Unmarried couples may have long-term relationships, children, and a desire to ensure security for their household. Still, for legal purposes, they often go through life as legal strangers. Examples of this include: An individual fails to make intentional decisions about his or her personal care and custody, health and medical decisions, disposition of remains, and funeral. Default provisions in the law favor blood-relatives, however distant, both for decision-making and for receiving financial benefits. This often occurs at the expense of an unmarried individual’s partner, household, and own wishes. This means planning to avoid the default must have a top priority when working with unmarried couples.
Incapacity Planning: Care and Custody
In the event of incapacity, by default, a blood-relative will have priority to make decisions regarding an unmarried person’s medical care and physical custody. By executing a legal document, referred to as an advanced health care directive,5 an
5 Each state uses its own terminology to refer to the document an individual uses to appoint agents for medical decision-making and indicated other wishes concerning medical care, dispo- sition of remains, and personal care and custody. Common names used by various states for such a document are: durable power of attorney for health care, living will, medical directive, or
unmarried person can designate the person who would have this authority.
Nearly as important as the legal document itself is the conversation between unmarried couples (and also with blood-relatives if appropriate) regarding the execution of the legal document that clarifies the individual’s wishes.
TIP: Unmarried couples should be advised always to carry their advanced health care directives, and do it when traveling. If they are in an accident, or one part- ner experiences a health crisis, the state or country where they seek treatment may not permit the unmarried partner to have access to, or receive information about, the injured partner. That is unless a document can be produced that legally grants an unmarried spouse that privilege.
TIP: Decisions concerning funeral plans and disposition of remains can be an unexpected source of tension between an unmarried individual’s partner and blood-relatives. Wishes concerning funeral plans and disposition of remains can be included in an advanced health care directive, preventing such a potential conflict. Payment of funeral and burial expenses should be arranged in advance, ensuring that these plans will be carried out without problems. Such an arrange- ment can be based on a prepaid plan, identification of an asset available to the surviving partner at death (see discussion of joint assets and beneficiary desig- nations below), or the use of a revocable living trust.
Incapacity Planning: Assets and Household Support
In the event of incapacity, by default, a blood-relative has the authority to make decisions affecting an unmarried person’s legal and financial affairs. However, in the absence of a legal obligation to do so (such as may exist toward a minor child), by default, that decision-maker typically does not have the right to use the incapacitated individual’s assets to support an individual’s unmarried part- ner or household. By executing a durable power of attorney, an unmarried person can not only designate the person who will have this authority, but can also clarify how household affairs would be managed during incapacity and what financial provisions might be made for the individual’s partner. In many states, individuals combine a durable power of attorney with a revocable living trust. This ensures a smooth operation for themselves and their households in the event of incapacity. Given the complexity of the issues, financial advisors should encourage unmarried couples to discuss the pros and cons of these options with their legal advisors.
advanced health care directive. In addition, there are other documents, such as the “Five Wishes”
form created by Aging with Dignity, that are accepted as valid in a majority of states.
TIP: Historically, a primary concern for unmarried couples has been the possi- bility of the partner entirely excluded from the decision-making process in favor of the blood-relatives. These concerns remain valid, and advisors should ask unmarried couples the awareness, support, and understanding of their relationship with blood relatives. They should suggest that they plan accord- ingly to accomplish ultimate objectives. A growing concern not to be ignored, however, is the stress placed on a household by state procedures that must be initiated in the absence of advanced planning. Perhaps nowhere is this con- cern as important as in state guardianship and conservatorship proceedings.
They must be initiated to transfer legal control of an unmarried person or the assets to another person in the event of incapacity.
ESTATE PLANNING
By default, at death, an unmarried individual’s assets automatically pass to the blood-relatives. Unmarried couples who wish to prevent such an automatic transfer of assets must execute a plan by one or more of the following techniques.
Joint Ownership. Assets held by unmarried partners as joint tenants with right of survivorship automatically pass to the surviving partner when the first partner dies, regardless of the state default inheritance laws. Upon death, this automatic transfer becomes efficient and quick (ensuring that the surviving partner has access to the assets without delay). It reduces the opportunity for others to chal- lenge the transfer (because there are no notification or publicity requirements).
A joint ownership has potential problems, however. A joint owner can sell the assets prior to the partner’s death, even over the objections of the partner. There is also an increased risk of unintentional taxable gifts during life (discussed earlier). A trust might be a more appropriate vehicle to provide creditor protection or ongoing management assistance to beneficiaries.
Beneficiary Designation. At the time of an unmarried individual’s death assets with a valid beneficiary designation in place automatically pass to the desig- nated beneficiary regardless of state default inheritance laws. Transfers to des- ignated beneficiaries are typically without problem and can occur a short time following death. A limited number of assets can be transferred through benefi- ciary designation, most notably bank accounts, retirement accounts, and life insurance policies. Like joint ownership, relying on beneficiary designation to transfer assets presents challenges, particularly in the case of taxable estates
where an executor or trustee must seek funds from a beneficiary to pay the estate taxes.
TIP: If current beneficiary designations are not in place, assets may pass in an unintended way to an out-of-date designated beneficiary or to the deceased partner’s estate. Financial advisors should encourage clients to verify regularly that designations are current.
TIP: Historically, nonspouse beneficiaries have had few options other than to claim a lump-sum distribution of a deceased partner’s retirement account.
Starting with 2010, nonspousal beneficiaries are authorized to direct a “rollover”
of funds from the retirement account into their own “inherited IRA” account.
Distributions from inherited IRAs can be stretched out over the designated ben- eficiary’s lifetime. From an income tax perspective this is preferable to a lump- sum distribution, although it is not as attractive as a spousal rollover. That permits the spouse to treat the account as his or her own account and defer any distributions until retirement age.
Will or Intestacy. Upon death, assets in an unmarried person’s individual name pass in accordance with the individual’s valid will or, in its absence, to blood- relatives as per the state’s default laws in intestacy. While everyone should have a valid will to avoid state default laws, it is advisable for unmarried couples to avoid the probate process typically needed to transfer assets by intestacy. Probate is public, providing ample opportunities for blood-relatives to challenge distribu- tion of assets to an unmarried partner. Following death the probate proceedings may significantly delay an unmarried partner’s ability to access funds, let alone the costly legal expenses that are bound to be incurred in this process.
TIP: State default laws for married couples often have spousal or homestead allowances available to surviving spouses during periods of probate administra- tion to ensure that a deceased individual’s family can function prior to collection and distribution of the decedent’s assets. These allowances are generally not available to unmarried partners. For this reason, unmarried couples would be well advised to avoid probate at all cost.
Revocable Living Trust. In many states, revocable living trusts have become a primary planning tool for dealing with both incapacity and death. For an effi- cient transfer of assets at death, unmarried couples generally favor using living trusts over other alternatives. These trusts are more private and less expensive to administer than probate estates. They are fairly efficient in facilitating access
to assets. They also offer great flexibility without the risks of joint ownership or beneficiary designation
TIP: While revocable living trusts do afford greater privacy than is associated with a probate proceeding, some states do have notification laws that require a Trustee to provide an individual’s closest blood relatives with a copy of the trust, giving them the opportunity to contest the the asset transfer.
TIP: Before designating a living trust as beneficiary of a retirement account, unmarried couples should consult with a legal advisor. Maximize the period of the income tax deferral.