If you haven't tied the knot

Lynn Brenner | Family Finance

June 26, 2004

Estate planning is a good idea for everybody, but for unmarried couples, it's vital. Unlike spouses, they have no legal inheritance rights based on their relationship.

Being married confers unique financial benefits. You can disinherit your kids, but not your spouse. Advantages available only to married couples include:

Automatic inheritance rights for the survivor. In New York, whatever your will says, your spouse is automatically entitled to $50,000 or one-third of your estate, whichever is bigger. If you die without a will, New York law divides your assets between your spouse and your kids. It provides nothing for lifelong companions or friends.

Unlimited marital deduction on estate taxes. You owe no state or federal estate taxes on any assets you inherit from your spouse.

Lynn Brenner Bio | E-mail | Recent columns

Unlimited tax-free gifts to each other.

Entitlement to be each other's named beneficiaries on employer-sponsored retirement plans.

The right to roll a deceased spouse's retirement plans and Individual Retirement Accounts into an IRA in your own name and postpone withdrawals until you're more than 70 1/2 years old. All other named beneficiaries must start taking withdrawals when they inherit retirement plan assets.

Social Security benefits for the survivor. Your lifelong partner doesn't qualify for Social Security benefits based on your earnings unless you are married. (By contrast, Social Security recognizes parent-child relationships outside marriage.)

Unmarried couples can protect each other by writing wills in each other's favor, by naming each other as life insurance beneficiaries and by owning their assets jointly with right of survivorship. You should also sign a health care proxy giving your partner the legal right to make medical decisions for you if you're incapacitated.

You may also want to consider a revocable trust: You transfer your assets into the trust, naming your partner as its beneficiary. As the trustee, you still control your assets, and like a will, the trust is revocable; you can change beneficiaries. The main advantage is that a trust is less easily contested.

"In a situation where parents disapprove of a relationship, I've seen them contest a will," says Stephen J. Silverberg, an East Meadow estate lawyer. To be sure, overturning a will is far from easy, but the legal battle alone makes life difficult for the surviving partner.

Life insurance benefits aren't subject to income tax, but any policy you own is included in your taxable estate. Consider having your policy owned by your partner or by an irrevocable life insurance trust, advises Eric Kramer, a Uniondale estate lawyer.

If you add your partner to the deed for your house, you're making a gift equal to half your equity. If you bought the house for $250,000, for example, and have a $100,000 mortgage, you've made a $75,000 gift. You must file a gift tax return, but no tax will be due.

Here's why: You can give away up to $1 million during your lifetime without owing a gift tax. (When you die, your estate tax exclusion - $1.5 million this year - will be reduced to the extent that you've used this lifetime gift-tax exclusion.) In addition, you can give gifts up to $11,000 each to as many people as you like every year, free of gift tax.