Power of Attorney
A financial power of attorney states who can make financial decisions on your behalf. A medical power of attorney does not specify who and how your finances will be handled if you are disabled. Both should work in tandem with each other to ensure that you and your partner are taken care of, both physically and financially.
In short, inheritance planning can be a very tedious and complex process, but it has to be done-married or not. While unmarried couples clearly face challenges that are not faced by married couples, they are challenges that can be overcome effectively with some careful planning. I highly recommend than anyone preparing a plantation plan
seek advice from a competent and experienced legal professional.