ESTATE PLANNING FOR NONTRADITIONAL FAMILIES

Barbara A. Simanek '73

Planning for the nontraditional family is more complex than for married couples, and estate tax planning for unmarried partners is even more challenging because unmarried couples do not have the benefit of the unlimited marital deduction.

1. Don’t die intestate. There is no statutory guidance for property distribution to unmarried partners. The intestate laws of the states favor next of kin. Without a carefully drafted Will, a surviving partner may not be able to receive any of the deceased partner’s estate.

2. Carefully execute a will. Although preparing a Will is a better strategy than intestacy, a bequest to an unmarried partner may be subject to challenge by relatives of the decedent. An unmarried couple should be careful to observe all the technical formalities of executing a Will, such as obtaining the signatures of the correct number and proper witnesses and proper notarization. An unmarried couple should be aware of the grounds for contesting a Will, such as improper execution, duress, undue influence or fraud. To minimize the chance of a challenge, if the testator desires to exclude his or her relatives, the Will should name and specifically disinherit those relatives, or leave them a small amount. Also, a clause can be included in a Will that provides that any beneficiary under the Will who contests the Will will not receive the property he or she otherwise would have received.

3. Create a trust. In addition to being subject to challenges, Wills are problematic because they require probate (court) proceedings and are a matter of public record. Alternatively, a trust may permit greater privacy with respect to the value of the estate and the disposition, which may prevent a challenge if the testator's biological family is unaware of the full scope of his or her assets. Further, because a trust may be established well before death, it may be more difficult to challenge. Care should be taken to ensure that during the trust creator's lifetime, assets are retitled to the name of the trust.

4. Engage in tax planning. Unmarried couples should strive to obtain tax benefits similar to those available to married couples. Some strategies include:

Attempt to equalize assets between the couple. Each partner should have as close to the credit amount as possible so that between both partners, twice the credit amount can pass free of estate tax regardless of which partner dies first. Unlike married couples who can pass assets back and forth without any tax considerations, the transfer from one unmarried partner to another may cause the imposition of gift tax. But there are tax efficient methods of transferring assets from one partner to the other. The annual exclusion from gift tax (currently $11,000 per donee) may be used to transfer assets from a partner with more property to a partner with less, over a period of time.

Another strategy is the creation of a Grantor Retained Income Trust ("GRIT"). Upon the creation of a GRIT, one partner would create a trust for a specified term, during which the trust grantor would receive the trust income. Since the grantor retains the right to receive the income, the reportable gift to the ultimate beneficiary is significantly less than the actual value of the transferred property. At the end of the trust term, if the grantor is living, the trust assets will pass to the ultimate beneficiary free of any additional transfer tax.

Create a credit shelter trust. Under the provisions of the Will or trust of the first partner to die, the credit amount should be held in trust for the benefit of the surviving partner until his or her death, at which time any remaining trust assets would pass to a contingent beneficiary. This will prevent the credit amount from becoming part of the surviving partner's taxable estate, permitting the surviving partner also to pass the credit amount free of tax upon his or her subsequent death.

Create an irrevocable trust to hold insurance. If insurance is owned by an irrevocable trust, upon death of the insured, the proceeds may not become part of his or her taxable estate. The trust can name the surviving partner as the beneficiary, either outright or maintained in trust. Once the surviving partner is taken care of through insurance proceeds, the remainder of the deceased partner's assets can pass to charity, thus reducing the estate tax consequences.

Create a Charitable Remainder Trust. When one partner dies, assets pass to a trust that would require annual payments to the surviving partner for his or her lifetime. Upon the death of the partner, any remaining trust assets would pass to charity. The first partner to die will receive an estate tax charitable deduction based on the projected future gift to charity.

5. Execute Powers of Attorney. In case an individual becomes incapacitated, medical providers and others typically look to next of kin to make decisions and serve as an individual's agent in financial matters. If an individual wishes instead that an unmarried partner serve as his or her agent, a general power of attorney and a health care power of attorney should be executed in favor of the partner.

Estate planning for nontraditional families may be challenging, but with creativity, opportunities exist.

Barbara Robbins Simanek '73, an associate with the law firm of Kirkpatrick & Lockhart LLP in Pittsburgh, focuses her practice on estate planning. She can be reached at (412) 355-8674 or bsimanek@kl.com.