Unmarried couples don’t have the same rights as married couples. They don’t have the same rights in the Social Security system. They don’t have the same immigration rights, hospital visit and health information rights, or joint bankruptcy rights. Perhaps most significantly, their inheritance rights are far less significant than those of married couples.
The Supreme Court’s Obergefell decision allowing gay couples to wed anywhere in the United States happened over three years ago, allowing many people to join the ranks of the married and begin to enjoy the benefits inherent in our system. But that doesn’t help couples who choose not to marry. Unmarried couples simply face more estate complexities than married ones do.
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What Is the Estate Planning Process?
When a person dies, his or her assets pass according to certain laws —laws that don’t include provisions for non-married partners. Estate planning is establishing ownership and titling, along with other documents, to carry out your wishes after your death.
And there’s a living side, as well. Health care decisions, hospital visitation rights, and other living considerations fall under the realm of estate planning.
Ownership and Titling of Accounts and Property
How assets are owned or titled determines what happens to them when the owner dies. This is a crucial piece for unmarried couples, as there are no spousal rights.
Beneficiary Designations
Some assets allow for beneficiary designations. Assets with beneficiary designations pass outside of the will — outside of probate. They pass directly from the deceased to the beneficiary. This is the most efficient way to transfer assets after death.
Retirement accounts, such as a 401(k), 403(b), or IRA, among others, all allow for beneficiary designations. You can check your current beneficiary and change your beneficiary through your plan’s administrator.
The downside of passing retirement assets is that the non-spousal beneficiary doesn’t have the same tax rights as a spousal beneficiary. Generally, non-spousal beneficiaries can’t maintain the tax-deferred status of the account and will need to pay income tax on this portion of their inheritance.
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But the key here is to make sure the beneficiary designation has your partner as the primary beneficiary. Otherwise, he won’t get the money.
Some investment accounts also allow for beneficiary-like designations. These designations can be “payable on death” (POD), “transfer on death” (TOD), or some other name, depending on state law. But these designations work like beneficiary designations in that they supersede any language in a will and allow the assets to pass directly to your beneficiary. This is an extremely important consideration for unmarried couples. Important for married couples, as well, but far more so for unmarried couples.
If you have significant non-retirement account investments that you wish to pass to your non-married partner, you should make certain that you have a beneficiary-equivalent designation on the accounts.
A Beneficiary Designation vs. Your Will
The difference between assets passing via your will and assets passing via a beneficiary (or equivalent) designation is huge. Assets that pass via your will go through the probate court process, often taking over a year to be distributed. And there are court costs and lawyer’s fees, often a couple percent of the assets, which can be significant.
Assets that pass via beneficiary don’t go through the probate process and are often available to the beneficiary within weeks. Plus, there are no lawyers or lawyer’s fees involved. Huge.
Forms of Ownership
Ownership and titling also affectthe distribution of assets after death. Several forms of ownership can have significant estate implications.
Tenancy in commonownership allows multiple people to jointly own an asset. The ownership doesn't have to be in equal proportion. Upon the death of an owner, the deceased person’s share becomes part of her estate. It's then distributed by her will.
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There are reasons people use this form of ownership, but it provides no estate advantage to an unmarried couple.
Joint tenancy with rights of survivorship (JTWROS) provides equal ownership of an asset between two people. It doesn’t allow for unequal ownership, but it does pass the ownership to the survivor in the event of the death of one of the owners.
The downside of JTWROS is that the IRS assumes that the assets came from the deceased unless you can demonstrate otherwise. This means the assets would be includable in the estate of the deceased for estate tax purposes. For most people federal estate taxes aren’t an issue. State estate taxes may be, depending on your state’s laws. But JTWROS is an excellent designation to ensure an asset is passed to a non-spousal partner.
Then there are trusts. A trust is a legal entity which can own property and pass it to a beneficiary. A trust can cost a lot to set up, and you’ll need to have a trustee who oversees it.
If you have a lot of assets, trusts can be great tools. But generally, you’re talking over a million of investment assets, or multiple homes in multiple states. Not generally a half-million in investment assets. You need issues that can’t be resolved by simpler things in order to justify a trust. A great tool, but not necessary for the average unmarried couple.
Life Insurance
Life insurance proceeds pass to the beneficiary after the insured’s death. There are a couple of important factors here for unmarried couples.
First, unmarried couples may have higher insurance needs, as some assets might not be able to maintain favorable tax treatment, and your partner isn’t entitled to spousal Social Security benefits. Be certain that the beneficiary designation is up to date to reflect your wishes.
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Also remember that while insurance death benefits are generally income-tax free, the proceeds are includable in the estate of the deceased. If estate taxes are an issue, you can consider cross-ownership of life insurance or an irrevocable life insurance trust.
Necessary Documents
Adults should have wills whether they’re in a relationship or not. You've got some stuff, so you need to specify what happens when you die. This is especially important for unmarried couples.
Remember, you don’t automatically have property rights when your partner dies. A will gives you property rights.
Health care proxies are also essential documents for unmarried couples. You don’t have the legal right to make health care decisions for your partner without one. Plus, you can’t see her medical records without one. You might not even be able to visit her in a hospital in some situations.
Note that people use other names for this, as well. It could be called a power of attorney for health care. Or it could be called something else. It doesn’t matter what it’s called. It matters what it does, and if you're a part of an unmarried couple you need it.
You also need a financial power of attorney. Spouses can make decisions if their partner is incapacitated. However, non-spouses don’t have the same legal right to do so.
Both health care proxies and financial powers of attorney need to specifically be durable. A power of attorney allows you to make decisions for someone who’s not present. A durable power of attorney allows you to make that decision even if the person is present, but incapacitated. It’s very important that these documents be durable because that’s when you need them most.
You might also need a living willto specify what, if any, life-extending procedures you wish to have or not have. And on top of this, you might now need a digital estate plan that your loved ones can use to find and gain access to digital accounts.
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Practical Considerations
Many people find estate planning discussions uncomfortable. They don’t like to talk about death or acknowledge their mortality. But it’s important. Not only do you need to have these conversations, but you also need to leave a simple estate roadmap.
You might think that you have everything spelled out in your will, but there may be a couple of things that are really important to your partner that you didn’t know about. Perhaps he gave you a gift that has great sentimental value to him, for example. There’s sure to be something that he would want that’s better spelled out than not.
And you have accounts. Through work. Outside of work. With banks. With other financial institutions. Covered under different documents. You need to provide a little overview and some basic instructions. Where your partner can find the info he needs to simply move the process forward without feeling overwhelmed. For many basic estates, this can easily be detailed on one page, and it will save your partner a ton of headaches.
Final Considerations
State laws vary. It behooves you to know the basics in your state and how these laws impact your planning.
And while marriage can sometimes end in a messy divorce, a non-marriage that ends has the mess without the legal framework of the divorce process. A living-together agreement can spell out responsibilities during the relationship and detail disposition of assets in the event that the union ends. It probably isn’t necessary if you live apart, but it’s essential for unmarried couples who live together.
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The estate process appears to be tricky. But so does walking, if you over-analyze it. There are basic steps that an unmarried couple can take that will make a world of difference when a partner dies. The work you put in upfront is essential in a world that favors the legal union of marriage.
