When the topic of unmarried partners is discussed, I think of Bob Dylan’s song, The Times They Are a Changin’. Gone are the days of meeting and courting your sweetheart, marrying and remaining in that union until death do us part. Finding love at any time in your life is a blessing, and more people of all ages are entering long-term, committed relationships without getting married.
Just as your clients who are in later-in-life marriages want to protect their families, when your clients are not married there is certain planning to be done so as to protect the client’s partner.
Unfortunately, state and federal laws do not protect unmarried couples as they do married couples when it comes to inheritance, taxes, and decision-making powers. I know your clients want to take care of each other.
Without proper planning, partners could end up with nothing should the other partner pass away, and vice versa.
The Law Is Not on the Client’s Side
If the client decides not to do any estate planning, Illinois intestacy law will determine who receives the client’s property and money, as well as the amount each legal heir will receive. The spouse receives half the property and the children split the remaining half. While this may work for married clients, this could be disastrous for a client who has been in a long-term relationship with someone and does not intend to get married. Unmarried partners are typically not mentioned in state intestacy statutes, meaning an unmarried partner will more than likely receive nothing upon the death of the other partner.
If the client has a life insurance policy and fails to complete the beneficiary designation form, the proceeds from the policy may be paid to the client’s estate, thus requiring a costly and time-consuming probate process. You’ve heard me say many times to avoid probate when possible. Alternatively, the proceeds may be distributed according to the default order outlined in the policy agreement. In many cases, the listed people will be the client’s family members, not the client’s partner. Similarly, if the client’s retirement account does not have a named beneficiary, that account may also end up going through probate, which may cause unintended tax consequences and distribution according to the default rules of the account agreement.
A Different Kind of “Blended Family” Concern
In most cases, when we consider blended families, we envision a client who remarries and has children from a previous relationship. In that instance, the planning objective is to make sure that the children from the previous relationship are not accidentally disinherited because, in many cases, the new spouse’s claim to the deceased’s money and property has priority. However, if the client has children from a previous relationship but is not married to their partner, the concern becomes protecting the partner who, under the law, would not be entitled to anything because the children would most likely have priority.
Federal Tax Issues
When both married partners are US citizens, each can give the other an unlimited amount of money or property during their lifetime without having to worry about the federal gift tax. Unmarried partners who are both US citizens are not given the same benefits. Therefore, the client can give only up to the annual exclusion amount to their partner without having to consider the gift tax implications. This amount is $15,000 in 2021 and is adjusted periodically for inflation. Should the client decide to give their partner more than the annual exclusion amount in a year, the client will need to file a federal gift tax return to report the excess gift. On the bright side, federal gift tax is not due until the client has made gifts totaling more than the client’s individual estate and gift tax exclusion amount, which is $11.7 million in 2021.
Federal estate tax rules are similar to the gift tax rules. Married couples are allowed to leave each other at death an unlimited amount of money and property free of federal estate tax. However, if the client is not married, any money or property left to the client’s partner at death would count towards the $11.7 million lifetime exclusion amount. If the client’s lifetime taxable gifts (those over the annual amount each year) and the amount of money or property transferred at death exceed the lifetime exclusion amount, then an estate tax will be due.
Personal Matters
Although the financial aspects of estate planning may motivate many unmarried clients, there are also important personal matters to consider, including financial and medical decision-making authority. If the client does not name someone to handle financial transactions or make medical decisions on their behalf, the state will apply its default order of priority and appoint someone. Depending on the state statute, the client’s partner may not even be on the list or may have a lower priority than the client’s blood relatives. This situation can be incredibly messy if your client’s relationship with his or her family is poor, and would not otherwise trust them to make decisions on your client’s behalf.
Later in this same newsletter issue, I share more about the Wills of the Rich & Famous, who planned well for their partners, who did not, and other cautionary tales.
Your Role in Protecting Unmarried Partners
When working with a client who is in an unmarried but committed relationship, there are a few things you can do to help protect the client as part of a comprehensive estate and financial plan:
- If you require an authorization form for someone to act on the client’s behalf, make sure the client completes the form. Your attentiveness to detail will inspire confidence and it will make your life easier should you need to work with someone on the client’s behalf.
- Review the client’s beneficiary designations with them. Remember, they must be filled out correctly to be effective.
- Find out how the client’s accounts and property are owned. This is a great opportunity to explain to the client what will happen to the accounts and property at their death.
- Make sure the client has enough life insurance, especially if the client wants to provide for others after their death. In a blended family situation, it is likely that the client will want to provide for multiple people who are at different stages of life. It is important that the client has the resources to make that a reality.
- Advise the client to meet with an experienced estate planning attorney to memorialize their wishes regarding who will receive their money and property upon their death, who will make financial and medical decisions for the client if the client cannot, and end-of life-care.
We Can Help You Build a Stronger Relationship with Your Clients
By helping a client protect their loved ones, you distinguish yourself as their trusted advisor, part of a comprehensive team that will ensure that your client receives the best planning possible. Regardless of the changes in the client’s life or the law, you can be a constant source of support. This level of care will help turn clients who will recommend you to friends and family.
In addition to deepening your relationship with your existing client, the client’s partner will also have an opportunity to benefit from this positive relationship with you, increasing the likelihood that the client’s assets remain under your management at the client’s death and increasing the possibility that the partner will ask you to manage their assets in an effort to consolidate the couple’s financial affairs.
Kerlin Walsh Law is here to help ensure that your clients’ wishes are protected. Our collaboration is invaluable. If you’d like to discuss ways to work together in serving our clients, email Eileen@KerlinWalshLaw.com or call 708-448-5169.
