ESTATE PLANNING FOR SECOND MARRIAGES First Run Broadcast: October 10, 2017

1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)

Second marriages post a wide range of planning challenges. Planning for the equitable

distribution of property in “blended” families – children or grandchildren from a prior marriage,

a second spouse, and perhaps children from the second or subsequent marriage – is fraught with

legal and emotional landmines well beyond customary tax planning. Failure to carefully

consider objectives and consequences, and to communicate and execute plans can easily leave a

client’s estate exposed to open and raw disputes among competing heirs and eventually to

destructive fiduciary litigation. This program will provide you with a guide to the practical,

substantive and tax aspects of planning for clients with second marriages and blended families.

• Estate and trust planning for remarriage and blended families

• Understanding the emotional context of planning for remarried clients and blended

families

• Use of pre-martial agreements to spot contentious issues, align interests, and decrease

post-mortem litigation

• Income tax planning issues for the second marriage, including exemptions and credits

• Use of trusts and gifting to prevent unjust enrichment of one component of a blended

family

• Traps and opportunities with retirement benefits

• Post-mortem planning techniques when the first spouse dies – and issues on the

“second death”

Speakers:

Missia H. Vaselaney is a partner in the Cleveland office of Taft, Stettinius & Hollister, LLP,

where her practice focuses on estate planning for individuals and businesses. She also represents

clients before federal and state taxing authorities. Ms. Vaselaney is a member of the American

Institute of Certified Public Accountants and has been a member of the Steering Committee for

AICPA’s National Advanced Estate Planning Conference since 2001. Ms. Vaselaney received

her B.A. from the University of Dayton and her J.D. from the Cleveland-Marshall College of

Law.

Michael Sneeringer an attorney in the Naples, Florida office of Porter Wright Morris & Arthur

LLP, where his practice focuses on trust and estate planning, probate administration, asset

protection planning, and tax law. He has served as vice chair of the asset protection planning

committee of the ABA’s Real Property, Trust and Estate Section and is an official reporter of the

Heckerling Institute. Mr. Sneeringer received his B.A. from Washington & Jefferson College,

his J.D., cum laude, St. Thomas University School of Law, and his LL.M. from the University of

Miami School of Law.

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Estate Planning for Second Marriages Teleseminar

October 10, 2017 1:00PM – 2:00PM

1.0 MCLE GENERAL CREDITS

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Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: October 10, 2017 Seminar Title: Estate Planning for Second Marriages Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

Trust and Estate Planning for Second Marriages

Presented by:

Missia H. Vaselaney

Taft Stettinius & Hollister LLP

200 Public Square, Suite 3500

Cleveland, Ohio 44114-2302

Direct Dial: (216) 706-3956

Fax: (216) 241-3707

mvaselaney@taftlaw.com

&

Michael A. Sneeringer

Porter Wright Morris & Arthur LLP

9132 Strada Place, 3rd

Floor

Naples, Florida 34108-2683

Direct Dial: (239) 593-2967

Fax: (239) 593-2990

msneeringer@porterwright.com

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Trust and Estate Planning for Second Marriages

I. Introduction

There are many similarities and significant differences in the planning for “first married”

couples and the planning for remarried couples, unmarried couples and blended families

(hereafter sometimes referred to as “non-traditional” couples). Usually planners tend to

focus on estate planning for the traditional couple and family. When non-traditional

couples seek advice, many professionals approach the planning for these couples and

families from the perspective of their experience with traditional couples and families.

Treating non-traditional couples the same as first married couples (the “Ozzie and Harriet

couple”) may produce an estate plan that does not address the non-traditional couple’s

unique issues and may ultimately result in missed tax planning opportunities and

contention among family members and heirs. With the changing demographics of our

society non-traditional couples may soon far outnumber traditional couples. For this

reason estate planners need to become much more familiar with the planning

opportunities and pitfalls that exist regarding planning for non-traditional couples.

Finally, with the uncertainty regarding the continued existence of the estate tax, the non-

tax planning required for these non-traditional couples may produce a practice

development opportunity.

II. Comparing and Contrasting Estate Planning for Traditional and Non-

Traditional Couples

A. Generally. Most couples, whether traditional or non-traditional, have similar

basic estate planning goals. An individual first and foremost will want his or her

dispositive wishes fulfilled. Secondary goals will generally include reducing estate taxes

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and avoiding probate. Estate planners, especially in planning for non-traditional couples,

must keep these goals, particularly the satisfaction of the client’s dispositive wishes,

upper most in his or her mind. Estate planners sometimes tend to let the tax issues drive

an estate plan to the detriment of the client’s other goals, the achievement of which may

in fact be more important than reducing estate taxes.

B. Traditional and Remarried Couples vs. Other Non-Traditional Couples.

Traditional couples and remarried couples have distinct advantages over other couples.

The institution of marriage has always been highly regarded by American society. In

1888, in the case of Maynard v. Hill, 125 U.S. 190, 203 (1888), Justice Field defined

marriage as “creating the most important relationship in life, as having more to do with

the morals and civilization of people than any other institution”. Due to society’s

reverence for the institution of marriage, the law confers many rights and benefits on

married couples that are unavailable to other couples (other than the Federal Income Tax

“marriage penalty”). Rarely does the law distinguish between first married couples and

remarried couples in bestowing these rights and benefits.

1. Rights and Benefits.

a) Marital property rights (community, dower etc.).

b) Preference in intestate succession.

c) A spouse has priority regarding appointment as the other spouse’s

guardian in the case of incompetency.

d) Spouse has priority with regard to the appointment of an Administrator

of the other spouse’s estate.

e) Court supervision of property rights on the termination of the

relationship.

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f) Federal (and sometimes state) estate tax unlimited marital deduction

and gift tax exemptions.

g) Spouses may file joint income tax returns.

h) Corporate benefits such as family health insurance coverage and

survivor pension benefits are available for married couples, but are rarely

allowed to non-married couples. However, some municipalities and some

corporations have amended their plans to include same sex or Domestic

Partners. (Some states still allow same sex and opposite-sex couples who

meet certain criteria to register as Domestic Partners.)

i) Social Security survivor benefits.

j) Stepparent adoption allowed.

k) Communications between spouses are protected by the spousal

communication privilege.

l) A spouse can sue for loss of consortium, emotional distress and

wrongful death for injuries to the other spouse.

C. What Marriages are Recognized

1. States. The legislature of each state has the right to prescribe what constitutes

a valid marriage and thereby who will marry.

2. Common Law Marriages. State legislatures also have the power to decide if

a “Common Law Marriage” should be recognized as a legal marriage. Mere

cohabitation by an opposite-sex couple does not constitute a common law

marriage. Generally, to be recognized as a common law marriage, in a state that

recognizes common law marriages, the couple must have (1) manifested an intent

to be husband and wife (own joint property, filed a joint income tax return); and

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(2) held themselves out to the public as husband and wife. Due to the increased

cohabitation by unmarried opposite-sex couples, several states have changed the

existing statutes recognizing common law marriages. Most statutes “grandfather”

common law marriages that existed on the date of the statutory change, but deny

recognition to relationships that would have qualified for common law marriage

treatment, where such qualifications were met, after that effective date of the

change to the law.

3. Conflicts of Laws Issue. First Restatement (Second) of Conflict of Law, 283

(1988), states that “a marriage is valid everywhere if the requirements of the

marriage laws of the state where the marriage takes place are met, except in rare

instances.” These rare instances include situations where recognition of the

marriage would go against strong public policy.

4. IRS Position. The current position of the IRS is that it will recognize a

relationship as a valid marriage, if the applicable state does so. Following

Revenue Ruling 2013-17, the IRS makes no distinction between same-sex or

opposite-sex marriages.

III. Estate Planning for Remarried Couples

A. Generally. For purposes of this discussion, a remarried couple is one where at

least one of the partners has at least one child prior to the marriage, whose natural parent

is not the other partner. This classification of remarried couples may include couples,

where neither couple has actually ever been married and may not include remarried

couples where neither party has had a child or children in his or her previous marriage.

The following discussion of planning for remarried couples may also apply to marriages

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where both partners have no children and desire to have their respective assets left to

their respective families. (The following discussion assumes no antenuptual agreement

has been executed.)

B. Guardianship. A spouse has priority if an individual becomes incompetent. This

may not be this individual’s desire, especially in a short-term second marriage. In this

circumstance the client should consider having a funded living trust supplemented by a

power of attorney naming the party the client wants to handle his or her affairs should he

or she become incompetent. In some jurisdictions, a power of attorney alone may avoid a

guardianship; however, a trust may provide more structure especially in the circumstance

of a non-traditional couple.

C. Intestate Succession. One statistic has placed the figure of people who die

without even a simple will at 75%. For this reason, states had to enact laws which govern

the distribution of these individuals property. Intestate succession statutes vary from state

to state, but usually they provide for a pattern of distribution similar to the following:

1. A married individual’s property will pass 100% to the surviving spouse if

there are no children.

2. If a married individual has a child or children. The spouse will receive a

percentage of the estate while the children will share the balance. (Some states

have changed their statutes to distribute 100% to the surviving spouse, where the

surviving spouse is the natural parent of all the decedent’s children.) A typical

distribution scheme in this situation is that after the spousal allowance, that the

balance of the net estate, if there is only one child, is divided 50/50 between the

spouse and child. If there is more than one child, the net estate is divided 1/3 to

the spouse and 2/3 to be divided among all children.

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D. Administrator. When a married individual dies without a will (or a will where a

named executor is unable to serve), the surviving spouse generally has first priority to

serve as Administrator. (An executor is the individual named by the decedent; an

administrator handles the same task but is chosen by the court.) This may not be the

decedent’s intent, especially where 2/3 of the assets are for the benefit of the children.

Also, if the decedent has a family business, and has not done other planning, the spouse

may end up controlling such business as Administrator of the estate.

E. Simple Wills. Simple wills in a remarriage are the “he who lives longest wins”

plan. Many remarried couples try to use a first marriage distribution plan. They execute

simple wills which leave everything to each other and then to their joint children. The

flaw in this plan is that there is usually nothing to prevent the surviving spouse from

executing a new will which leaves everything to his or her children only (or to another,

following another remarriage, spouse). Another frequently seen defective plan involves

each spouse executing a simple will, which leaves everything to his or her respective

children. In this circumstance, it is not uncommon for the surviving spouse to elect

against the estate of the first spouse to die. The spousal election is usually equal to 1/3 of

the probate estate. The decedent may have designated the surviving spouse as the

beneficiary of certain non-probate assets, while intending that the balance of the assets

pass to the children. The spouse would receive the non-probate assets and the spousal

election.

F. Probate Avoidance Techniques.

1. Distinction Between Assets Subject to Probate and Assets Includible in

Taxable Estate. An asset may be included in the decedent’s estate for death tax

purposes, but not be includible in the probate estate. For example, the decedent’s

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assets held in joint tenancy, in a bank account, or in a funded revocable living

trust will be included in the decedent’s estate for tax purposes, but are not subject

to probate. Moreover, if the decedent retained any of the incidents of ownership

in a life insurance policy on the decedent’s life, or transferred such ownership

within three years of death, the proceeds will be includible in the decedent’s estate

for tax purposes (see I.R.C. §§2035 and 2042), but if payable to a beneficiary

other than the decedent’s estate, the proceeds will not be subject to probate.

Assets which have been gifted by the decedent in such a way that the decedent

retained a prohibited right or power (see I.R.C. §§2036 through 2038) will also be

includible in the taxable estate, but not in the probate estate. It is important to

keep in mind that avoiding probate does not necessarily avoid estate taxes. It is

also important to keep in mind that these techniques should not be utilized

without thorough evaluation, especially by non-traditional couples, as they may

produce unintended results.

2. Methods of Avoiding Probate. There are a number of methods for planning

an estate that will avoid the probate process and the disadvantages regularly

associated with such process, without causing any great risk that the asset or

proceeds will not be distributed as the decedent desired. The remainder of this

section reviews those important alternatives.

a) Joint Ownership with Rights of Survivorship. Ownership of real and

personal property in joint tenancy is the most common method of avoiding

probate. Joint tenancy is an estate in real or personal property held by two

or more persons jointly with rights to share in its enjoyment. Upon the

death of a joint tenant, the entire estate passes immediately to the

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surviving joint tenant or tenants. The survivor(s) automatically own(s) the

entire asset without the need for probate or any other form of court

intervention. The death certificate of the deceased joint owner is all that is

necessary to establish the title of the surviving joint tenant(s). Often there

is a presumption against the creation of a joint tenancy in real or personal

property other than bank accounts, unless the legal instrument transferring

the property states that the property is conveyed or transferred in joint

tenancy. The safest way to establish joint tenancy is to state clearly on the

deed, assignment, or other document creating title, “in joint tenancy,” “as

joint tenants,” or “as joint tenants with right of survivorship and not as

tenants in common.” The absence of such language will ordinarily create

a tenancy in common, which does not have the survivorship feature. A

joint tenant’s share of the estate may be conveyed by a joint tenant at any

time, thereby terminating the joint tenancy. If the joint tenants cannot

agree on how to divide the property, either may bring a partition suit and

ask the court to divide the property. No one can destroy or affect the joint

tenancy or prevent the entire interest owned by the deceased joint tenant

from passing to the survivor.

(1) Advantages and Disadvantages of Joint Tenancy. The

following summarizes the advantages and disadvantages of joint

tenancies:

(I) Advantages

(i) Joint tenancies are easily understood.

(ii) Joint tenancy can be used to avoid probate,

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although joint tenancy property is required to be

included in the estate tax return.

(iii) Joint tenancy property is often free from the

claims of creditors of the deceased joint tenant if no

prior lien was attached.

(II) Disadvantages

(i) Joint tenancy property cannot be passed by the

will of the joint tenant dying first; instead, the

property passes to, and is subject to disposition by,

the surviving tenant.

(ii) The estate may be deprived of liquid funds

necessary to pay death costs, claims, and taxes.

(iii) Joint tenancy property may be caught up in

discord between spouses because of the inability to

reach agreement on management of the property

and the right of noncontributing spouse to acquire

one-half of the property through partition or

severance.

(iv) If the joint tenancy property is subject to a

mortgage, the property will pass to the surviving

joint tenant, but the estate may be required to pay

the mortgage out of the residue, thus frustrating the

decedent’s family giving plan.

(v) Creditors of either joint tenant may attach the

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person’s interest in the property during life.

(vi)There may be unfavorable gift and estate tax

consequences depending on the specific facts of

each case.

(2) Example. An example of a misplaced joint savings account

was created by a widowed mother of three. She transferred her

life’s savings into a joint account with one nearby daughter for

convenience. Upon the widow’s death, her one daughter received

the entire account. It did not matter that the widow’s will provided

all three children were to share the money equally.

(3) Tax Issues and Traps of Joint Ownership with Rights of

Survivorship. There are many tax issues and traps for the unwary

that develop from joint ownership with rights of survivorship,

including the following:

(I) The creation of a joint tenancy between spouses

does not create a taxable gift because of the unlimited

marital deduction.

(II) The creation of a joint tenancy with a non-spouse

creates a taxable gift when the contributions are unequal.

When a donor conveys to himself or herself and a donee as

joint tenants and either party has the right to sever the

interest, there is a gift to the donee in the amount of one-

half of the value of the property. The gift usually occurs

when the non-contributor claims or takes a portion of the

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joint interest.

(III) In the case of the property held in joint tenancy

between spouses, only one-half of the value is included in a

deceased joint tenant’s estate. The deceased’s one-half

interest acquires a stepped-up basis. Compare this with

community property states where both halves acquired

stepped-up basis. This adjustment to the surviving spouse’s

basis is a major incentive for classifying property as

community property, and creates complex tax issues when

moving from a community property state.

(IV) In the case of property held in joint tenancy with a

non-spouse, termination may trigger gift tax consequences.

The entire interest of the property is included in the estate

of the joint tenant who dies first, unless the estate is able to

prove the amount of consideration furnished by the

survivor. The contribution of the survivor must not be

traceable to the decedent. There is an exception where the

property was acquired by the decedent through inheritance.

(V) Use of joint tenancy may frustrate other tax

planning. For example, use of joint tenancy can result in

over-qualification of the marital deduction, resulting in

property being taxed a second time.

b) Insurance, Savings, and Retirement Plans and Annuities. Insurance

policies, annuity contracts, profit-sharing and pension plan accounts,

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Keoghs, and individual retirement accounts (IRAs) are just some examples

of assets that may be passed by contract, agreement, or beneficiary

designation and avoid probate. Contingent beneficiaries should be named

in the event the primary beneficiary named does not survive to receive the

benefit. Mistake and neglect in properly designating and changing

beneficiaries result in many problems in estate administration. Many

beneficiary designations are made and forgotten in the files of insurance

companies and banks. Later marriages, divorce, births, deaths, financial

needs, and estate planning goals are not taken into consideration. Imagine

the surprise when a former spouse turns up as the beneficiary after a bitter

divorce (In many states divorce acts to treat the former spouse as

predeceased in any existing will or trust agreement, however this does not

usually remove the former spouse as a beneficiary on non-probate assets).

or an after-born child is forgotten. Beneficiary designations should always

be signed and reviewed when any family or planning changes occur. If no

beneficiary designation exists, most policies, plans, or accounts have an

automatic designation. If your estate is large enough to be subject to

federal estate taxes, coordinate the designation with tax planning.

c) Retirement Plan Distributions. Since December 31, 1984, there is no

estate tax exclusion for qualified profit-sharing, pension, Keogh, IRA, and

other employee benefit plans. This means that they may be subject to both

income tax and estate tax. The income tax rules governing these plans are

very complex and vary depending on design of the plan, source of

contributions, and conditions at death. In addition, tax laws, rules, and

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regulations are changing constantly. In the event of the death of an

individual who has money remaining in a retirement account, expert tax

advice should be obtained before any distributions are made. Written

retirement plan beneficiary designations are important estate planning

documents to assure the eventual flow of assets to pre-selected

beneficiaries with the minimum amount of tax impact. Often the

retirement plan distributions become the estate’s largest asset.

d) Payable on Death Accounts. In most states an individual may enter

into a contract with a bank or other institution authorized to receive money

whereby the proceeds of the owner’s account may be payable to another

person upon the owner’s death, notwithstanding the provisions of his or

her will. Such accounts as “payable on death” or “payable on the death of”

may be abbreviated to “P.O.D.” During the depositor’s lifetime, he or she

has the sole control of the account and may withdraw it or change the

beneficiary at will. From a tax and estate planning point of view, this

form of holding title is similar to a bank account in joint tenancy created

with one tenant’s separate funds. The outstanding difference is that the

non-contributing party (and his or her creditors) has no right of withdrawal

during the depositor’s lifetime. If the P.O.D. trust is not revoked during the

depositor’s lifetime, the beneficiary will receive the proceeds on the death

of the depositor.

e) Transfer-on-Death Deed. Some states have enacted legislation to

provide for a transfer-on-death deed, adding to the arsenal of methods to

avoid probate administration of estates, which include payable-on-death

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bank accounts, joint ownership of personal and real property with rights of

survivorship, transfer on death designation for securities, and beneficiary

designation for life insurance and qualified retirement plans. The most

important advantage of a transfer-on-death (TOD) deed is that the

beneficiary or beneficiaries have no interest in the property during the

lifetime of the owner of the interest. The interest of the named transfer-

on-death beneficiary is not subject to attachment by such beneficiary’s

creditors, is not transferable through the estate of the named transfer-on-

death beneficiary if such beneficiary precedes the owner’s death, and the

spouse of the named transfer-on-death beneficiary has no interest in the

property during the life of the owner of the interest. The owners of the

interest may change or revoke the deed, and may sell or do anything with

the property during the owner’s life without the consent or signature of the

designated transfer-on-death beneficiary. To change the designated

transfer-on-death beneficiary or add a new beneficiary, the owner need

only execute another deed in which a new or no transfer-on-death

beneficiary is named. Generally, the owner of real property may create a

transfer-on-death interest in either the entire or any separate interest in the

property. Such interest may be designated to one or more individuals

including the owner (grantor). Finally, such deed need not be supported

by consideration and need not be delivered to the transfer-on-death

beneficiary to be effective.

G. Trusts

1. QTIP Trusts. Remarried couples have the perfect tool, as opposed to

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other non-traditional couples, for planning their estates. A Qualified Terminal

Interest Property Trust (“QTIP”) allows an individual to provide for his or her

surviving spouse, while still controlling the ultimate distribution of the assets

contained in the trust. A QTIP also qualifies for the unlimited marital deduction,

if requirements are met. (A technical discussion of these requirements is beyond

the scope of this outline. Please see Tom Austin’s outline from the 2001

conference for a detailed discussion.) The basic requirements are that the

surviving spouse must be the only beneficiary of the trust during his or her

lifetime and the spouse must receive at least all the income from the trust for life.

In most states income is defined as interest and dividends but not capital gains.

Due to the manipulation of income that may be possible, the choice of Trustee

should be carefully considered. One option is to have the surviving spouse and

one of the decedents children act as Co-Trustees. The client may wish to structure

the trust as an “income only” trust, particularly if the surviving spouse is likely to

enter a nursing home. Placing all assets in trust for the surviving spouse, where

the trust allows for principal distributions for the surviving spouse’s health,

maintenance and support, may deprive the children of any inheritance.

2. Lifetime QTIP. QTIP Trusts also can be used during life to equalize

assets, in order not to waste a “poorer spouse’s” credit.

3. A/B QTIP Trust. Generally, a client’s estate plan is structured as an A/B

trust, so as to take advantage of both the Unified Credit Equivalent (“the credit”)

and the unlimited marital deduction. In the case of a remarried couple the A Trust

should be structured as a QTIP. Many times it turns out the A Trust has been

structured as an Outright Marital Trust or a Power of Appointment Trust, thereby

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giving the surviving spouse complete control. This mistake is usually made by

either an inexperienced estate planner or an estate planner who is only focusing

on obtaining tax saving and not on the family situation. In structuring the A/B

Trust, consideration should be given to either distributing the B Trust to the

decedent’s children or holding it for the children’s benefit, even if the spouse

survives. The needs of the surviving spouse should be considered, but so should

the age of the spouse in relation to the ages of the children. The client may wish

to only give a portion of the B Trust to the children, or on the other hand,

especially in a larger estate, the client may not want to maximize the marital

deduction. With the changing credit amount, careful drafting is necessary to avoid

unintended results.

4. Life Insurance and Individual Retirement Accounts. In some situations

so as not to complicate the drafting of the client’s trust agreement, Life insurance

and/or Individual Retirement Accounts (IRA’s) can be left directly to the children

or to a trust for their benefit. Careful consideration should be given to both the

income and estate tax consequence of such an arrangement. If the client has a

taxable estate, the life insurance should be owned by an irrevocable trust to

minimize and/or eliminate the transfer tax consequence. An Irrevocable Life

Insurance Trust can leave a much greater sum of money to the children, while still

maximizing the marital deduction. Leaving an IRA directly to the children

generally will result in continued income tax deferral, and may attain income tax

savings, if the children are in lower brackets. (Qualified Plans at many companies

will make only deferred payments over the life of the surviving spouse, therefore

naming the children as beneficiaries of such plans may result in income tax

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acceleration. In addition, in order to name children as beneficiaries of such a plan

requires the spouse’s consent.) One benefit of designating the children as

beneficiaries of the client’s IRA or as beneficiaries of the client’s life insurance

(not owned by an Irrevocable Life Insurance Trust), is that the client can change

the beneficiary without the expense of redrafting the estate planning documents.

However, the client should keep the planner informed to avoid any unintended

results.

5. “Anti-hovering” Money. Whether a client leaves a portion or the entire B

Trust to his or her children, or makes them the beneficiaries of life insurance or

other non-probate assets, it is a good idea to leave something to the children, even

if the spouse survives. This gesture may minimize potential conflict between the

spouse and the children. It may keep the children from hovering, waiting for the

spouse to die to inherit what they feel is rightfully theirs.

6. Funded Trust. In some states it is possible to disinherit a spouse.

Normally the statutory spousal election only applies to probate assets. Anything

that passes outside of probate is not subject to that election. Making sure that all

assets avoid probate will, in effect, disinherit a spouse. It may be difficult to

transfer real estate to a trust without the knowledge of the other spouse, even if

the real estate is only held in the trust grantor’s name due to dower rights and

community property rights which exist in some states. A fully funded trust may

be an alternative to an antenuptual (only for death not divorce) in these states,

especially if the trust is fully funded prior to the marriage.

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IV. Estate Planning for Non-Married Couples

A. Generally. Some opposite-sex and same-sex couples choose not to marry for a

number of reasons. Previously divorced clients may be marriage shy. Older individuals

may not want to risk their assets should the other spouse enter a nursing home. They may

not want to lose social security or other benefits that may result should they remarry. The

couple may not want to be subject to the income tax “Marriage Penalty.” Same-sex

couples were previously prevented from marrying. The estate planning for these couples

can be very similar to the estate planning for married couples, except that the tax benefits

and priority rights do not exist. These couples may resemble traditional couples in the fact

that they have children together and there are no children outside this relationship. They

may resemble remarried couples in that one or both have children from prior marriages.

B. Guardianship. The partner will have no priority with regard to the appointment

of a guardian and because of not being related by blood will have little chance of being

appointed. At least a Power of Attorney should be executed to remedy this problem. In

addition, a health care power of attorney should be executed to ensure that the partner is

not prohibited from being involved in healthcare decisions or prevented from seeing the

other partner by biological family members.

C. Intestate Succession. The partner will not be included at all and will have no

priority regarding appointment as Administrator.

D. Wills. Using simple wills in these situations may leave the estate plan subject to

attack by the natural objects of the decedent’s bounty, those who would have inherited

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had the decedent died without a will. The surviving partner will not have any statutory

protection. (If there are only children from this union, this probably will not be an issue.)

A partner’s will may be subject to claims, by family members, of undue influence by the

other partner. Caution must be used in following all formalities regarding the execution

of the will. Heirs-at-law should be specifically mentioned in the will and disinherited.

Some commentators suggest including heirs in the will, who would potentially contest

the will and also include a “no-contest” clause. This may not work because, if the will is

declared invalid, so is the clause. It may, however, deter some uninformed heirs.

Unmarried opposite-sex and same-sex couples should update their wills regularly to

demonstrate their continued desire to benefit each other. All prior wills should be retained

and marked as superseded. A client may also want to include funeral instructions in the

will. Although the will is not admitted to probate until after the funeral, it demonstrates

the decedent’s intent. Prepaid funeral arrangements also should be considered to prevent

biological family members from taking control of the situation.

E. Probate Avoidance Techniques. As discussed above, joint and survivorship and

other non-probate estate planning strategies are very risky due to their unintended tax and

legal consequences. If these mechanisms are used, the client should clearly document his

or her intent to avoid any challenge after death. The advantage of using these probate

avoidance techniques, including fully funded living trusts, are that they are usually more

difficult to challenge and the transfers are not a matter of public record. However, in

some cases, appearing secretive can make other heirs, particularly children, more

suspicious of the situation leading to increased legal action. Again clearly documenting

the client’s intent should reduce these risks.

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F. Trust. Much the same as in the case of a married couple, a trust can be used to

support a partner while leaving the ultimate distribution of the assets in the control of the

grantor. Sometimes there is no desire to control the ultimate distribution of the assets. In

such an instance, the easiest course of action would be an outright distribution to the

other partner. Unless the estates are modest this will result in double taxation of the

transferred assets and the loss of one partner’s Credit. These trusts, however, are not

eligible to defer estate tax on assets in excess of the Credit, until the surviving partner’s

death. The advantage non-married couples have over married couples is that these trusts

do not have to be structured as QTIP Trusts. The trust may have more than one

beneficiary, does not have to pay all income and may terminate at a desired event such as

the marriage of the surviving partner. Other types of trusts beyond the scope of this

article may be used to leverage one partner’s Credit and annual gift tax exclusions to

provide greater income to the other partner. Such trusts may include Charitable

Remainder Trusts, Charitable Lead Trust, Grantor Retained Annuity Trusts and Grantor

Retained Income Trusts.

G. Gifting. The ability of these couples to equalize assets, to take advantage of both

partners’ Credits, is severely restricted due to the unavailability of the unlimited marital

exclusion. In addition, gifts between these partners may be reclassified as taxable income,

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subject to both regular income tax and self-employment tax, to the partner receiving the

gifts. This may happen in a situation where one partner works and the other partner

provides domestic duties. Also, if one partner owns the home and the other lives there

rent free and is the one who provides domestic services, half the rental value of the home

may be deemed taxable income to the non-owner partner.

H. Life Insurance. As long as a partner is still insurable, life insurance can be used to

provide for the other partner. In cases where it is likely that disinherited relatives are

likely to enter into litigation, a client can chose to leave all his assets to his heirs-at-law,

while providing for the partner through life insurance. In order to minimize the tax

consequences, the insurance should either be owned by the other partner or by an

Irrevocable Life Insurance Trust. If the partner owns the insurance to the extent the

proceeds are not consumed during the surviving partner’s life, they will be taxable on his

or her death. If the non-insured partner should predecease the other partner, any cash

surrender value would be taxable in his or her estate and the disposition of the policy

would be governed by such partner’s estate plan. In these situations, there also may be an

issue of whether or not the partner has an insurable interest with regard to the other

partner’s life.

I. Guardianship of Children. If children result from an opposite-sex relationship,

the fact that the couple is not married will not prevent the other partner from becoming

guardian of the children, as he or she is the natural parent. In situations involving both

unmarried opposite and same-sex couples, where one partner is the only natural parent of

a child or children and this partner wants to name his or her other partner as the

guardian of this child or children, the partner should execute a will naming the other

partner as guardian. If this action is not taken, the blood relatives of the children may be

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appointed guardian by the court and prevent the surviving partner from having contact

with the child or children. This is particularly tragic in the case of lesbian couples, where

the child or children were conceived during the relationship by artificial insemination.

Adoption by the other partner, without severing the natural parent’s (the other partner’s)

parental rights, is usually precluded by state law, regardless of whether the unmarried

couple is an opposite-sex or same-sex couple. Only step-mother or step-father may adopt

a child while preserving his or her spouse’s parental rights.

V. Non-Estate Planning Remedies Available to Unmarried Couples.

A. Cohabitation Agreement. Where marriage is not an option, a non-traditional

couple can enter into a cohabitation agreement. Such an agreement fulfills the same

function that an antenuptial agreement does in a marriage. Such an agreement may

address issues such as:

1. The treatment of income earned by either party during the relationship.

2. What property was owned and what debts are owed prior to the relationship.

3. The rights with regard to property acquired during the relationship by

purchase, gift and inheritance.

4. How different debts incurred during the relationship should be handled.

5. What any change in ownership or the purchase of joint property during the

relationship means.

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6. How living expenses and household responsibilities are to be shared. (Income

tax consequences must be considered.)

7. How property is to be divided if the relationship terminates.

8. Agreement to transfer property on death and/or option to purchase property

from the other’s estate.

9. If arbitration is to apply to the agreement.

B. Creating a Partnership. An unmarried couple may, with the proper purpose,

establish a partnership. The benefits of such an arrangement may include enforceable

property rights, reduction in income and estate taxes, deferral of income, valuation

discounts for transfer tax purposes, and such an arrangement would create an insurable

interest for each partner on the other partner’s life.

C. Adult Adoption. Adult adoption has been used by some couples as an estate

planning tool. One partner may adopt the other partner, thereby making the adoptee an

heir-at-law of the adopting partner. Care must be taken in undertaking such a course of

action. An adoption is irrevocable. However, the adopting partner could still disinherit

the adopted partner, but such partner would still be an heir- at-law, and in a position to

challenge such “parent’s” will. Another important factor in considering adult adoption is

the fact that the adoptee loses all his or her rights as a child of his or her natural parents.

Many states allow for adult adoption only under very limited circumstances such as

where the adoptee is mentally retarded or permanently disabled, or where a step or foster

parent relationship was established prior to the adoptee attaining majority. Finally, adult

adoption is sometimes considered where one partner is the beneficiary of a Dynasty or

“Bloodline” Trust. By adopting his or her partner, a client

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could make him or her the beneficiary of such trust. However, many carefully drafted

trusts anticipate this situation by defining children or descendants, as including adopted

children, but only if they were adopted as minors. Another option similar to adoption is

available in some states. Each partner can make the other partner his or her designated

heir.

D. Remedies at Law. Even if no formal planning is undertaken, at the termination of

a relationship, either during life or at death, a partner may still recover some benefit from

the other partner or such partner’s estate. Marvin v. Marvin 18 Cal. 3d 660 (1976),

established contractual rights and equitable remedies for individuals involved in an

intimate cohabitating relationship. Other actions have been brought in these situations

based on the theories of quantum meruit, unjust enrichment and the theories of

constructive and resulting trust.

VI. Ethical Considerations

A. Who is Your Client? When either a traditional couple or a non-traditional couple

approaches an estate planner for legal advice there is always a question of who is the

client and can the planner ethically represent both partners. Although this issue is obvious

in the case of a non-traditional couple, this issue is sometimes ignored in the case of the

“Ozzie and Harriet” couple, but should never be ignored in any other type of couple.

Even in situations involving first married couples, not addressing this issue can cause

serious consequences. Even these couples can have different goals. One partner may

disclose information to the planner, which he or she says should not be shared with the

other partner. Such a situation would put the planner in an ethical dilemma. If an estate

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planner is to represent both partners, it is essential that a clear engagement letter be used

which should contain a waiver of conflicts and confidentiality of communications

between each individual partner and the planner, however, not a waiver of confidentiality

between the couple and the planner. A planner should be cautious in agreeing to represent

both partners, even if a waiver is obtained. If it appears that an actual conflict exists

between the partners, despite their representations to the contrary, the planner should

refer one of the partners to another planner.

B. Asset Gathering. It is essential in all situations that a complete listing of all

client’s (clients’) assets, including the exact titling of such assets be obtained from the

client (clients). A planner must also obtain a thorough knowledge of the client’s

(clients’) heirs-at-law, especially in the case of a non-traditional couple. It is generally a

good practice to have this information contained in a completed client questionnaire that

the client (clients) signs off on, which states that the information provided is a clear and

complete representation to the best of the client’s (clients’) knowledge.

C. Fee Payment. In the case of a non-traditional couple, a planner should be wary of

one partner paying the fee, as this may give the appearance of undue influence and

unethical conduct on the part of the planner.

VII. Conclusion

Estate planning for non-traditional couples can be interesting and creative engagements.

These couples share many of the issues and concerns of traditional couples and other

issues and concerns that are unique to them. Working with these couples can be

rewarding for a planner who is sensitive to these couples’ needs and fully aware of the

planning options available.