Unmarried Couples Need to Have Solid Estate Plan to Ensure Their Assets are Distributed to Their Partner in the Event of Death
By Ken Bloom, J.D., LLM
The laws concerning estate planning were drafted for traditional families. However with the increase in couples of all ages living together and the growing acceptance of cohabitation of same sex couples, the laws governing estate planning need to be reviewed.
Estate Planning Concerns
A spouse is granted certain preferences when their spouse dies. For example, the estate of someone who dies without a will is considered “intestate.” The provisions of the intestate statute are mandatory. Most people assume that upon the death of a spouse the surviving spouse is entitled to all of the assets of the deceased spouse. However, according to Michigan law a surviving spouse of an intestate estate is entitled to the fist $150,000 of assets (indexed for cost-of-living); the remainder of the estate is split evenly between the spouse and children. The law doesn’t recognize family dynamics – all children are treated equally under the law. This means that even if a child is estranged from the family they receive the same share from an intestate estate as the other children.
Unfortunately, those same preferences are not accorded to unmarried couples. If you are not married and your partner dies, the surviving partner isn’t considered a family member in the eyes of the law and therefore would not have a claim on any their deceased partner’s assets. The intestate law does not recognize cohabitation relationships. It doesn’t matter the level of commitment a couple has for one another – in the eyes of the law they are strangers. To protect someone you are living with you need to memorialize your wishes in a will or trust.
It is important to understand that the intestate provisions only apply to assets owned by an individual solely in their own name at the time of their death that do not have a beneficiary designated. Retirement accounts such as IRAs provide for a beneficiary- so as long as the beneficiary is alive they will receive the account even if there is no will. The same applies if there is an account that provides for a transfer on death (often referred to as “TOD”). In both these cases, even an unmarried partner could receive these assets if their deceased partner had named them as a beneficiary.
Owning assets as joint tenants with rights of survivorship (JTWROS) is another option to transfer assets at death. Legally JTWROS means that both owners must act together to sell the property or to borrow against the property. The property is owned by both owners jointly and no one owner can do anything with respect to the property without the consent of the other. The estate planning advantage of owning property as JTWROS is that upon death the property automatically transfers to the surviving owner.
A surviving spouse not only has rights (or preferences) to their spouse’s pension, 401(k) or IRA accounts but also is entitled to distribution options not available to non-spouses. A surviving spouse does not have to withdraw from the deceased spouse’s IRA until the survivor reaches age 70 ½. Any other beneficiaries including non-married partners must withdraw from the IRA regardless of their age.
Real Estate Issues
In the event of divorce real estate owned as JTWROS automatically terminates. The property becomes owned as tenants in common (this means each person owns 50% of the property). There is no such provision in the event a relationship disintegrates – the joint owners must act jointly. No individual can force a sale. This can create an awkward and difficult problem for the parties.
To avoid problems owning property as JTWROS, unmarried couples can own real estate as “tenants in common.” Tenants in common hold an individual, undivided ownership interest in the property. Each owner can legally do whatever they want with respect to their share of the property. The interest can be transferred to anyone at death.
Establishing a trust is another option for unmarried couples to own property together. By establishing a trust for each person’s assets and then identifying what should happen to those assets in the event of one of the partner’s death, unmarried couples can ensure that their assets are distributed per their wishes. They can also name each other as the trust’s successor, which would enable one of the partners to manage the couple’s affairs in the event the other person becomes disabled.
Another form of ownership for real estate is a partnership or limited liability company. Each party owns an interest in the entity which owns the real estate. Since the entity owns the real estate, not the individuals, the real estate does not have to be probated following death of an individual. The interest in the entity will be distributed to the beneficiaries of the trust or will.
To be effective a partnership or limited liability company requires preparation of legal agreements governing the terms of the partnership and limited liability company. In addition tax returns must be filed annually.
Healthcare Directive and HIPPA – A durable power of attorney for healthcare will specify who can make healthcare decisions for each partner in the event the person can’t make these decisions for themselves. It is also advisable for each partner to name the other on a HIPPA form so they can have access to their partner’s medical information in the event they become ill.
Financial Power of Attorney – This legal document will establish each partner as someone who can make financial decisions for the other in the event they can’t do so on their own.
Beneficiary Designations-One of the most important things unmarried couples can do to ensure that their partner receives assets from life insurance, retirement accounts and other bank and investment accounts is to fill out a formal beneficiary designation form. For retirement accounts, the form will need to be filled out with the administrator of the plan.
With more and more couples choosing to live together without being married, it is vital to understand the ways to protect them legally and financially in event of unexpected events such as death or disability. Laws on these issues can vary from state to state, so it is always advisable for unmarried couples to consult an estate attorney or financial advisor to make sure they have the proper directives and legal documents to ensure their financial future.