Estate Planning For Unmarried Couples | Finance information

Whether

of same-sex or opposite-sex unions, unmarried couples face many estate planning issues (and opportunities). Although unmarried couples clearly face challenges that married couples Thurs not, most are challenges that can be overcome with planning. However, because many of the issues discussed in this article are state-specific, it is important that unmarried couples preparing an estate plan seek the counsel of an attorney familiar with the laws of their states of domicile.

Unmarried couples (Whether same-sex or opposite sex) have the same estate planning objectives as married couples Thurs. They want to: avoid the costs, delays and publicity associated with probate, minimize estate taxes or eliminate, make certain their assets will pass to whomever they want, when they want, and how they want, and protect assets from their heir heirs? inabilities , disabilities, creditors and predators.

Unlike married couples, unmarried couples Thurs benefit not from many of the legal Presumptions and default provisions under state and federal law. For example, unmarried couples: are not entitled to the federal unlimited estate and gift tax marital deductions, can not utilize the tax free ?rollover? of retirement benefits in the same manner as a surviving spouse, not are covered under most state intestacy laws that deterministic mine Who Receives a decedent?s property if there is no Will, and are not permitted, by most state laws, to elect against a partner?s Will and THEREBY receive a portion of the deceased partner?s property

Same-sex couples have. made some strides toward qualifying under the law for the same benefits that married couples enjoy. In Massachusetts, Connecticut, Iowa, Vermont, New Hampshire, and Washington DC, marriages for same-sex couples are legal and currently performed. In New Jersey, civil union are allowed, Which Provide state-level spousal rights to same-sex couples. In California, Oregon, Nevada and Washington (state), domestic partnerships are permitted, Which Provide nearly all state-level spousal rights to unmarried couples. In Hawaii, Maine, Washington, D.C. and Wisconsin, domestic partnerships are permitted, Which Provide only some state-level spousal rights to unmarried couples. And in New York, Rhode Iceland and Maryland, same-sex marriages from other states or foreign countries are recognized, but they are not performed. Still, 41 states have statutes on the books Prohibiting same-sex marriage, including 30 states have constitutional bans did so.

Same-sex couples have made some strides toward qualifying under the law for the same benefits that married couples enjoy. In Massachusetts, Connecticut, Iowa, Vermont, Maine and New Hampshire, marriages for same-sex couples are legal and currently performed. In New York and Rhode Iceland, same-sex marriages from other states or foreign countries are recognized, but they are not performed. The states of California, Hawaii, Nevada, New Jersey, Oregon and Washington, by way of laws regarding domestic partnerships and civil unions grant same-sex unions persons in a similar legal status to married couples. Still, 36 states have statutes on the books Prohibiting same-sex marriage, including some that also have constitutional bans. Only three states ? New York, Rhode Iceland and New Mexico -. Have taken no action in either direction

Although the U.S. Constitution requires each state to give ?full faith and credit? to the laws of other states, the 1996 federal Defense of Marriage Act (?DOMA?) Expressly undercuts the full faith and credit requirement in the case of same-sex marriage. As noted above, 36 states have passed their own DOMA laws. Thus, because of the conflict between the U.S. Constitution and DOMA, it may ultimately be left to the Supreme Court of the United States to decide the issue of same-sex marriage.

Avoiding Default State Laws Most unmarried couples

will want to avoid their state?s intestacy laws. These are the laws that deterministic mine Who Receives a decedent?s ?probate? estate if he or she so without a Will. Except for a few states, intestacy laws Thurs not recognize ?unrelated persons.? However, assets passing to a surviving joint tenant, or payable by beneficiary designation to a person or trust, are not part of the decedent?s probate estate and avoid the intestacy laws Therefore. Same-sex couples will also want to avoid most states? laws on default matters as burial seeking desires and priority among persons to act as guardians, conservator, personal representatives, and patient advocates.

Accordingly, unmarried couples should use Wills, Will substitutes (ie, joint property, beneficiary designations, and payable upon death accounts), Revocable Living Trusts, general powers of attorney for financial matters, living wills and healthcare powers of attorney, directives to avoid any and burial adverse state law. Moreover, when unmarried couples designate partners as beneficiaries in Wills or Revocable Living Trust, it is possible that disapproving family members may contest the Will or Trust. By including in ?in terrorem? clause in the Will or Trust Agreement, any person contesting the Will or Trust would receive nothing. Such a clause is intended to discourage persons from challenging a Will or Trust court since nothing material may be gained by the action. Qualified Retirement Plan

Although not technically a state law default issue, unmarried couples usually do not fare as well as their married counterparts when it comes to qualified retirement plans. Many 401 (k) plans and pension plans Provide that, upon a participant?s death, his or her retirement account is to be distributed in a lump sum. As such, the distribution is fully taxable (as ordinary income) in the year of the participant?s death. However, when the participant?s spouse is the named beneficiary, the spouse can roll over into the distribution of IRA. Thus, the income tax on the distribution can be deferred until the surviving spouse attains age 70 1/2, at Which time the spouse can ?stretch? the distribution over 4.27 years.

Until recently, a non- spousal beneficiary would have been forced to take distributions of the entire qualified retirement plan within five years after the participant?s death or, in some plans, immediately following the participant?s death. Under the Pension Protection Act of 2006 (PPA), beginning in 2007, a non-spouse beneficiary of a qualified retirement plan can roll over, via a trustee-to-trustee transfer, into the benefits of ?inherited? IRA. The inherited IRA must be titled in the participant?s name for the benefit of the non-spousal beneficiary (eg, ?Mary Smith, Deceased IRA f / b / o Alice Jones?). The PPA also permits the post-mortem transfer of qualified retirement plans to IRAs inherited held by trusts for the benefit of non-spousal beneficiaries. Once the benefits are in the inherited IRA, the beneficiary may stretch the benefits over his or her life expectancy. Domestic Partnership Agreements

As mentioned above, some states have enacted laws Allowing domestic partners to register as such. By doing so, unmarried couples will have many of the rights and responsibilities afforded to married couples. However, not in the vast Majority of states, domestic partners are recognized. Therefore, it may be beneficial for unmarried couples to define the terms of their relationship in a written Domestic Partnership Agreement (DPA). A DPA works much like a prenuptial agreement for couples planning to marry.

Basically, a legally enforceable contract is a DPA between two unmarried persons that clarifies the rights and obligations of each person in the relationship. Following are some of the provisions Typically found in a DPA: A statement of the relative rights in property acquired before the date of the DPA (for example, seeking property could belong to the person who earned or acquired it), how income earned by the partners will be divided, how living expenses will be shared, how inherited property will be divided, if at all, Whether jointly titled assets are to be created and, if so, how they are to be divided in case of separation, how assets will be divided in the event of separation, and post-separation support Whether will be provided by one partner to the other, and how assets will be a distributed in the event of death

Beyond addressing financial concerns, DPA. can help other parameters set forth in the relationship THEREBY helping to clarify and Strengthen the relationship. A DPA can also help to avoid potential misunderstandings and disputes by a dispute resolution mechanism Specifying search as arbitration. Because some states recognize the validity of Thurs not DPA, it is important to consult a local attorney.

Basic Gifting Strategies

Like everyone else, unmarried couples having taxable estates will need more than Revocable Living Trust or a Will to reduce the federal estate tax. They will also need to implement a gifting program. While there is a lapse in the present estate and generation-skipping transfer taxes, it?s likely that Congress will reinstate both taxes (perhaps even retroactively) sometime during 2010th If not, on January 1, 2011, the estate tax exemption (which was $ 3.5 in million in 2009) becomes $ 1 million, and the top estate tax rate ?(which was 45% in 2009) becomes 55%.

p> Federal estate tax law provides for unlimited marital deduction. Assets left to a surviving spouse through a Will, Trust or Will substitute are estate and gift tax free (if the surviving spouse is a U.S. citizen). In other words, a married couple can defer the estate tax until the death of the surviving spouse. Because of the Defense of Marriage Act (DOMA), unmarried couples are not afforded this opportunity ? even in those states that recognize same-sex marriages, civil unions and domestic partners. Therefore, unmarried couples Whose assets exceed the estate tax exemption will incur federal estate taxes upon the first partner?s death, and possibly state deathntaxes Depending on the state of domicile. Following are some tax saving techniques available to unmarried couples:

Annual Gift Tax Exclusion. This exclusion Allows the donor to make tax free gifts of up to $ 13,000 per donee per year, with no limit on the number of donees or the donees? relationships to the donor. This exclusion is scheduled to increase in amount, as it is now indexed to the rate of inflation. Lifetime annual exclusion gifts under this Thurs not reduce the donor?s $ 1 million lifetime tax exemption poison. (See below) Moreover, a gift tax return (Form 709) need not be filed for seeking gifts.

In addition, unlimited direct payments of the donee?s tuition or medical bills are not subject to tax toxic, nor do they count towards the donor?s $ 1 million lifetime tax exemption or toxic to the $ 13,000 annual tax exclusion poison. However, the funds must be paid directly to a qualified educational institution or medical provider. Education costs include room and board not Thurs, books or supplies. Medical costs include amounts not reimbursed by Thurs insurance companies. Unmarried partners may earn different incomes or Substantially have accumulated different amounts of wealth. The gift tax annual exclusion and the exclusion for tuition and medical costs allow the wealthier partner to transfer assets to the less wealthy partner during his or her lifetime. This strategy will be Particularly beneficial when the wealthier partner?s estate is over the estate tax exemption, the less wealthy partner?s estate is below that amount, and they wish to benefit the same persons at the surviving partner?s death. Lifetime Gift Tax Exemption. In addition to the annual tax exclusion poison, a donor can poison a cumulative total of up to $ 1 million to anyone during his or her lifetime without any toxic tax. This is the so-called ?gift tax exemption.? Gifts in excess of the $ 13,000 annual tax exclusion poison reduce the gift tax exemption dollar for dollar. Unlike the estate tax exemption, however, the gift tax exemption does not increase. Any poison used tax exemption decreases, dollar for dollar, the estate tax exemption available at the donor?s death. However, the income and appreciation on the gifted property is removed from the donor?s estate, THEREBY reducing the estate tax. Thus, to unmarried couple can use the wealthier partner?s gift tax exemption to make gifts to the less wealthy partner Sun that the overall estate tax of both partners is reduced.

Gifts to irrevocable trusts. Unmarried couples are often reluctant to make outright gifts to partners because the donor-free control over the gifted property. By making gifts to in irrevocable trust, the wealthier partner (grantor) Can Provide the less wealthy partner (beneficiary) with trust income and / or principal as needed, but can also deterministic mine where the remaining trust property will pass upon the beneficiary?s death or dissolution of the relationship. Moreover, if it?s properly Drafted, the assets remaining in the trust can pass, estate tax free, to the ?remaindermen? named in the trust agreement upon the beneficiary?s death.

To be effective for estate reduction purposes, The trust must be irrevocable and the grantor should not be a trustee or beneficiary of the trust. However, the grantor can, within limits, retain the right to remove and replace trustees and, as noted above, the trust can be designed that the Sun beneficiary partner is replaced by another beneficiary named in the trust already if the relationship is terminated.

To qualify for the $ 13,000 annual tax exclusion poison, irrevocable trusts usually contain a commission giving the trust?s beneficiary a temporary right to withdraw gifts made to the trust, at least in part. This withdrawal right is often called a ?Crummey? power, named after the Federal Court case that validated this technique.

Irrevocable Life Insurance Trusts. Unmarried couples often purchase life insurance for the benefit of the surviving partner to help supplement future income lost from the inability to do a spousal rollover, and the inability to receive survivor pension benefits. Life insurance can also be used to create an estate To provide financial security for the surviving partner, or to create the liquidity to pay estate taxes with Which. While life insurance proceeds are tax free income generated rally to the beneficiary , they are still part of the insured?s gross estate and are subject to estate taxes. Accordingly, if the insured has a taxable estate (after including the face amount of life insurance), it may be advisable to transfer his or her life insurance policies to Irrevocable Life Insurance Trust at (ILIT). If the life insurance policy is owned by and payable to at ILIT, the insurance proceeds will be both income and estate tax free. However, if, to an existing policy is Transferred to the ILIT and the grantor-insured within three years of the transfer, the death proceeds are brought back into the grantor-insured?s estate. This problem can be avoided if the ILIT is the initial owner and beneficiary of a new policy. Gifts to ILIT can be made with in the grantor-insured?s $ 13,000 annual tax exclusion using poison ?Crummey? powers ( see above) and / or with the grantor-insured?s $ 1 million poison tax exemption. As mentioned above in connection with gifts to irrevocable trusts, the grantor-insured should not be a trustee or beneficiary of the ILIT. Besides keeping the insurance proceeds out of the grantor-insured?s estate, the ILIT Allows the grantor-insured to set the parameters upon his or her partner Which (as the beneficiary of the ILIT) will receive trust income and principal. The ILIT should therefore be Drafted Sun that, if the beneficiary is no longer in a relationship with the grantor-insured, another person (already named in the ILIT) automatically becomes the new beneficiary. Before transfer ring a policy to at ILIT, applicable state law Must Be Examined to deter mine if the ILIT has an ?insurable interest? in the grantor-insured. If not, the insurance company might not be required to pay the death benefit. It may be possible to avoid this problem by having the insured purchase the policy and assign it to the ILIT Subsequently. Under most state laws, the insurable interest requirement Applies only to the initial owner and not to a subsequent assignee. As mentioned above, however, if a policy is assigned to at the ILIT and the insured within three months of the assignment, the death proceeds are includable in the insured?s quiet large estate. One possible technique to unmarried avoid the three-year rule would be for the insured to sell the policy to that of ILIT is designed as a grantor trust. Advanced Gifting Strategies

For couples with very large estates, Fully Utilizing the $ 13,000 tax exclusion and not poison annual $ 1 million tax exemption may be enough poison to Significantly reduce the overall estate tax. Gifts in excess of the $ 1 million are taxed poison tax exemption at the same rates as estate transfers. In light of possible estate tax repeal or reform, many people are reluctant to make taxable gifts to reduce estate taxes. Therefore, effective estate planning for persons with large estates must involve strategies that help reduce or freeze the value of assets at cost minimally toxic tax. Following are some strategies the wealthier partners can use to shift future appreciation to the less wealthy partner while Minimizing taxable gifts to the maximum extent possible:

Low interest rate loans. One simple way to shift appreciation potential partners from the wealthier to the less wealthy partner, without incurring a gift tax, is to make an interest-only loan. The loan must bear interest at the Applicable Federal Rate (AFR) is published monthly by the IRS. The less wealthy partner reinvests the proceeds loan, and the appreciation in excess of the AFR will pass to the borrower free of gift tax and will therefore be excluded from the lender?s estate. For the last several years, the AFR has been at all-time lows, making this strategy Particularly beneficial. The loan should be documented with a promissory note.

Family Limited Partnerships or LLCs. A Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC) Allows the wealthier partner to make gifts to the less wealthy partner on a ?discounted? basis while retaining some measure of control over the gifted partnership / membership interest. For example, the wealthier partner could transfer property to at FLLC in exchange for a 1% voting interest and a 99% non-voting interest. The nonvoting interests are then gifted to the less wealthy partner (either outright or in trust). The wealthier partner maintains control over the FLLC?s assets through the voting interests by naming him-or herself as the manager of the FLLC. Moreover, the gift tax value of the non-voting interests may be discounted because they lack control and marketability. Besides the tax reasons for creating FLP or FLLC to (ie, discounting the value of the property for gift tax purposes and removing the income and appreciation on the gifted property from the donor?s estate), so there is a variety of non-tax reasons for using FLP or FLLC to. As mentioned above, the donor can retain control over the management of the entity?s property and the distribution of its profits.

FLP or FLLC assets in on are protected (to a degree) from creditors, and FLPs and FLLCs Facilitate the making of gifts in ways much more efficient than direct gifts of property, Particularly when real estate is involved.

The substantial benefits of using FLPS FLLCs and their use have Subjected to Increased scrutiny and challenge by the IRS. A recent line of case law has complicated the task of estate planners in advising clients on the use of FLPs and FLLCs. Thus, the proper structuring, Administering and defending of the FLP or FLLC must be placed in the hands of a knowledgeable attorney. Grantor Retained Income Trust. A Grantor Retained Income Trust (GRIT) is an estate planning tool that has been around for many years. However, the Revenue Reconciliation Act of 1990 Effectively eliminated the GRIT as a wealth transfer technique among ?family? members. GRITS but are still a viable tool for unmarried couples ? one of the few areas of the tax laws of where unmarried couple has an advantage over a married couple

A GRIT is an irrevocable trust Whereby the grantor (the. wealthier partner) transfers assets to a trust while retaining the right to receive all of the net income from the trust assets for a fixed term of years. The net income must be paid at least as frequently as annually. At the expiration of the fixed term of years, the remaining trust principal is either distributed to the remainder beneficiary (the less wealthy partner) or held in trust for the benefit of further investigation beneficiary. However, if the grantor does not survive the fixed term, the assets are included in the GRIT in his or her estate tax exemption but any poison used in Establishing the GRIT is restored. Thus, the grantor is no worse off than if no GRIT had been created. In many cases, it might be advisable for the grantor to create an irrevocable life insurance trust to own a policy on his or her life to Provide the liquidity ? both income and estate tax free to pay the estate tax that will be Increased owed if the grantor fails to survive the GRIT?s term.

The gift tax value with a GRIT will be only the value of the remainder interest (ie, the difference between the full value of the property Transferred to the GRIT and the present value of the grantor?s income interest). The idea is to select a term that will give the present value of the grantor?s income interest a substantial value (using the IRS?s published monthly discount rate), but that the grantor is likely to outlive.

A big advantage of a GRIT is that if the assets Transferred to the GRIT generate income at a rate lower than the IRS?s discount rate for the month of the transaction, the net effect is to undervalue the gift to the remainder beneficiary. In contrast, where the remainder beneficiary is a family member, the Internal Revenue Code requires the payout to be a fixed annuity, a so-called Grantor Retained Annuity Trust, or GRAT. The gift tax value can be further reduced if the assets Transferred to the GRIT qualify for valuation discounts (as seeking to interest in a family limited partnership). It is possible, with a long enough term and a large enough discount valuation, that the gift tax value will be nominal. Appreciation of the asset?s value during the fixed term escapes estate taxation Malthus. The GRIT should be Drafted Sun that, if the grantor

and the beneficiary are no longer in a relationship, then another person already named in the GRIT automatically becomes the new beneficiary.

SUMMARY

The laws affecting unmarried couples are changing rapidly. Certainly more changes are likely, even the federal courts in challenges to the Defense of Marriage Act. The different rules concerning property rights from state to state add complexity to the situation, Particularly for same-sex couples who move from a state civil unions or Recognizing same-sex marriages to a state that does not. For unmarried couples it is important to have some form of estate planning to preventDefault default state laws from disinheriting their partners. Finally, because unmarried couples with large estates Thurs not have the benefit of the unlimited marital deduction and other advantages that married persons enjoy, they need to aggressively seek out alternative solutions to maximize assets, reduce estate taxes and make use of powerful techniques not available to married couples.

TO THE EXTENT THIS ARTICLE CONTAINS TAX MATTERS, IT IS NOT INTENDED OR WRITTEN TO BE USED AND CAN NOT BE USED BY A taxpayer FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE Taxpayer, ACCORDING CIRCULAR TO 230th

id=?article-resource?> Julius Giarmarco, JD, LL.M, is the Chair of the Estate Planning Group of Giarmarco, Mullins & Horton, PC, Troy, Michigan.

http://www.disinherit-irs.com

Source: http://www.lovefinanceinfo.com/2012/03/estate-planning-for-unmarried-couples/?utm_source=rss&utm_medium=rss&utm_campaign=estate-planning-for-unmarried-couples

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