Whether the same sex or opposite sex unions see many unmarried couples estate planning problems (and opportunities). Although unmarried couples clearly challenges that married couples are not available, most challenges can be overcome with planning. However, since many of the problems described in this article San Diego estate planning lawyer state-specific, it is important that unmarried couples preparing an estate plan have the advice of an attorney familiar with the laws of their states of domicile.
Unmarried couples (whether same sex or opposite sex looking for) the same goals as estate planning do married couples. You want to: Avoid the costs, delays and disclosure connected in probate court, property taxes, eliminating or minimizing, make sure their property is to whom to pass they want when they want and how they want estate planning attorney San Diego and protect heirs assets of their heirs "inabilities, disabilities, creditors and predators.
Unlike couples, unmarried couples do not have to take advantage of many of the presumptions and default provisions under state and federal laws, for example, unmarried couples. are not entitled to federal unlimited estate and gift tax marital deduction, can not get the tax free "rollover" of the retirement system in the same way as a surviving spouse are not subject to most state inheritance laws that govern covered who gets a decedent's property if there is no will, and are not permitted by the Most laws in order to choose a partner and will get a portion of the deceased partner's property.
Same-sex couples have made some steps under the law to qualify for the same benefits that married couples enjoy. In Massachusetts, Connecticut, Iowa, Vermont, New Hampshire and Washington DC are marriages for same-sex couples legal and ongoing. In New Jersey registered partnership are permitted, the state-level spousal rights to same-sex couples. In California, Oregon, Nevada and Washington (state), local partnerships are permitted to offer almost all state-level spousal rights to unmarried couples. In Hawaii, Maine, Washington and Wisconsin, local partnerships are permitted to offer only a few state-level spousal rights to unmarried couples. And in New York, and Maryland are Rhode Iceland, recognizes same-sex marriages from other states or other countries, but they are not carried out. However, 41 states have laws on the books banning same-sex marriages, including 30 states and constitutional bans.
Same couples have some progress made under the law towards qualification for the same benefits that married couples enjoy. In Massachusetts, Connecticut, Iowa, Vermont, Maine and New Hampshire, are marriages for same-sex couples legal and ongoing. In New York and Rhode Iceland, same-sex marriages from other states or other countries are recognized, but they are not carried out. The states of California, Hawaii, Nevada, New Jersey, Oregon and Washington to grant by way of laws regarding domestic partnerships and civil unions individuals in same-sex partnerships, a similar legal status as married couples. However, 36 states have laws on the books banning same-sex marriages, including some that have constitutional bans. Only three states - New York, Rhode Iceland, and New Mexico - have taken no action in either direction.
Although the U.S. Constitution requires each state give "full recognition" to the laws of other states, the 1996 Federal Defense Administration of Marriage Act ("Doma") express the full faith and credit requirement undercuts the case of gay marriage. As mentioned above, 36 states have adopted their own laws DOMA. Like, because the conflict between the U.S. Constitution and DOMA, it may ultimately be left to the Supreme Court of the United States, the issue of same-sex marriage.
Avoiding State Standard Laws
Most unmarried couples choose to avoid their state's laws of succession. These are the laws that receives a decedent's "probate" estate if he or she dies without a will to determine. Except for a few states have laws of succession does not recognize "non-related persons." However, assets are moving to a joint tenant or surviving beneficiary designation at the expense of a person or trust is not part of the testator's probate estate and thus avoid the inheritance laws. Same-sex couples want the default most states' laws on issues such as burial wishes and priority of persons to avoid as guardians, conservators, personal representatives act, and patient representatives.
Accordingly, unmarried couples use Wills; Substitute (ie, joint ownership, beneficiary designations and payable upon death accounts); Revocable living trusts, general powers of attorney for financial matters, living wills and healthcare powers of attorney and funeral policies no adverse law. In addition, if an unmarried partner couples declared null and void as a beneficiary in Will's life, or to call for trusts, it is possible that family members can reject the will or trust to deny. By including an "in terrorem" clause in the will or trust agreement, would any person who denies the will or trust will receive nothing. Won such a clause is used to people from challenging a will or trust in the Court since the material can not be discouraged by the Retirement action.
Although are technically not a state law default problem, unmarried couples typically do not fare as well as their married colleagues when it comes to qualified pension plans. Many 401 (k) plans and pension plans provide that upon the death of a participant, his or her retirement account in order to be distributed in one lump sum. As such, the distribution is fully taxable (as ordinary income) in the year of death of the participant. However, if the participant mentioned the beneficiary is a spouse, the spouse can roll over the distribution into an IRA. Thus, the income tax will be deferred to the distribution to the surviving spouse attains age 70 1/2, can "stretch" at which time the spouse be the distribution of 27.4 years.
Until recently, would be a non-marital receiver was forced distributions of all qualified retirement plan within five years after the death of the participant or, in some plans, immediately after the death of the participant. Under the Pension Protection Act of 2006 (PPA), beginning in 2007, a non-spouse beneficiary of a qualified retirement plan, roll to be transmitted via a trustee-to-trustee, the benefits to an "inherited" IRA. The inherited IRA must be titled in the name of the participant for the benefit of the beneficiary outside of marriage (eg "Mary Smith, died IRA f / b / o Alice Jones"). The PPA also allows post-mortem transfer of qualified pension plans to IRAs inherited from trusts for the benefit of the beneficiaries rather than outside of marriage. Once the benefits are inherited in the IRA, the receiver can take advantage of his or her life expectancy.
Domestic partnership Agreements
As stretch mentioned above, some states have laws allowing domestic partners to register as such, entered into force. In this way, non-married couples many of the rights and obligations granted to married couples. But in the vast majority of countries, domestic partners are not recognized. Therefore, it may be advantageous for unmarried couples, define the terms of their relationship in a written Domestic Partnership Agreement (DPA). A DPA plan works much like a marriage contract for couples to marry.
Basically, a DPA a legally enforceable contract between two unmarried persons, the rights and duties of each person clearly in the relationship. Here are some of the provisions of the rule are found in a DPA: A statement about the relative rights in property acquired prior to the date of the DPA (for example, such a property could be the person who deserves it or are acquired), such as income with the earned partners are divided, how living expenses are shared, such as inherited property is divided, if at all; whether to be created jointly titled assets, and if so, how they should be divided in the event of separation, such as assets in the event of a separation can be divided, and whether, after the separation, the support of a partner to the other provided, and as assets in the case of addressing death.
Beyond financial worries will be distributed, a DPA to help set other parameters in this relationship help to clarify and strengthen the relationship. A DPA can also help potential disputes and misunderstandings, by avoiding a dispute resolution mechanism such as arbitration. Because some states do not recognize the validity of the data protection authorities, it is important to consult a local attorney.
Basic strategy Gifting Line Break Line Break Line Break Line Break Like everyone else, are unmarried couples with taxable estates need more than a will or revocable living trust in order to reduce the federal estate tax. You need to also implement a gifting program. Although there is a lapse in the gift of land and generation skipping transfer taxes, it is likely that Congress both taxes again (even retroactively) sometime in 2010. If not, at first January 2011 the estate tax exemption (which was $ 3.5 million in 2009) $ 1,000,000, and the top estate tax rate (which was 45% in 2009) is about 55%. Line Break Line Break Line Break Line Break Federal estate tax law provides an unlimited marital deduction. Assets are left to replace the surviving spouse through a will, trust or estate and gift tax-Will-free (if the surviving spouse is a U.S. citizen). In other words, a married couple move to the estate tax until the death of the surviving spouse. Because of the Defense of Marriage Act (DOMA) Unmarried couples are not offered that opportunity - even in those states, same-sex marriages, civil unions and domestic partners be recognized. Therefore, unmarried couples whose assets exceed basic federal estate tax exemption on the first partner's death and may cause the death of state taxes depending on the state of residence.
Here are some tax saving techniques are available to unmarried couples: Line Break Line Break Line Break Line Break Annual gift tax exclusion. This exclusion of donors can make tax-free gifts of up to about $ 13,000 per donee per year without limitation on the number of the recipient or the recipient 'relationship to the donor. This exclusion is intended to increase the amount, as it is now indexed to inflation. Lifetime annual gifts under this exclusion does not reduce the donor's $ 1 million lifetime gift tax exemption. (See below) In addition, a gift tax return (Form 709) is not the need for such gifts.
In be submitted in addition, unlimited direct payments under the donee of school fees or medical bills are not subject to gift tax, nor do they count against the donor's $ 1 million lifetime gift tax exemption or the $ 13,000 annual gift tax exclusion. However, the fees payable directly to a qualified educational institution or medical provider. Educational costs do not include room and board, books and accessories. Medical expenses do not include amounts reimbursed by insurance.
Unmarried partners must earn significantly different incomes and have accumulated different amounts of wealth. The gift tax annual exclusion and the exclusion for tuition and medical costs to enable the richer partner assets to the less wealthy partner to transfer during his lifetime. This strategy is particularly useful when the richer partner estate over the estate's tax exemption, the less wealthy partner of the estate under the amount, and they want to benefit from the same people on the surviving partner death.
Lifetime gift-tax exemption. In addition to the annual gift tax exclusion, a donor can gift a total value of up to $ 1,000,000 for each over the course of his life with no gift tax. This is the so-called "gift tax exemption." Gifts that reduce the annual $ 13,000 gift tax exclusion, the gift tax exemption dollar for dollar. Other than the basic exemption, however, does not the gift tax exemption used increase.
Any gift tax exemption decreases dollar for dollar, the real estate tax exemption available at death of the donor. However, the income and appreciation of the property gifted by the donor's estate is removed, allowing the estate tax. Thus, an unmarried couple with the richer partner to make the gift tax exemption for gifts to the less wealthy partner, so that the entire estate tax is reduced by both partners.
Gifts to irrevocable trusts. Unmarried couples are often reluctant to actually make gifts to partners, because the donor loses control over the property gifted. Through the gifts to an irrevocable trust, the richer partner (lessor) for the less wealthy partner (beneficiary) to trust income and / or principals ever deliver as required, but can also determine where the remaining trust property will pass to the beneficiary's death or dissolution the relationship. In addition, when properly formulated, the wealth that can happen to the trust estate tax free to the "remaindermen" in the trust agreement to the beneficiary named death.
To effectively reducing his estate purposes, the trust must be irrevocable and the grantor should not be a trustee or beneficiary of the trust. However, the grantor, within limits, the right to remove reserve, and replace trustees, and, as mentioned above, the trust can be designed so that the recipient's partner is called by another receiver already in reliance replaced when finished, the relationship .
In order for the $ 13,000 annual gift tax exclusion to qualify, irrevocable trusts contain a clause in the rule, which withdraw the confidence of the beneficiaries a temporary right to donate to the trust, at least in part. The right of withdrawal is often called a "Crummey" power because the federal court case that these technique.
Irrevocable Life Insurance Trusts validated called named. Unmarried couples often buy life insurance for the benefit of the surviving spouse to supplement future income from the inability to do a double rollover to help lost, and the inability to receive pensions. Life insurance can also be used to create offer a property to provide financial security for the surviving partner, or the cash to pay the estate taxes.
While life insurance proceeds are generally income tax free to provide to the recipient, they are still part of the insured's gross estate and subject to estate taxes. Accordingly, if the insured has a taxable estate (including the face on the amount of life insurance), it may be advisable to transfer his or her life insurance to an irrevocable life insurance trust (ILIT).
If the life insurance is owned by and payable to an ILIT, the insurance benefits of both income and estate tax to be free. However, if you die an existing policy to an ILIT, and the grantor-insured within three years will be transferred after the transfer, the death proceeds are returned to the grantor-insured property. This problem can be avoided if the ILIT is the first owner and beneficiary of a new policy.
Gifts can become an ILIT with the grantor-insured $ 13,000 annual gift tax exclusion made with "Crummey" powers (see above) and / or with the be grantor-insured the $ 1,000,000 gift tax exemption. As mentioned above in connection with gifts to irrevocable trusts, the grantor-insured should not be a trustee or beneficiary of the ILIT. In addition to the denial of insurance benefits from the grantor-insured facility enables the ILIT, the grantor-insured to the parameters obtained in the his or her partner (as a beneficiary of the ILIT) trust income and principal set. The ILIT should also be formulated such that when the receiver (already mentioned in the ILIT) is no longer in a relationship with the grantor-insured, another person who is automatically the new receiver.
Before transferring a policy to an ILIT, must comply with applicable state laws examined to determine if the ILIT has an "insurable interest" to be insured in the grantor. If not, the insurance might not be obliged to pay the death benefit. It may be possible for this problem by avoiding the insured to purchase the policy and then assign it to the ILIT. Under most state laws, the insurable interest requirement applies only to the original owner and not transferred to another legal successor. Is assigned as already mentioned, however, if a policy to an ILIT and dies, the insured within three years of the sale, the proceeds are still roughly in the death of the insured property includable. One possible technique to avoid the three-year rule would be for the insured, the policy to an ILIT, the grantor is construed as trust.
Advanced Gifting Strategies
For unmarried couples with very large estates for sale, fully utilizing the $ 13,000 annual gift tax exclusion and gift tax are exempt $ 1 million may not have enough to significantly reduce the total inheritance tax. Gifts over $ 1 million gift tax exemption are taxed at the same rates as real estate transfers. Given the potential estate tax repeal or reform, many people are reluctant to make taxable gifts to reduce estate taxes. Therefore, effective succession planning for people with large estates include strategies that help reduce freeze, or the value of assets at minimal cost gift. Here are some strategies that are richer partners use to shift future appreciation to the less affluent partners while minimizing taxable gifts to the maximum extent possible:
Low-interest loans. An easy way to shift the potential appreciation of the wealthier partner to the less wealthy partner, without any gift tax, there is an interest-only loan. The loan has interest at the applicable federal rate (AFR) is published monthly by the IRS to carry. The less wealthy partner reinvested the loan proceeds and the esteem in which the AFR will happen to the borrower free of gift tax and will be excluded from the lender's estate. For the past few years, the AFR have been at all-time lows, so this strategy is particularly favorable. The loan should be documented with a limited partnership or limited liability companies note.
Family change. A Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC) to richer partners allows for gifts to the less wealthy partner on a "discounted" basis to make while maintaining a degree of control over the gifted partnership / membership interest. For example, the wealthier partner property to an FLLC in exchange for a 1% of the voting rights and 99% non-voting interest forward. The non-voting interests are then gifted to the less wealthy partner (either directly or in trust). The richer partner control over the FLLC's assets through the voting rights by designating himself as the manager of the FLLC. In addition, the discounted gift tax value of the nonvoting interests, because they lack the control and marketability.
In addition to the tax reasons for creating an FLP or FLLC (ie, discounting the value of the property for gift tax purposes and removal of the income and appreciation on the gifted property from the donor's estate), there are also a variety of non-tax reasons for with an FLP or FLLC. As already mentioned, the donor may retain control over the management of the company's property and the distribution of their profits. FLP or FLLC assets in a protected (to a degree) from creditors, and FLPs FLLCs facilitate the production of gifts and a much more efficient way than the direct gifts of property, especially if real estate is involved.
The significant advantages in use and increased use FLPS FLLCs have their control and subject to the challenge by the IRS. A recent line of case law has the task of Estate Planners in advising clients on the use of FLPs and FLLCs complicated. Thus, the proper structuring, administration and defense of the FLP or FLLC be placed in the hands of an experienced attorney.
Grantor Retained earnings trusts. A Grantor Retained Earnings Trust (GRIT) is a tool that estate planning has been around for many years. However, the Revenue Reconciliation Act of 1990 effectively eliminated is the GRIT as a wealth transfer technique, "family" members. But grits are still a useful tool for unmarried couples - one of the few areas of tax law, where an unmarried couple has an advantage over a married couple.
A GRIT is an irrevocable trust where the grantor (the richer partner) the transfer of assets to a trust while retaining the right to the entire net income from the trust fund received for a fixed term of years. Net income must be paid at least as often as annually. After expiration of the fixed term of years, the remaining trust principal is distributed to either the remainder beneficiaries (the less wealthy partner) or held in further trust for the benefit of such beneficiary. However, if the grantor survives the fixed term, the assets are included in the GRIT in his estate, but any gift tax exemption is used in determining the GRIT restored. So the deal is no worse off than if no GRIT was created. In many cases it can be to create a good idea of Ã¢ÂÂÃ¢ÂÂthe grantor, an irrevocable life insurance trust to have a policy for his or her life in order to provide liquidity - both income and estate tax free to the increased property tax owed have paid if the grantor does not survive the GRIT office.
The gift tax with a value GRIT will only be the value of the remainder interest (ie transfer the difference between the full value of the property to the grit and the present value of the grantor's income interest). The idea is a concept that will choose the cash value of the grantor's income interest is a fundamental value (using the IRS publishes the monthly discount rate) to give, but that the grantor is likely outlive.
A big advantage is a GRIT, that if the assets transferred to the GRIT produce at a rate lower than the discount rate the IRS for the month of the transaction is to underestimate the net effect on the gift to the remainder beneficiaries. In contrast, where the residual beneficiary is a family member, the Internal Revenue Code in order to pay a fixed annuity must be kept a so-called Grantor Annuity Trust, or gift tax GRAT.
The value can be further reduced if the assets transferred to GRIT for valuation discounts (such as an interest in a family limited partnership) to qualify. It is possible, with a long maturity and a sufficiently large enough haircut that the gift will be a nominal value. Revaluation of the asset during the fixed term thus escapes estate taxation. The GRIT should be edited to ensure that, if the grantor and the recipient is no longer in a relationship, then called another person already in the GRIT, is automatically the new receiver.
The laws that unmarried couples are changing rapidly. Certainly expect more changes are also challenges in federal courts in defense of Marriage Act. The different rules for the ownership rights of the state government to increase the complexity of the situation, especially for same-sex couples who move from one state to recognize marriage-like same-sex marriages or to a state that does not exist. For unmarried couples, it is important to prevent a form of estate planning to default on state laws from disinheriting their Partners. Finally, because unmarried couples with large estates do not enjoy the unlimited marital deduction and other benefits that married people enjoy, they have to aggressively search for alternative solutions to maximize assets, reduce estate taxes and do not use powerful techniques couples married for disposal. This article provides for tax
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