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Cohabitation Complexities

Cohabitation Challenges

Marital Matters

    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    The state of Virginia earlier this year repealed an 1877 law prohibiting cohabitation ...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.

Incapacity Challenges

    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.

Inheritance Challenges

    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.

The Marital Estate Plan

Non-Citizen Spouses    Not surprisingly, very few married couples – whether they are newlyweds or celebrating sixty years of marriage – realize the importance of estate planning. However, every married couple needs some form of estate planning to protect and provide for their spouse – in sickness and in health. In this article, we review some fundamental legal tools and techniques that are essential for every married couple.

Durable Power of Attorney

    Most married couples have the mistaken belief that they can make personal, health care and financial decisions for one another should either become incapacitated due to illness or injury. But in reality, nothing could be further from the truth. The law requires further and more specific written legal authority.
     Every adult American citizen is responsible for making his or her own personal, health care and financial decisions. Accordingly, if one spouse is legally disabled, then the other spouse will not automatically have access to the disabled spouse’s medical information, bank accounts, retirement plans, etc. In fact, the healthy spouse will not even be able to file a joint income tax return for the couple.
    Hiring an attorney now to prepare a durable power of attorney to appoint your spouse as your agent is much less expensive and much more efficient than hiring one after the fact. A durable power of attorney may be prepared to cover both financial and health care matters in one document. Alternatively, separate documents may be created with one for financial and the other for health care.

Wills & Trusts

    Once you have made arrangements to care for each other in the event of incapacity, make arrangements for the transfer of your assets to one another upon death. These transfers may be outright or in trust. Also, do not forget to make arrangements for any eventual inheritance that may be left to your children. Sometimes it is wise to protect an inheritance both from and for your children. Inheritance trusts, whether established under a last will and testament, or under a revocable living trust, can provide considerable inheritance protection for your children from potential divorces, lawsuits or bankruptcies.

Estate Tax Challenges

    Most people think they donít need to worry about the federal gift and estate tax, especially married couples. Under current law, everyone can exempt $5.25 million from federal gift and estate taxes. Additionally, married couples have an unlimited marital deduction when passing wealth from one spouse to another. They also can combine their exemptions to protect a total of $10.5 million of estate assets, under a concept called portability.
    However, portability is not automatic, and these are not do-it-yourself projects. Appropriate legal counsel can help you preserve and protect your estate from unnecessary taxation, now and in the future.

This publication does not constitute legal, accounting or other professional advice. Although it is intended to be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on this material.

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