The national debate over same-sex marriage has obscured a different trend: cohabitation. Whether Americans are gay or straight, it is more popular than ever to live together, outside of marriage. In fact, research shows that in 1930, married couples accounted for 84 percent of American households. And just 75 years later, married couples were the minority at 49.7 percent. Remarkably, the number of unmarried cohabitants increased by 88 percent between 1990 and 2007.
The state of Virginia earlier this year repealed an 1877 law prohibiting cohabitation ... leaving only Mississippi, Florida and Michigan as the three remaining states in which it is a crime for unmarried couples to live together.
While the topic of cohabitation causes political and social divides, there is no disagreement that unmarried cohabitants face unique estate planning challenges regarding incapacity, inheritance and estate taxation. In this article we will review such challenges and some of the potential problems they can cause.
Unlike their married counterparts, unmarried cohabitants may not be able to make fundamental health and financial decisions for one another in the event of incapacity. Absent prior legal planning or specific statutory authority, they have no legal standing over blood relatives in a court of law.
For example, consider John and Jane, an unmarried, childless couple who have chosen to cohabitate.
Jane is in a severe automobile accident and is left in a coma. If Jane’s parents and John disagree over Jane’s healthcare decisions and both parties seek to be her guardian in a court of law, the preference will be for Jane’s parents. In addition, Jane’s parents may legally bar John from visiting Jane and even have the authority to make end-of-life decisions without John’s input.
Similarly, John would not be able to manage Jane’s finances. Jane’s parents likely would be appointed as conservators for her financial affairs as well.
Absent proper legal planning, the death of one cohabitant may leave the surviving cohabitant in financial distress. State intestate succession laws (i.e., state laws that determine the distribution of assets of persons who die without a will) only distribute assets to blood relatives. Thus, a cohabitant will have no legal standing to claim ownership of the decedent’s assets.
Consider John and Jane once again. They reside in a home titled in Jane’s name alone. If Jane dies intestate, her parents likely will inherit the home, and the legal authority to remove John from it.
Estate Tax Challenges
Under current law, most Americans won’t face a federal gift or estate tax. Everyone gets a $5.25 million exemption, which effectively eliminates gift and estate taxes for most people. However, assets left to a surviving spouse are not subject to federal estate tax, no matter how much they are worth. This rule is called the unlimited marital deduction.
However, be aware that the unlimited marital deduction is just that: marital. It is only available to married couples. So, if you are a wealthy couple electing to cohabitate, you should consider speaking with qualified legal counsel to minimize or eliminate adverse tax results. Failing to do so could prove costly.
Consider this scenario: Jane’s estate is worth $10.5 million, chiefly consisting of a family business, an IRA and a life insurance policy designating John as the beneficiary. Without proper legal planning, her estate could be facing a hefty tax bill on the value in excess of $5.25 million. In fact, Jane’s estate could pay about $2 million in federal estate taxes on the remaining $5.25 million.
Now contrast that result with Bob and Barbara who are married. Barbara’s estate is also worth $10.5 million. Bob will inherit Barbara’s $10.5 million estate federal estate tax-free.
Cohabitating couples often do so to avoid some financial and legal complexities, only to face other financial and legal complexities.