Estate planning can be a complex process, and for unmarried couples, whether in same-sex or opposite-sex relationships, the challenges can be even more daunting. However, with careful planning and legal guidance, these challenges can be addressed effectively. It's crucial for unmarried partners to seek legal advice from an attorney who is well-versed in the laws of their state to create a comprehensive estate plan that reflects their wishes and needs.
Unmarried couples, regardless of their sexual orientation, share similar estate planning goals with married couples. They aim to bypass the costs and delays of probate, reduce or eliminate estate taxes, ensure their assets are distributed according to their wishes, and safeguard their assets from potential threats such as heirs' creditors or poor financial management.
However, unlike their married counterparts, unmarried partners do not automatically benefit from various legal presumptions and default provisions under state and federal laws. For instance, they are not entitled to the federal unlimited estate and gift tax marital deductions, cannot take advantage of tax-free "rollover" options for retirement benefits in the same manner as a surviving spouse, are often excluded from state intestacy laws that dictate asset distribution without a will, and typically cannot elect against a partner's will to receive a portion of the deceased partner's property.
Same-sex couples have made significant legal progress in some states. Marriages for same-sex couples are legally performed in states like Massachusetts, Connecticut, Iowa, Vermont, New Hampshire, and Washington D.C. New Jersey recognizes civil unions, providing state-level spousal rights, while California, Oregon, Nevada, and Washington offer domestic partnerships with nearly all state-level spousal rights. Other states like Hawaii, Maine, and Wisconsin offer domestic partnerships with limited spousal rights. New York, Rhode Island, and Maryland recognize same-sex marriages from other jurisdictions but do not perform them. Despite these advancements, 41 states have statutes prohibiting same-sex marriage, with 30 of those also having constitutional bans.
The federal Defense of Marriage Act (DOMA) of 1996 complicates matters by contradicting the U.S. Constitution's full faith and credit clause regarding same-sex marriage recognition. With 36 states having their own DOMA laws, the Supreme Court may ultimately have to resolve this conflict.
To avoid unfavorable state intestacy laws, unmarried couples should consider using wills, will substitutes (such as joint property, beneficiary designations, and payable-upon-death accounts), revocable living trusts, financial powers of attorney, living wills, healthcare powers of attorney, and burial directives. These tools can help ensure that their estate planning wishes are honored.
In addition, including an "In Terrorem" clause in a will or trust can deter potential challenges from disapproving family members by disinheriting anyone who contests the document.
Qualified retirement plans often present challenges for unmarried couples. While married individuals can roll over a deceased spouse's retirement account into an IRA and defer taxes, unmarried partners historically faced immediate or accelerated taxation. However, the Pension Protection Act of 2006 introduced the option for non-spousal beneficiaries to transfer qualified retirement plan benefits into an "inherited" IRA, allowing for the possibility of stretching distributions over their lifetime.
In states where domestic partnerships are not recognized, unmarried couples may benefit from creating a Domestic Partnership Agreement (DPA). Similar to a prenuptial agreement, a DPA is a legally enforceable contract that outlines the rights and obligations of each partner. It can cover property rights, income division, living expenses, asset division upon separation or death, and post-separation support. A DPA can also establish parameters for the relationship and include dispute resolution mechanisms like arbitration. It's essential to consult with a local attorney to ensure the validity of a DPA in your state.
The second part of this series will explore basic gifting strategies that unmarried couples can use to minimize or avoid estate taxes.
Please note that this article is for informational purposes only and should not be used as a substitute for professional legal advice.
Learn more about estate planning for unmarried couples Understanding the Pension Protection Act of 2006 Explore the Defense of Marriage Act and its implications
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