Love is complex, as most individuals in a marriage can confirm. When money and assets like homes and vehicles enter the picture, life gets complicated quickly.
We recently worked with an investor who chose to forgo marriage. After her first divorce, she decided that it was easier for her and her long-term significant other to remain unmarried partners. This arrangement worked well for them for many years. However, as she approached retirement and sought to consolidate her retirement accounts, we discovered several estate planning issues that needed to be addressed.
Typically, a surviving spouse can benefit from the unlimited marital deduction, which allows assets to transfer to the spouse without incurring gift tax. Estate planning must be deliberate for unmarried couples since the marital deduction is unavailable. Should our investor die, her partner could suddenly find himself without a home, as the house was solely in her name. Consequently, it would be passed to her estate, with her grown daughters serving as beneficiaries.
One might think a “simple solution” would be to add his name to the property’s deed making them joint tenants with rights of survivorship. However, adding him as a joint owner without payment would be considered a gift equal to 50% of the property’s fair market value for tax purposes. If the value of the gift exceeds the annual exclusion limit of $17,000, our investor would need to file a gift tax return to report the transfer. Furthermore, he would gain the same rights as her, including selling the home and retaining the profits, effectively excluding her daughters from an inheritance.
What about designating him as a beneficiary of an IRA? Unfortunately, non-spouse inherited IRAs must be depleted within 10 years, preventing him from treating it as his own like a spouse could. Distributions from the inherited IRA could affect his taxes for several years.
Ultimately, the solutions for these situations depend on your wishes for your assets. Creating a Last Will and Testament is the initial step when considering distribution. However, if you want someone to benefit from your assets without granting full possession of them—as in this case—a trust could be structured to support a significant other for several years or until death, after which the assets would pass to other designated heirs.
While a lawyer’s expertise is required to draft wills and trusts, working closely with your financial planner and tax adviser is also essential. A financial planner will help ensure your assets are actually transferred to the trust, as failing to fund the trust or even incorrectly titling your assets could negate your entire estate plan. A tax adviser can also apprise you of any adverse tax consequences when naming beneficiaries to accounts outside the trust. Beyond assets, unmarried couples may want to consider granting financial power of attorney and establishing a health care directive should one become incapable of managing financial matters or making medical decisions.
Working out the intricacies of your estate plan with your advisers is crucial for unmarried couples, even if remaining unmarried partners seemingly is a simpler alternative to marriage.
If you have questions on how to tailor your estate plan for your situation, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the June 24, 2023 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
