22 Estate Planning for Nontrad Relationships

Question 1

Nontrad Issues

Answer 1

• Marriage deduction may not be available
• Gift tax, estate marital deduction, and gift-splitting are available

Question 2

Disadvantages of Nontrad

Answer 2

1. Gift tax or estate tax marital deduction generally is unavailable to unmarried couples.
   
   1. In some cases, common law spouses may be eligible for the marital deduction.
   2. An unmarried donor will only be able to use one annual exclusion to reduce the amount of the taxable gift (gift splitting is not available).
2. Portability provision is not available to nonspouses.
   
   1. Make sure both partners fully use the lifetime exemption amount.
   2. Use lifetime transfers to help equalize estates.
3. Surviving cohabitants have no intestacy rights to the decedent’s property.
   
   1. If the decedent dies without a will, the intestacy laws determine who will receive the decedent’s property.
   2. Intestacy laws never transfer the assets to nonrelative, nonspouse individuals.
   3. Unmarried couples should generally have a will, use legal titling, or create trusts to prevent undesired consequences.

Question 3

Planning for Transfers at Death

Answer 3

1. Create a will leaving specific bequests to the partner—although effective, not necessarily the best choice because of potential for will contests
2. Make lifetime gifts to partner—use the annual exclusion
3. Convert property owned outright into joint tenancy with right of survivorship (JTWROS) or tenancy in common
   
   1. JTWROS property will avoid probate, but the entire date-of-death (DOD) value must be included in the gross estate if the decedent purchased the property initially.
   2. Tenancy in common property will not avoid probate, but only the decedent’s share of the property will be included in his estate at death
4. Name the other cohabitant as the beneficiary of qualified plans and IRAs
5. Obtain a life insurance policy with the other cohabitant as beneficiary
6. Use pay on death (POD) and transfer on death (TOD) beneficiary designations for bank and investment accounts
7. Create a revocable living trust and name partner as beneficiary

Question 4

Planning for Incapacity and Healthcare

Answer 4

1. Execute durable powers of attorney for health care (DPOAHC) and living wills
2. Give surviving partner power to make funeral and burial arrangements and donate organs
   
   1. State law often gives these decisions to family members.
   2. An unmarried partner may not be recognized as a family member

Question 5

Planning for Children

Answer 5

1. Ensure that surviving partner has sufficient assets to support children
2. Adoption may help ensure that desired custodial arrangements are recognized
3. Children born outside of marriage should be specifically acknowledged by name in estate planning documents

Question 6

Cohabitation Agreements

Answer 6

1. Similar to marital property agreements (prenuptial agreements) between spouses
2. Covers ownership of property and income during relationship
3. Covers distribution of property if relationship terminates or one partner dies
4. Valid in most states
5. Full disclosure requirements