According to the U.S. Census Bureau, in 1970, the median age at first marriage was around 21 for women and 23 for men; in 2010, those ages were 26 and 28, respectively. These figures demonstrate a growing trend: many couples are either waiting to get married or deciding not to get married at all. As a result, financial advisors are facing various planning challenges for unmarried couples. What should you do for couples who have yet to sign a marriage certificate? In many cases, you might find that unmarried couples are conducting their financial lives in the same fashion as typical married couples—but without many of the same statutory protections and privileges.
This changing landscape presents new and interesting challenges for financial advisors. Here, I'll address five of those planning challenges, as well as solutions you can use to help unmarried couples meet their financial goals.
1) Health Care Decisions
The challenge. When it comes to making health care decisions for an incapacitated loved one, a spouse has much stronger rights than does an unmarried partner. I experienced this firsthand when my fiancée underwent shoulder surgery. It was a low-risk operation, but my fiancée would be receiving anesthesia and remain unconscious for a few hours. What if she had a bad reaction to the anesthesia? What if difficult decisions arose during the surgery? Although we've been in a long-term relationship, I realized I had none of the statutory rights of a spouse in this situation.
The solution. After the surgery, we decided to have a health care power of attorney (POA) drafted, granting each other authority to make medical decisions.
- This is a legal document that names another individual as a proxy for health care matters.
- The POA can be placed on file with a hospital before surgery, so that doctors know whom to consult if decisions need to be made.
- In the absence of a POA, state law establishes a priority order of decision makers (typically, spouse, adult child, parent, sibling, etc.).
We also executed living wills, specifying how we wish to be cared for in particular situations. Although the health care proxy has ultimate authority, a living will can help guide him or her in making important decisions. Drafting these documents is a good opportunity for couples to discuss their wishes, providing a clear understanding of how each partner wants to be treated.
2) Financial Decisions
The challenge. Many unmarried couples share expenses and have tightly intertwined finances. As unmarried individuals, however, they typically have no right to access information about the other's finances. Unless both names are on the account, one partner may be unable to view bills, execute transactions, make payments, or get simple information.
The solution. A financial POA can help protect unmarried couples in emergency situations. It's a legal document drafted by an attorney that grants another individual authority to act on behalf of the granting party. The POA can be very broad or very specific. It may have a specific duration of effectiveness or can survive until death or revocation.
The challenge. Would you be surprised to learn that 51 percent of Americans age 55 to 64 don't have a valid will? This percentage increases sharply in the under-40 population, which includes many unmarried couples. Although married couples enjoy at least some statutory protection through state intestacy laws, unmarried couples do not. Let's look at an example.
Lisa and Sue have been in a committed relationship spanning a decade, and they live in Massachusetts, where they were married. They have no children, and both Lisa's and Sue's parents are deceased. Neither has executed a will. Because they are married, when Lisa dies, the Massachusetts law of intestacy dictates that Lisa's assets will pass to Sue. If Lisa and Sue were not married, Sue would inherit nothing from Lisa.
The solution. To ensure that the surviving partner is not disinherited, it's imperative that unmarried couples execute wills. Even if the bulk of the couple's assets would pass by operation of law, it's likely that some assets acquired during the relationship (e.g., personal effects) would not escape probate. A common solution to this problem is to execute "pour-over wills" or "sweetheart wills."
A pour-over will is used in conjunction with trust planning. It is a catchall device designed to ensure that the trust document will control the disposition of assets at the testator's death. Essentially, this will says that any assets passing through probate at the time of death will "pour over" into the trust, which makes the trust document the controlling instrument in determining who gets what assets.
A sweetheart will is typically used for small, simple estates. Each partner's will states that all assets and interests at the time of death are left to the other partner. For example, I have a sweetheart will leaving everything to my fiancée, and she has one leaving everything to me. This is effective since the bulk of our valuable assets would pass through beneficiary designations or operation of law. Some of your clients may have more complex situations requiring more elaborate documents. But at a minimum, a sweetheart will can provide an inexpensive layer of protection for unmarried couples.
The challenge. In some states, the probate process can be expensive, time consuming, and difficult to understand. In other states, the process is much more streamlined. Opinions on the probate process even vary based on regions. In the Northeast, for example, the consensus is that probate should be avoided at all costs, whereas sentiment in the Midwest is less hostile. Regardless of geographic location, a living trust is a useful method for probate avoidance and a highly effective estate planning tool for unmarried couples.
The solution. Unmarried couples may want to use a revocable living trust. With a living trust, the grantor transfers ownership of assets to the trust, which acts like a wrapper around the property:
- The trust uses the grantor's tax ID number, so that everything is still tied to him or her for tax purposes.
- The trust's assets are controlled by a trustee (typically, the grantor).
- Because the grantor is also the trustee, he or she maintains full control over the assets and can move assets into or out of the trust.
The trust has no practical role until the grantor's death. At that time, all assets in the trust avoid probate because the trust is the legal owner of the property. From there, the trust language directs how the property should be disposed.
The challenge. The American tax system includes several provisions benefiting married couples that do not extend to unmarried couples, including the following:
- Married couples can transfer ownership of assets between spouses during their lifetime with no gift or transfer taxes.
- Spouses may transfer their unused lifetime exclusion amount to the surviving spouse at their death, effectively giving the surviving spouse the ability to transfer $10.86 million in assets free of estate tax at death (for tax year 2015).
The solution. Unmarried couples are essentially operating under the same system that married couples faced prior to portability of the lifetime exclusion. Further, many of the techniques previously used to preserve the lifetime exclusion amount can be employed to protect unmarried spouses who find themselves in this situation.
The traditional A-B trust design commonly used in estate planning is effective in preserving the deceased partner's lifetime exclusion amount. At the death of a partner, his or her lifetime exclusion amount is used to pass assets into a trust. Although the trust can hold these assets for the benefit of the surviving partner, the assets are removed from the surviving partner's estate. This includes any further appreciation of the assets between the first partner's death and the second partner's death. If you have unmarried clients with substantial wealth, it is imperative that they explore planning techniques to ensure the efficient transfer of assets at their death.
The Value of Planning
Whether you're working with same-sex couples or heterosexual partners who have been together for a long time, addressing these challenges can bring tremendous value to your client relationships. As some of your clients may not have considered these issues, it's increasingly important to engage them in these critical planning conversations.
Have you encountered other planning challenges for unmarried couples? What solutions have you implemented? Please share your thoughts with us below.