Estate Planning for Unmarried Couples

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Who Has Legal Authority When One is Incapacitated?

     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 relationship giving legal standing in court over blood relatives.
     For example John and Jane are unmarried cohabitants when a severe automobile accident leaves Jane in a coma. If John and Jane’s parents square off in a court of law seeking to be her guardian, then the preference will be for Jane’s parents. In addition, if Jane’s parents do not like him, they may legally bar John from visiting her. Jane’s parents would 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. Her parents likely would be appointed as conservator over her financial affairs, paying her bills and filing her taxes, too.

Protecting Your Partner's Inheritance

     Absent proper legal planning, state intestate succession laws (i.e., state laws that determine the distribution of assets of a person who dies without an estate plan) may leave a surviving cohabitant on the street. For example, Jane and John reside in a home titled in Jane’s name alone. If Jane dies, then her parents inherit the home and may force John to leave as a trespasser. If Jane and John had children together, then the children would inherit the home, not Jane’s parents. But what if the children were minors?
     As the surviving parent, John would be responsible for maintaining the home for the children, or selling it on behalf of the children. When the children reach the age of majority (i.e., age 18 in most states), John may be required to turn the home or the proceeds from its sale over to the children without any further guidance or control.

Unmarried Couples Lose the Unlimited Marital Deduction for Estate Taxes

     The unlimited marital deduction is an unlimited deduction for estate (and gift) tax purposes, but only for transfers between spouses. For example, Jane’s estate is worth $7 million, chiefly consisting of an IRA and a life insurance policy designating John as the beneficiary. Upon her death, only $3.5 million of the IRA and life insurance proceeds will be sheltered from federal estate taxes. What about the remaining $3.5 million?
     Jane’s estate will pay more than $1.5 million in federal estate taxes (plus income taxes on any IRA funds withdrawn to pay these federal estate taxes) within nine months of Jane’s death.
     Contrast this result with Bob and Barbara who are married and make their home in the next cul-de-sac. Assume they present the same facts. Bob will inherit Barbara’s full $7 million without any reduction due to federal estate taxes.* This is because the unlimited marital deduction allows spouses to give during life or leave upon death an unlimited amount of assets free of transfer taxation.
     Couples who elect to cohabitate should consider seeking qualified legal counsel to minimize or eliminate these adverse results.

*Note: This scenario requires significant tax planning beyond the scope of this article.

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