New York Estate Planning & Elder Law Blog
There are many couples at retirement age that have been together for years but have opted to not get married for personal, professional, or legal reasons. For these unmarried couples, estate planning is crucial if you want your partner to inherit from your estate. If the homeowner dies without a will in place, the other partner would be out on the street with little to no recourse. However, there are options to ensure that your partner is protected through your estate plan while simultaneously planning for the other loved ones in your life.
Estate Planning Options
For couples that want to protect their partner but still leave the home to their children, one of the more popular ways of dealing with this problem is to create a life estate for the surviving partner. If drafted correctly, the partner gets the right to live in the home until they move into a nursing home facility or pass away, at which point the real estate would revert to the children. If a couple decides to go with this option, it is smart to also leave money to the spouse specifically for the purpose of house maintenance and upkeep.
If one partner wishes to leave personal property, bank accounts, or other assets to their partner, having a will is incredibly important to have. Without a will, the partner is completely at the mercy of family members set to inherit the estate. Simply claiming that one partner wished for the other to inherit is not enough to beat intestacy laws in probate court. A will can specify what you wish for your partner to inherit in addition to what you want your loved ones to receive.
Potential Pitfalls
Unfortunately, the U.S. tax code does not look too favorably on unmarried couples for the purposes of estate planning. Under the code, married couples are allowed to inherit an unlimited amount of assets without paying any state or federal estate taxes. This exception also applies to gifts from one spouse to another while both people are still alive. However, this exemption does not apply to unmarried couples who wish to inherit or gift assets to each other.
The current federal estate exemption level is $5.43 million, but many states have lower thresholds for state estate or inheritance taxes. In some states like Pennsylvania, non-family heirs must pay up to fifteen percent of their inheritance for tax purposes. In addition, the annual gift exception of $14,000 applies to unmarried couples who wish to gift assets to one another before they die without owing taxes on the gift.
Finally, the federal tax code also favors married couples when it comes to inheriting both traditional and Roth IRAs. A spouse is allowed to roll an inherited IRA into their own when the other spouse passes away in addition to postpone the minimum distributions until they are 70 ½ years old. Unfortunately, this does not apply to couples that are unmarried, and the best option is to name the partner as the beneficiary to the IRA account. While the partner cannot escape taxes entirely, taxes can be minimized by rolling an account into an inherited IRA and taking distributions based on life expectancy.