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Estate Planning for Cohabitants
Living together with a domestic partner is not a new concept. Many couples decide to live together, buy a property, and rear
children together before they get married, or instead of getting married. For some couples, it makes more financial sense to remain unmarried. For others, the decision not to marry may be more personal. Regardless of the reason, the important point is to ensure that you are each protected in the event one or the other of you becomes incapacitated or passes away.
Too often, we hear about couples who have lived together for years, amassing assets, rearing children, and becoming financially and emotionally dependent on each other, only to have one partner die. This leaves the other partner with no legal rights to any of their deceased partner’s assets. Ever heard of “The Girl with the Dragon Tattoo”? Author Stieg Larsson passed away without a will, leaving his partner of 32-years without any legal rights to any of the book profits or the literary estate. Swedish law, like American law, grants estates left without a will to the next of kin.
With a little planning, you can avoid this type of negative outcome and take care of your domestic partner, in the event you pass away. Let’s review some of the important financial and medical documents you should have if you are cohabiting.
Maryland Inheritance Tax Considerations
Maryland charges a 10% on most assets that you leave to someone who is not a close relative. Spouses, ancestors, descendants, and siblings are exempt, as are tax-exempt charities. This tax must be paid by long-term significant others, even if they cohabitate. For example, if you name your significant other as the beneficiary on an IRA, even though the transfers to the beneficiary and avoids probate, the 10% tax must be paid.
A few things avoid this tax, such as life insurance and jointly owned real estate if owned with a “Domestic Partner”.
We recently worked with a woman who lived with a man for over 20 years in the home they bought together wanted to change the deed after his death. It is not clear if they qualify as Domestic Partners, and recording such a deed could result in her receiving a $20,000 tax bill. Some help from an experienced estate planning attorney would have assured their status as Domestic Partners and eliminated the possible tax. Establishing such facts after death is never preferable.
Wills & Trusts
A will enables you to designate how your assets will be distributed upon your death. Trusts can do the same thing, although there are certain assets that cannot be held in trust. Trusts are beneficial because they allow assets to pass to your beneficiaries, without having to go through probate. Each situation is unique, so great care should be taken when evaluating whether a will, a trust, or both, is appropriate for you and your partner.
Without a will, your estate will be distributed, according to your state’s intestate laws. This generally means that your children, siblings, or parents will receive your assets when you die — not your Dometic Partner. For cohabiting couples with minor children, remember to designate your partner as guardian (i.e., backup parent) of your children in your will.
Beneficiary Designations
Bank accounts, investment accounts, and retirement accounts allow you to designate one or more beneficiaries to receive those assets when you die. You will want to check these designations annually and whenever you have a major life event, such as a birth, death, or change in marital/relationship status — just to make sure that each asset is designated to pass where you intend.
Life Insurance
If you have minor children or if one partner relies heavily on the other for financial support, then adequate life insurance is essential. Life insurance can help defray the costs of your funeral, help your partner pay off debts, fund college educations, and meet day-to-day living expenses. Life insurance proceeds can give your partner some breathing room during a difficult time.
Financial & Health Decisions
A durable power of attorney for financial matters gives your partner (or other trusted agent) the power to sign documents and manage your financial affairs, in the event that you become incapacitated.
Like a financial power of attorney, the healthcare power of attorney gives your partner/agent the power to make healthcare decisions on your behalf, should you become incapacitated.
Living Will/Health Care Power of Attorney
This document enables you to document how you would like to be treated if you are rendered unconscious for an extended period of time or suffer from catastrophic injuries. To empower your Domestic Partner as your decision-maker, having a Living Will and Health Care Power of Attorney is critical. It is also a good idea to discuss your wishes with your partner, before either of you becomes incapacitated, to ensure that you are on the same page.
Funeral Wishes
Writing down your funeral wishes can help take a load off of your partner, as well as take any guesswork out of the process. This also can avoid arguments with family members, who may have a different idea as to how to memorialize your partner’s death.
Domestic Partner Agreement
Every relationship deserves to have its terms set down in advance. Like a prenuptial agreement, a Domestic Partnership agreement outlines how income and assets will be treated during the course of the relationship and how assets will be distributed, when the relationship ends.
Property Title
In general, when two people buy property jointly, whether married or unmarried, they often do so as joint tenants with rights of survivorship. This means the property automatically passes to the surviving owner, without going through probate. For unmarried couples, this may have unwanted tax and non-tax consequences. Accordingly, be sure to get legal and tax advice, before changing the title to assets in this form of ownership.
Child Custody
When it comes to children, non-biological parents can often run into trouble when the biological parent dies. Second-parent adoptions are an option in some states, but it is always a good idea to spell out who will have custody of your children when you die. In most, but not all states, a will is the appropriate legal document to nominate the guardian (backup parent) for your minor children. If the other biological parent is deceased or legally unfit, then you may nominate your partner as guardian in place of other family members. Non-biological parents may also need to have documentation giving them the right to authorize medical treatment for their non-biological children.
The Takeaway
The decision to marry is a personal one. If you choose not to, consult an Estate Planning Attorney to ensure protection for yourself, your Domestic Partner, and any minor children you may have. There is no better way to show that you love and care for your partner than by reducing his or her stress if life gets complicated.
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