ESTATE PLANNING FOR NON-TRADITIONAL FAMILIES
Donna M. Turley, Esq.
Glickman Turley LLP, Boston
Estate Planning
Estate planning is of critical importance in providing for loved ones in a non-traditional family. State and federal laws protect married couples in the event of death—the spouse of a person who dies without a will has rights to his or her estate and assets transferred because of death may be transferred to a spouse free of estate tax under the marital deduction. Unmarried couples and non-traditional families do not have these legal rights. There no laws protecting unmarried partners and the laws tend to favor biological next of kin. Therefore, those in non-traditional families have to overcome that bias by executing the right documents.
Hiring an Attorney
Many non-traditional couples approach estate planning together. They want to use the same lawyer and develop reciprocal arrangements between them. Often, taking this step is an affirmation of their relationship and is approached with appropriate solemnity. However, what is good planning today may turn into a nightmare later should the couple decide to separate. This is particularly true when one partner has significantly different assets or income than the other. Clients should be counseled about the potential problems if they both use the same attorney for their estate plans. Dual representation also raises another issue—the attorney cannot be given information by one client in confidence with the expectation that it will be withheld from the other client. The lawyer must discuss this rule about confidentiality with the clients. The lawyer should also advise you that if the same lawyer drafts their estate planning documents, the documents should be reviewed by independent legal counsel.
Initial Meeting
Before you meet with a lawyer for the purpose of estate planning, you should prepare a detailed list of your assets, know the name of the partner who holds title to each asset, how calculate the value of the asset and check to see if there is a named beneficiary. This inventory should include bank accounts, retirement plans, mutual funds, stocks and bonds, automobiles, valuable personal possessions, life insurance, business values, stock options, real estate and whether there is the possibility of inheritance or any other financial windfall. You should also have a general sense of your desired asset distribution at death. If all your assets are going to go to your partner, you should think about what might happen if he or she is not living at the time of your death. A lawyer should not assume that you want a simple will, power of attorney and health-care proxy “package.” The value of the estates both jointly and separately will determine there may be estate taxes. What may be appropriate for younger couples will be different than what is appropriate for older couples, who may have concerns about retirement planning, Social Security and the family problems created by remarriage. Some older couples may be better off without the legal sanction of marriage. Your attorney should ask you for your objectives and listen carefully. Many a client arrives saying that he or she wants to protect the partner, but with probing, realizes that the will should include provisions for other individuals or institutions. Also, remember to provide for pets and consider charitable giving.
Understanding a couple’s relationships with members of biological families is important. If there are family members who will be hostile to the survivor of the couple, an attorney may want to add language to the estate planning documents that limits the involvement of those family members or consider other ways of transferring assets to the survivor instead of relying on a will. Some of these methods are discussed below.
Fees
Most practitioners offer a low-cost, flat-fee will or estate planning package consisting of a simple will, power of attorney and health-care proxy. Reasonably set fees bring clients into the law office and they allow the attorney to develop a professional relationship with new clients. In these days of computerized word processing, some attorneys offer a discount for the preparation of estate planning documents for both members of a family. Note that experienced lawyers will say that there is no such thing as a simple will, especially where non-traditional families are concerned. The fee arrangement for other estate planning documents varies. For example, many attorneys charge a set fee for trusts, but others charge an hourly fee for time spent drafting trusts.
WILLS
A will is the foundation of every estate plan. Wills are often criticized because the assets that pass through the will are generally subject to probate, which is court supervision of the distribution of assets. In some states, this can be expensive because the fees charged by the executor and lawyer are a percentage of the estate. In other states, percentages are not allowed. However, no matter how many legal vehicles are employed to remove assets from probate, there is always property held by the individual that cannot practically be transferred except through the probate process. Personal possessions and clothing are good examples of this sort of property. Without a carefully drafted will, a beloved partner may be left emotionally and financially adrift. A will can provide unmarried couples with the opportunity to reinforce the importance of their non-traditional relationship, both to each other and to the world. If the threat of a hostile biological family is great, the couple may be well advised to get married, since a married spouse will be entitled to inherit if a will is declared invalid and the decedent declared interstate.
A simple will generally provides for the disposition of tangible and intangible property and names an executor. A pour over will takes most, if not all, of the decedent’s estate and places it in a trust. The advantage of a trust is that the terms can be completely private, whereas disposition in a will is subject to court and public scrutiny. A will should not express wishes or hopes. Without positive directions and positive dispositions of property, beneficiaries may sue because of disputes. Wishes and hopes are known as “precatory” language and should be avoided.
Personal Property
One of the first paragraphs of a will should provide guidance for the disposition of personal property. Removing personal property from the remaining parts of the estate (the “residue”) protects it from being used to pay debts and administration costs. For non-traditional families, members should consider naming the other members as beneficiaries. The emotional toll of the death of a partner whose status is unrecognized is exacerbated when others come in to remove personal property that has been part of the partner’s home.
Memorandum
Wills may include reference to a written memorandum to provide guidance in the distribution of personal property to loved ones. The advantage of a written memorandum is that the testator can draft it without the help of an attorney and it can be changed daily, if so desired. The disadvantage is that distribution of personal property in accordance with the dictates of the memorandum is not enforceable in court. It is simply guidance and an executor can choose to ignore the directions. If there are particular pieces of identifiable property that the testator wants to leave to certain people, these items and their intended recipients should be included in the language of the will. These gifts will then be enforceable in court. An example of a will provision for a memorandum follows:
I give and bequeath all my tangible personal property to my partner, _________________, if she survives me or, if she fails to survive me, to my executor. I request that my said partner or my executor dispose of my tangible personal property in accordance with any memorandum I may leave for guidance or, if such memorandum does not indicate my wishes, in accordance with my said partner’s or my executor’s understanding of my wishes. The decision of my said partner or my executor shall be binding on all concerned. I expressly declare that I do not intend to create any trust with respect to said tangible personal property.
Children
If the non-traditional family includes minor children, a will should provide for a guardian, as well as an alternate. However, nomination of the guardian is subject to court appointment to determine if the placement is in the best interest of the children. Naming a partner as the guardian will not extinguish the parental rights of another legal parent of the child, but it will give the partner standing to challenge placement of the children with others who may have had limited involvement in their lives or if that placement represents further disruption in the lives of the children. Anyone nominated as a guardian should be consulted before the nomination is included in a will.
When one partner wants to make a provision in his or her will for the minor children of the other partner, consideration should be given to who will control the children’s assets while they are still minors. If the other parent, who is not the partner, will control the assets, the testator may want to consider putting the funds in trust to be released upon the children reaching a certain age. If the bequest is contingent on the couple being together at the time of death, the will should include this condition with great specificity. A trust might also be appropriate where a parent wants to ensure that the children are the ultimate beneficiaries, but has the trust assets working for the surviving partner during his or her lifetime.
Other Considerations
When a married couple divorces, disposition of property in a will created before the divorce becomes invalid. Because the disentanglement of non-married couples may be more easily accomplished, the testator should consider whether he or she wants to add language that requires that the couple be living together at the time of death in order for a bequest to be effective.
If the possibility exists that biological family members will be unhappy with distribution under a will, your lawyer may advise you to include a clause to mitigate the possibility of a challenge. In some states, the intended target must receive enough under the will to want to avoid risking it through a challenge. An example of this language follows:
If any beneficiary of this Will shall contest or dispute the probate thereof or seek to maintain before any judicial body that this is not my Willow call into question before any tribunal the validity of any legacy given or any of the provisions hereof, then I absolutely revoke whatever provision I have made in this Will for the benefit of such person and declare the same void and of no effect and that all property which would have been covered by such provision shall be added to and disposed of as a part of my residuary estate.
You may want to consider a provision for pets. This provision can name a specific pet or any pet. Providing funds for the care of pets is advisable if the person who will take your pets has limited income. It is useful to bequeath pets owned with a partner to that partner to eliminate any confusion about ownership rights.
Executor
Your partner should be considered as the executor of the estate. Where some or all of the probate estate will be transferred to the partner, it will give him or her control over those assets and limit the disruption in his or her life. However, where the partner may be unsuitable as an executor due to a tendency toward disorganization or financial chaos, the executor should be a trusted individual or institution that has respected the bonds of the testator’s non-traditional family. Co-executors can be named and it is wise to also name an alternate executor. If the nomination of the partner as executor is tied to the assumption that the parties will remain partners until death, the testator may want to limit the partner’s ability to be the executor by requiring the parties to be living together at the time of death.
Wills can specify whether an executor can collect a fee and in what amount. The fee is part of administration and administration expenses are paid before other creditors. Mandating a fee to the executor/partner is a way to transfer funds to that individual. Any fee paid will be subject to income tax on the recipient. In the case where a person dies without a will, the collection of a fee for administration of the estate may be the only way for the grieving partner to take assets from the probate estate, assuming the partner can be named as administrator.
Execution
You must sign the documents with great attention paid to the mandates of the law. If not, the will can be declared invalid long after you can do anything about it. Because documents may be challenged for fraud or undue influence by biological family members, counsel should anticipate attack when arranging for the execution of the documents. Videotaping the signing of the documents or a contemporaneous psychiatric exam, may derail attempts to invalidate a document.
Burial Instructions
For long-term partners, there is probably no greater insult than losing control over a partner’s body after death. If the decedent leaves no instructions, in most states, next of kin are given possession of the body for burial. A court battle over the disposition of remains promises to be a losing battle for all. Consequently, written directions giving an unmarried partner control over funeral and burial arrangements are essential. Burial instructions can name a particular place for burial and can dictate the type of religious service or even the songs at a memorial gathering. Burial instructions should be made part of a will because the wishes of the decedent will be enforceable in court. However, the cautious client will also give the executor written burial instructions, because a will may not be located until weeks after a person’s death. If a document is created for this purpose, you should sign it using the same formalities used when a will is signed.
Probate
It is important to differentiate the concept of “probate” from the concept of “estate.” Property that is included in probate is only property that passes through a will and is overseen by the court. An estate is the totality of all tangible and intangible property in which the decedent had an interest at the time of death. It is irrelevant if something was subject to probate when calculating estate taxes. The Internal Revenue Service counts all interests, not just those that were subject to probate.
While probate has taken on an onerous connotation in the public eye, it is an orderly process of gathering assets, determining debts and distributing the residue of the estate. Probate is time-consuming and the time creditors have to bring debts to the attention of the estate varies from state to state. Furthermore, the attorney fees to probate an estate can be relatively expensive. In some states, attorneys to bill by the hour, but in other states their compensation is a set percentage of the estate. Because wills become public documents, probate is considered indiscreet to those who value privacy. Of course, the biggest reason to keep assets out of probate for non-traditional families is the possibility of a will contest.
Will Contests
While it is imperative that the members of a non-traditional family execute wills, they should be made aware that wills are more easily challenged than other forms of ownership created by the decedent while alive. However, giving up ownership of property while alive or making it joint property, may be more difficult for some than testamentary disposition. Note that both types of transfer can be challenged. However, wills are subject to proof in the probate process and are therefore more easily challenged than gifts on the basis of mental capacity, undue influencer invalid execution.
TRUSTS
Wealthy or not, unmarried couples may use trusts for a variety of reasons. Trusts are very flexible instruments with many drafting options. Trusts can be set up to provide for an unmarried partner, with the remainder to a secondary beneficiary, often a charity or adult children. A trust can offer the grantor control over his or her assets while alive by naming the grantor as trustee, while protecting an unmarried spouse in the event of incapacity or death. A trust can provide for the orderly transfer of assets upon the death of a grantor. Trusts created outside of a will avoid probate. Because the trust does not have to be proven, legal challenges to a trust are much more difficult. Trusts also offer a semblance of privacy, because knowledge of the terms of the document and the included beneficiaries is limited to those with an interest in the trust estate.
Counsel should discuss the advantages and disadvantages of naming a partner as a trustee. The same considerations in choosing an executor apply in choosing a trustee. The trust is essentially a business. Ability, integrity and judgment should be sought. If a partner is disorganized, consider naming him or her as a co-trustee to a trust created for his or her benefit.
Revocable Trusts
A relatively safe estate planning tool is to create a trust where the grantor is both the trustee and the beneficiary, with full rights to amend or revoke the trust and to control the distribution of trust assets. The partner can be named as the primary beneficiary and/or successor trustee upon the grantor’s death. The partner could also be named co-trustee while both parties are living. This tool gives the grantor full power over the assets while he or she is alive, provides protection for his or her partner after the disability or death of the grantor and can provide for a third beneficiary for the remainder upon the death of the partner.
One benefit to the grantor is that upon disability, there is no need for court intervention, because the rules for the lifetime management of the assets of the trust are already spelled out in the trust. If the intent is to provide for a partner and then for others, the grantor should consider making the partner the sole trustee upon the grantor’s death. This will help guarantee that the grantor’s wishes are recognized. If there may be substantial assets or assets beyond the needs of the partner, the trust should give the surviving partner the right to disclaim any of the assets passing to the trust at the death of the grantor. Without a disclaimer, any gifts that the surviving partner makes to the remaining beneficiaries may be subject to gift tax. See I.R.C. § 2501. Note that any assets that pass to or are in a revocable trust at the time of death will be considered part of the grantor’s estate when calculating estate taxes.
Because this type of trust is revocable until the death of the grantor, it does not exist as a separate entity for income tax purposes. Its income and deductions are reported under the grantor’s Social Security number and on his or her individual tax return.
Irrevocable Trusts
Revocable trusts usually become irrevocable upon the death of the grantor. Irrevocable trusts are also used to hold life insurance. Trusts created within the body of a will are generally irrevocable, unless the will is revoked. However, counsel should avoid creating a trust in a will because it will be subject to challenge and court scrutiny. When a trust is used as part of an estate plan, the trust should be in existence at the time the will is executed. That way, reference need only be made to the name of the trust and the date it was signed. Irrevocable trusts should only be created after careful consideration of tax implications and the client’s needs.
LIFETIME TRANSFERS
Co-Ownership in General
Owning property jointly “with rights of survivorship” is a valuable estate planning tool. If property is jointly held, it automatically passes to the survivor upon the death of the joint owner. Property that is held jointly allows the surviving owner to spend or sell the property immediately without seeking court approval in probate after the co-owner’s death. Jointly held property is excluded from the risk of challenge that is inherent in the probate of a will. Stocks and mutual funds can be held as joint tenants, again guaranteeing that the interest will pass upon the death of a partner.
Whenever possible, an unmarried partner should consider naming his or her partner as a beneficiary on all financial accounts that ask for such designations. If bank accounts are set up in both names, the parties should be advised that either partner can withdraw the whole account at any time. For tax purposes, if one partner contributes most or all of the money to an account, it is not a completed and therefore taxable gift until the funds are withdrawn. See Treas. Reg. § 25.2511-1(h)(4). The goal of naming a joint owner or beneficiary is avoidance of probate.
Joint Tenancy in Real Estate
Holding real estate in a joint tenancy with the right of survivorship is a guarantee that the property will pass to someone upon the death of the other owner. It is particularly useful when the parties are contributing similar amounts to the down payment. Where there is a large difference in contribution to equity, there may be tax implications in this form of ownership.
Tenancy in Common in Real Estate
If the deed does not specify joint tenancy, the presumption is that the property is held as tenants in common. Holding real estate as tenants in common should be considered where one party contributes significantly more toward the purchase of the property or when clients decide that their interest in the real estate should be dispersed through their wills and not necessarily to the other partner.
Life Insurance
For estates in excess of the federal estate tax nontaxable amount ($2,000,000 in the year 2007), life insurance can be a way to satisfy estate taxes while preserving assets and transferring them to a partner. For smaller estates, life insurance offers a relatively inexpensive way for clients to provide for burial expenses, pay off a mortgagor provide other necessities. More commonly, life insurance is used for the dual purpose of a death benefit and retirement savings. Where an insurance policy names a beneficiary who is not the insured, the proceeds from the insurance pass to the beneficiary upon the death of the partner.
There are companies that purchase life insurance policies from an insured if he or she has a life-threatening illness. For many, these viatical companies provide the only access they may have to funds for living expenses during a catastrophic illness.
Life insurance should always be considered as an estate planning tool by unmarried couples. It is particularly important where there are joint debts or the partners are engaged in a joint business venture. The proceeds can provide the cash to pay the debts or allow the business to recover from the death of an owner. While the amount of the insurance payment is used to calculate the gross estate of the decedent, the gifting of a policy during life is usually without gift tax implications. Clients should consider irrevocable life insurance trusts as a way to remove insurance proceeds from being taxed as part of an estate where an estate will be larger than the current exempt amount.
Gifts
All individuals are allowed to transfer assets up to the “exempt amount” without paying gift or estate taxes. The Internal Revenue Code allows a person to transfer an unlimited amount to his or her married spouse free of gift tax and estate tax both while alive and at death. See I.R.C. §§ 1041, 2523. Non-traditional families do not have this flexibility. Gifts to an unmarried partner or other members of a non-traditional family may be subject to the federal gift tax. See I.R.C. § 2501.
A donor can give up to $12,000 per year to as many individuals as he or she pleases without implicating gift taxes. See I.R.C. § 2503. This is known as the “annual exclusion.” If one client places his or her property in the name of both partners and it creates a present interest, there will be a presumption of a gift. If the value of the property exceeds $12,000, then the donor is required to file a gift tax return for the year that the gift was completed. If the intent of the gift is simply to expedite the transfer of the property upon the death of the donor, it would be wise to draft an affidavit signed by both parties stating that no gift was intended or assumed. Conversely, if a gift was intended, depletion of the exempt amount may be avoided by executing an affidavit stating that the gift was limited to the annual exclusion.
In the case of a large asset, such as real estate, the donor may gradually transfer a portion of the asset to the joint tenant by executing annual affidavits gifting the exempt amount to the partner. In five years, the value of the gift will reach $55,000, without the necessity of filing a gift tax return or depleting the exempt amount. Bear in mind that a gift retains the basis it had when acquired by the giver. When property is passed through an estate, the basis of property is “stepped up” to the value it represents at the time of death. As always, gifts should be made in writing to protect the recipient from next of kin or the tax authorities. In the context of a large estate, gifts may be preferable to inheritance. If the practitioner encounters an estate of more than $10 million or partners with disproportionate estates, an expert should be consulted about the advisability of gifts.
TAXATION
All joint tenancies create income and estate tax issues. Regardless of whether the property is subject to probate, the value will be included in calculating estate taxes. See I.R.C. § 2040(a). When the second partner dies, the property will again be subject to estate taxes, albeit using a basis for part of the property that represents the value of the property at the time of the first joint tenant’s death. If the creation of a joint tenancy results in a present interest to the recipient, gift taxes could be due. And if the joint tenancy produces income, a portion of the income will be taxed to the joint tenant. As with a joint tenancy in real estate, the practitioner must be aware of possible tax consequences.
The total value of jointly held property will be included in the estate of the first partner to die, unless the living partner can prove that he or she made some or all of the contributions toward the purchase. See I.R.C. § 2040(a). The burden of proof is on the survivor. See I.R.C. § 7491. While exact records are not necessary, bank statements, canceled checks and other traceable payments can prove equal contribution. The practitioner should consider drafting an affidavit from both parties at the time of transfer that states the contribution of each, as well as any agreement regarding the payment of the mortgage if the asset is real property.
The gift and estate tax is progressive—that is, the more you own, the higher the percentage that must be paid in taxes. If the couple has substantial assets and is concerned about estate taxes, discuss the advisability of equalizing the size of the estates. This will generally reduce the overall estate tax paid by the couple’s beneficiaries. Carefully documenting transfers of $12,000 each year or transferring property with a low present interest is a way to equalize a couple’s estates without incurring tax implications.
POWER OF ATTORNEYS
In unmarried partnerships, it is essential that the unmarried partner be given the power to act as an attorney in fact should the principal become disabled or incapacitated. While the power of attorney can be springing, meaning it will only become effective from subsequent disability or incapacity of the principal, counsel should seriously consider otherwise. A springing power of attorney may result in a dispute with biological family members or medical providers over the level of incapacity and whether the power is really in effect. Such a dispute may tie up the couple’s assets and make it impossible for the healthy partner to financially maintain the joint household. This can be avoided by creating a durable power of attorney. Counsel can hold the power of attorney pending his or her determination of incapacity should the client want an extra layer of protection. A power of attorney may also nominate a guardian or conservator for the principal should he or she become incapacitated. Again, the partner should be considered as a nominee. A power of attorney offers another opportunity for a principal to affirm the personal and legal stature of a partner.
HEALTH CARE PROXIES AND LIVING WILLS
Medical providers typically look to next of kin to make health-care decisions for an incapacitated individual. This reliance leaves an unmarried spouse powerless to carry forward the wishes of his or her partner. In most states, a competent adult may appoint a health-care agent to make decisions for him or her should incapacity strike. This agent has priority over any other person who is making health-care decisions for the principal when he or she is unable to do so. It can also give the agent access to medical records and access to the principal.
Living wills direct the medical providers to honor explicit wishes set forth in the document. Such guidance may address termination of life support, preferences for type of medical career limits to the agent’s scope of authority. This is the recognized document in other states. Unmarried partners should make certain that the living will gives the partner the authority to make decisions in lieu of next of kin.
