If they’re of same-sex or other-sex unions, couples who are not married are faced with a myriad of estate planning concerns (and potential opportunities). Although they have challenges that married couples don’t however, the majority of these challenges can be overcome through planning. However, as many of the issues covered in this article pertain to specific states and state-specific, it is essential for unmarried couples to create their estate plans seek assistance of an attorney experienced with the tax lawyer in their home states.
Unmarried couples (whether opposite or same-sex) share the same goals for estate planning as married couples. They wish to avoid the expense, delay and public relations associated with probate, eliminate or minimize estate taxes ensure that their assets be transferred to who they want and when they wish and in the manner they prefer and safeguard their estates from other heirs’ limitations or disabilities, creditors, and predators.
In contrast to married couples, unmarried couples are not able to benefit from a lot of legal presumptions and default clauses in federal and state law. For instance, couples who are not married do not have the right to the federal gift and estate tax deductions for marital property; are not able to benefit from the tax-free “rollover” of retirement benefits the same way as spouses who survive is not covered under the majority of state laws on intestacy that determine who will receive a deceased person’s property when there isn’t a Will or Will; and aren’t allowed, under many state laws, to choose against the partner’s Will and, as a result, be entitled to a portion of the deceased partner’s estate.
Couples who are gay have made progress under the law toward getting the same advantages that married couples receive. For Massachusetts, Connecticut, Iowa, Vermont, New Hampshire in addition to Washington D.C., marriages for couples who are same-sex are currently legal and are being performed. For New Jersey, civil union is allowed, which grants state-level spousal rights to the same-sex couples. For California, Oregon, Nevada and Washington (state) domestic partnerships are legal and provide nearly all state-level rights to couples who are not married. For Hawaii, Maine, Washington D.C. and Wisconsin domestic partnerships are legal and provide only a few state-level spousal rights to married couples. In New York, Rhode Island and Maryland the same-sex marriages of other states or nations are recognized, however they’re not legally performed. Yet 41 states have laws in place that prohibit the same-sex wedding, and include 30 states with constitutional prohibitions.
Couples with same genders have made progress under the law towards getting the same benefits married couples receive. For Massachusetts, Connecticut, Iowa, Vermont, Maine and New Hampshire, marriages for the same gender are legal and are currently being performed. The states of New York and Rhode Island Same-sex weddings from other states or from foreign countries are accepted, however they aren’t performed. States like California, Hawaii, Nevada, New Jersey, Oregon and Washington through laws governing domestic partnerships and civil unions, give people who are who are in unions with same genders legal status as married couples. But 36 states have laws in force that ban same-sex unions, and states with constitutional prohibitions. Three states that are New York, Rhode Island and New Mexico – have taken none of these actions in any direction.
While it is true that the U.S. Constitution requires each state to grant “full faith and credit” to statutes of states other than its own, the Federal Defense of Marriage Act (“DOMA”) specifically slashes down the obligation to give full faith and credit for the same-sex marriage. As previously mentioned 36 states have enacted DOMA laws of their own. DOMA laws. This is because of the contradiction between DOMA and the U.S. Constitution and DOMA the issue could be up to the Supreme Court of the United States to determine the question of marriage between a man and woman.
Avoiding State Default Laws
A majority of unmarried couples want to stay clear of their state’s laws on intestacy. They decide who will receive a deceased person’s “probate” estate if he dies without having a Will. With the exception of certain states, the laws governing intestacy don’t recognize “unrelated persons.” However, assets passed to a joint tenant who has died or payable via the beneficiary designation of a trust or person are not included in the estate of the deceased, and therefore do not fall under the laws governing intestacy. Couples who are gay will also wish to stay clear of the majority of state’s default law regarding things like burial preferences and the right of a person who are conservators, guardians and personal representatives. advocates for patients.
Therefore, married couples should make use of Wills as well as substitutions for Wills (i.e. jointly owned property, beneficiary designations and accounts payable upon death) and Revocable Living Trusts and general powers of attorney in financial issues; living wills, health care authorities; as well as funeral directives to prevent any negative state laws. Additionally, when married couples name their partners for beneficiaries on Wills and Revocable Living Trusts there is a chance that family members who disagree with the decision could challenge or challenge the Will or Trust. If you include an “In Terrorem” clause in the Will or Trust Agreement, anyone contesting or challenging the Will or Trust would receive none. This clause is designed to deter individuals from contesting the validity of a Will or Trust in court as nothing substantial can be gained through the process.
Qualified Retirement Plans
While technically not a law of the state the fact is that unmarried couples generally aren’t as fortunate than their married counterparts with respect to pension plans that are qualified. A majority of 401(k) plans as well as pension plans state that upon the participant’s death, his/her the retirement account of the participant will be distributed in one lump amount. This means that the distribution will be tax-free (as normal income) during the year of the deceased participant’s death. If the spouse of the participant is the designated beneficiary the spouse is able to carry the distribution over to an IRA. Therefore, the assessment on the distribution could be delayed until the remaining spouse turns 70 1/2. At that the spouse is able to “stretch” the distribution over 27.4 years.
In the past the non-spouse beneficiary was required to make distributions from the entirety of a eligible retirement fund within 5 years of the death of the participant or in certain plans, within a few days of the death of the participant. According to the Pension Protection Act of 2006 (PPA) that took effect in 2007 the spouse beneficiary of a qualified retirement plan is able to transfer, through the trustee-to-trustee transfer the benefits to the form of an “inherited” IRA. This inheritance IRA must be named in the name of the participant for benefits to the non-spouse beneficiary (e.g., “Mary Smith, Deceased IRA f/b/o Alice Jones”). The PPA also allows the after-mortem transfers of retirement plan benefits to inherit IRAs that are held in trusts for the benefit of beneficiaries not spousal. After the benefits have been transferred to the transferred IRA the beneficiary is able to prolong the benefits for the course of their life.
Domestic Partnership Agreements
As previously mentioned, some states have passed laws that allow domestic partners to be registered as the same. This means that couples who are not married will enjoy some of the rights and obligations that are granted for married couples. But, in the vast majority of states domestic partners aren’t recognized. This is why it could be beneficial for couples who are not married to establish the terms that govern their relationships in an agreement in writing Domestic Partnership Agreement (DPA). A DPA is similar to the prenuptial agreement of couples who are planning to get married.
The basic idea is that it is essentially a DPA will be a legally binding agreement between two people who are not married which outlines what rights and obligations are owed to each party who is in the relation. Below are a few clauses that are typically included in the DPA which include: A declaration of the rights of each partner to property that was acquired prior to that date in the DPA (for instance, the property may belong to one of the parties who earned it or purchased it) as well as how any earnings earned by the parties are divided and how expenses for living are shared as well as how inheritances is divided, if it is divided at all and whether joint-titled assets are planned to be created, and in that case the manner in which they will be divided in the event separation and how the assets are split in case of divorce and whether post-separation assistance will be offered either partner will be provided by the other and how assets will be divided in the case in the event of the death of one.
Beyond addressing financial concerns the DPA will help establish different aspects of the relationship, which can help improve and clarify the relationship. A DPA can also assist in helping avoid disputes and misunderstandings by establishing an alternative dispute resolution method like arbitration. Because some states don’t accept the legitimacy of DPAs, it’s essential to speak with an attorney local to you.
Basic Gifting Strategies
Like all married couples who have estates that are tax deductible require more than an Will or Revocable Living Trust to minimize their federal estate taxes. They’ll also have to set up a gifting plan. There is currently a absence of the estate and generation-skipping transfer taxes it’s possible that Congress will restore the tax rates (perhaps perhaps retroactively) sometime in the year 2010. If not then, on January 1, 2011 the exemption for estate tax (which stood at $3.5 million as of 2009) increases to $1 million and the estate tax’s top rate (which was 45percent in 2009) changes to 55 percent.
The Federal estate tax law offers an unlimitable marital deduction. The assets left to the surviving spouse by way of a Will or trust are gift and estate tax free (if the spouse who survives is the U.S. citizen). That is couples who are married is able to defer estate tax up to the time of death their surviving spouse. In light of the Defense of Marriage Act (DOMA) that couples who are not married aren’t able to enjoy this benefit even in states that allow same-sex marriages as well as civil unions and domestic partners. So, married couples who have assets that exceed the exemption from estate tax will be subject to federal estate tax on the death of the first spouse or death in the state, as well as possibly death taxes in the state of domicile based on the state in which the domicile is located.
Below are some tax-saving methods available to married couples who are not married:
Annual Gift Tax Exclusion. This exemption permits the donor to make tax-free gifts as much as $133,000 for each donee in a year, with no limitation to the amount of donees, or the relationship between the donees and the donor. The exclusion is set to grow in size in the future, since it is indexable at the inflation rate. Annual gifts made under this exemption do not affect the amount of the $1 million annual gift tax exclusion. (See below) Additionally the tax return for gifts (Form 709) is not required for these gifts.
Additionally, direct payments for the donator’s medical or tuition fees are not tax-deductible as gifts and do not contribute to the donor’s lifetime gift tax of $1 million exemption or the annual gift tax of $13,000 exclusion. The funds have to be paid directly to an medical institution or educational institution. Education expenses don’t include accommodation and books, nor do they include supplies or other materials. Medical expenses do not count reimbursements from insurance companies.
The spouses of unmarried couples may have different incomes or accumulate different sums of wealth. The annual gift tax exclusion as well as the exclusion of medical and tuition costs permit the partner with more wealth to transfer their assets to the partner who is less wealthy in the course of their lives. This is especially advantageous when the wealthy partner’s estate is in excess of the estate tax exemption the estate of the less rich partner is less than that and they would like to help the same people in the event of death of the partner who died.
Lifetime Gift Tax Exemption. Apart from the tax exclusion for gifts each year donors can also give a total sum of $1 million to anyone in their lifetime, and not pay any tax on gifts. This is referred to as “gift tax exemption.” Gifts over the annual $13,000 gift tax exemption decrease the exemption for gift tax dollar-for-dollar. Contrary to the estate tax exemption however the gift tax exemption doesn’t rise.
The gift tax exemption that is used reduces, dollar for dollar the exemption for estate taxes available upon the death of the donor. However, the gain and appreciation earned from the gift property is taken out of the estate of the donor, thus decreasing taxes on estates. Therefore, a couple that is not married can benefit from the more wealthy spouse’s exemption from gift taxes to give gifts to the partner who is less wealthy to ensure that the total estate tax on each partner is decreased.
Gifts to Irrevocable Trusts. Unmarried couples are typically unwilling to make gifts to each other because the gift recipient loses control of the property being gifted. When making donations to trusts that are irrevocable, the more wealthy partner (grantor) can give the less wealthy member (beneficiary) with trust principal or income when necessary, but decide on where the remainder of the trust assets will go after the death of the beneficiary or the end or dissolution of their relationship. Furthermore, if the trust is properly written, the trust’s assets in the trust could be transferred, tax-free on to “remaindermen” named in the trust agreement following the death of the beneficiary.
In order to be efficient to be effective in reducing estates The trust should be irrevocable. The beneficiary should not act as trustee or a beneficiary of trust. But, the trust grantor may in certain limits, keep the power to remove trustees or replace them. Additionally in addition, as mentioned above the trust could be designed to ensure that the beneficiary-partner will be replaced by a beneficiary who is already included in the trust in the event that the relationship ceases.
To be eligible to receive the $13,000 annual tax-free gift Irrevocable trusts typically contain an agreement that gives the beneficiary of the trust a short-term option to take gifts that are made to the trust at the very least, in some way. This power of withdrawal is typically known as the “Crummey” power, named in honor of this Federal Court case that validated this method.
Irrevocable Life Insurance Trusts. The majority of unmarried couples buy life insurance to the benefit of the remaining partner to supplement the future income loss due to inability of the spousal rollover and the inability to get pension survivorship benefits. Life insurance is also utilized to establish an estate in order to provide financial security for the survivor spouse, as well as to generate the cash flow needed can be used to pay for estate taxes.
While the proceeds from life insurance are usually tax-free for those who receive them, the proceeds remain part of the insured’s total estate and subject to estate tax. In this regard, if the insured’s estate is tax-deductible (after adding the face value in life insurance) then it might be beneficial to transfer the policy of life insurance in the Irrevocable Life Insurance Trust (ILIT).
When the insurance is held by an ILIT the proceeds of the insurance are both income and estate tax-free. In the event that the already existing insurance policy gets transferred to ILIT and the insured dies within the three years following it being transferred, proceeds of death are reintroduced into the estate of the grantor insured. This issue can be avoided if ILIT is the first beneficiary and owner of the new policy.
Donations to the ILIT can be made using the grantor insured’s $13,000 annual exclusion from taxation on gifts making use of “Crummey” powers (See above) or using the grantor’s one million tax-free gift exemption. In the above paragraphs in the context of the gift of irrevocable trusts the person who is insured by the grantor should not be a trustee or a beneficiary in the ILIT. Apart from keeping the insurance funds out of the estate of the grantor insured The ILIT permits the grantor-insured determine the terms under which his or her spouse (as as the beneficiary in the ILIT) will be able to receive principal and trust income. The ILIT must also be written in a way that, if the beneficiary ceases to be connected to the grantor insured, a new person (already listed on the ILIT) immediately becomes the beneficiary.
Prior to transferring a policy an ILIT the applicable state law is required to be reviewed to determine whether it is the case that ILIT is able to claim any “insurable interest” in the policy’s grantor. If it does not, the insurance company may not be required to make the payment for the funeral benefit. It is possible to get around this issue by letting the insured purchase the policy, and then assign this policy to ILIT. According to the majority of state laws the requirement for insurable interest is only applicable to the first owner, not an assignee who is later. However, as mentioned earlier the policy can be transferred to an ILIT and the insured dies within three years after the assignment, the proceeds of death can still be included in the estate of the insured. One way to circumvent the three-year limit is the insured transfer the insurance policy into an ILIT which is designed to function as the grantor trust.
Advanced Gifting Strategies
If you are a couple who is not married and have massive estates, fully taking advantage of the annual gift tax exclusion as well as the one million tax exclusion for gifts might just not suffice to reduce the total estate tax. Gifts over the $1 million exemption from gift tax are taxed at similar rate as transfers to estates. In the event of a possible changes to the estate tax or repeal the majority of people are not willing to give gifts that are tax-deductible in order to cut down on estate taxes. Thus, efficient estate planning for those with substantial estates must include strategies to limit or even eliminate their value to very low tax costs for gifts. Below are some methods that partners who are wealthy can use to transfer any future gains to the lesser wealthy spouse, while minimising tax-deductible gifts to the greatest extent feasible:
Low Interest Rate Loans. A simple method to transfer any potential gains from the more wealthy partner to the partner with less wealth without incurring taxes on gifts is to take out the loan interest only. The loan will be liable for rates of interest equal to the applicable federal rate (AFR) which is published every month by the IRS. A less financially wealthy spouse can reinvest the loan’s proceeds and the growth in above the AFR goes to the borrower without gift tax , and will be exempt from the estate of the lender. In the past few years this AFR was at record lows, which makes this method extremely advantageous. The loan must be properly documented by means of a promissory notes.
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 richer partner can transfer their the property in the FLLC as a gift in exchange for one percent of the voting rights and an 99% non-voting stake. The non-voting interests are transferred to the less rich partner (either in trust or outright). The partner with the most wealth is able to control over the assets of the FLLC by granting voting rights and the designation of himself as manager for the FLLC. Additionally the tax on gifts of the non-voting interest could be discounted since they lack control and are not marketable.
In addition to the tax benefits of the creation of an FLP or an FLLC, besides the tax advantages of having an FLP or (i.e. discounted the worth of the asset for tax purposes and eliminating the gains and income from the property that was gifted from the estate of the donor) There are also many other non-tax motives to consider using an FLLC or an FLP. As previously mentioned the donor is able to retain control over the administration of the property owned by the entity and its distribution of profits. Assets that are part of the form of an FLP or FLLC are secured (to certain extents) from creditors. FLPs and FLLCs allow for the making of gifts in more effective ways than direct gift of real estate, especially when real property is involved.
The significant advantages of the use of FLPS as well as FLLCs have led to their subjecting their use to greater scrutiny and scrutiny from the IRS. A recent trend in cases has made it more difficult for the job of estate planners when it comes to advising clients about the advantages of FLPs as well as FLLCs. So, the proper structure as well as the administration and defense for FLPs and FLLCs FLP or FLLC should be into the hands of a skilled attorney.
Grantor Retained Income Trusts. The Grantor Retained Income Trust (GRIT) is an instrument for estate planning which has been used for several years. However it was the Revenue Reconciliation Act of 1990 effectively ended GRIT as an effective method of transfer of wealth between “family” members. However, GRITs remain an effective tool for non-married couples. It is being one of the only areas in tax law in which a couple who is not married has an advantage over married couples.
GRIT trust is an irrevocable one that the grantor (the more wealthy partner) transfer assets to the trust, with the option to collect all net income generated by the trust’s assets over a predetermined period of time. The net income has to be paid out at least as often as each year. When the fixed period of time the trust’s principal is given to the remaining beneficiary (the less well-off partner) or deposited in a separate trust to benefit the beneficiary. In the event that the grantor dies during the fixed period and dies, the assets of the GRIT are added to the estate, however the gift tax exemption utilized to establish the GRIT is reinstated. Therefore, the grantor is not in any way worse off than if the GRIT hadn’t been made. In many instances it is possible for the grantor to set up the Irrevocable Life Insurance Trust so that they can hold a life insurance policy for his or her death to ensure liquidity, as well as estate tax-free – to pay the estate tax increase due if the grantor dies during the term of the GRIT.
The value of a gift tax with GRIT is only the amount of the remaining interest (i.e. that is the amount between complete amount of property that is transferred in the GRIT as well as the current amount of grantor’s interest in income). It is important to select an option that will grant the current amount of the interest an enviable value (using the monthly IRS published discount rate) however, the grantor will likely outlive.
Kentucky One of the major advantages of the GRIT is that, if the assets that are transferred to the GRIT yield income that is lower than the discount rate of the IRS for the month in which the transaction took place The result is that the gift is undervalued to the remaining beneficiary. However, if the beneficiary who is not a member of the family and there is a requirement that Internal Revenue Code requires the payment to be a fixed annuity. known as a Grantor Retained Annuity Trust, or GRAT.
The value of a gift tax deduction is reduced in the event that the assets given to GRIT can be eligible for valuation discount (such for example, an investment in a limited family partnership). It is possible when you have a long enough time frame and a significant valuation discount that the gift tax amount will be negligible. Appreciation of the value of the asset over the course of the fixed term does not trigger estate tax. The GRIT must be designed in such a manner that, in the event that the grantor and beneficiary have ended an intimate relationship, then the beneficiary already listed in the GRIT is automatically the beneficiary.
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