Estate Planning Strategic for Unmarried Couples
Koehn, Jo Lynne, Klimek, Janice, The National Public Accountant
Increasingly, many people choose to live together as couples outside of marriage. The 2000 census documents that unmarried opposite-sex couples comprise 4.5 percent of all U.S. households and same-sex couples constitute an additional 1.6 percent (Table 1). To be prepared to interact effectively with such non-traditional clients, financial planners need to be knowledgeable of the available estate planning strategies that are effective for unmarried couples. This article discusses strategies unmarried couples can use to transfer wealth and also highlights several very traditional estate planning strategies that are not available outside of the marriage relationship.
The Marital Deduction and the Unified Tax Credit
A planner considering the estates of married persons knows that estate tax law allows two basic, important tax breaks. The first tax break applies to property inherited by the surviving spouse of a marriage, and applies only when the surviving spouse is a United States citizen. This is called the "Unlimited Marital Deduction." (2) A surviving citizen-spouse is entitled to inherit an unlimited amount of property; the surviving spouse will have no federal estate tax liability owing to Uncle Sam. The second tax break available under the law is the use of the unified tax credit, which applies both to gifts made while alive and to property passed on by way of inheritance after death. The federal unified tax credit is a dollar amount (currently $345,800), which can be used to offset or pay the estate tax liability on a decedent's estate that is imposed by the federal estate tax law. Under current law, the equivalent amount of estate that is "sheltered" by this tax credit is $1,000,000 for the year 2002. (3)
The unified tax credit is not dependent on marital status. The first-to-die of an unmarried couple may transfer $1,000,000 tax-free to the surviving partner in the relationship. By contrast, the marital deduction allows the first-to-die-spouse to transfer any amount of wealth to the surviving spouse with no transfer taxes due. The unified tax credit is the centerpiece of estate plans for unmarried couples. However, estate planning is necessary if an unmarried person desires to transfer wealth in excess of $l,000,000 to a surviving partner in a tax-efficient manner. Table 2 summarizes the applicability of the marital deduction and unified credit to wealth transfers given marital status. The table also summarizes the consideration of marital status relative to the other wealth transfer strategies discussed in the subsequent sections of this article.
Unmarried couples may transfer wealth between each other or to other beneficiaries by annual gifting. (5) In 2002, the annual amount for excluded gifts rises from $10,000 to $11,000. If either or both partners recognize that their estates will exceed the amount of the lifetime exemption, he or she can establish a strategic program of annual gifting. Each year, $11,000 of wealth may be removed from the estate with no restriction on the beneficiary of the gift. However, the gift must be of a present interest--this means the donee must have an unrestricted right to the immediate use, possession, or enjoyment of the property or income. If the size of the estate is significant, it is best to initiate the gifting program as early as possible since only $11,000 may be transferred per year.
By designating gifts as "split gifts," (6) married couples can remove $22,000 annually from an estate even if one spouse owns all the couple's assets. The split-gift designation is not available to unmarried couples. Therefore, the annual gifting strategy by unmarried partners, while important and effective if used overtime, has only half the ability--in a given timeframe--granted married couples to remove wealth systematically from a sizeable estate.
Intestacy Laws/Community Property
Under the general laws of intestacy, if a married man or woman dies without a will, the surviving spouse automatically receives a portion of the estate according to state law. …