Estate Planning for Same-Sex and Unmarried Couples

Same-sex couples and heterosexual unmarried couples are increasingly visible, vocal, and currently comprise a large segment of our nation’s population. Meeting their financial needs, as society becomes more complex and people have more personal responsibility for their financial future, can be a boon to producers who sell permanent life insurance.

The U.S. Census Bureau reported in 2000 that only 23% of the nation’s families were traditional mother-father-and-kids units. Most–77% of American households–reported other, non-traditional living arrangements. The U.S. Census Bureau reported over 600,000 households consisting of same-sex couples or unmarried domestic partners. By 2005, the Bureau estimates that figure jumped to over 770,000.

Clearly, many couples, same-sex and heterosexual alike, have resolved to live together without formalizing their relationship through marriage. Despite the growing acceptance of these family structures and lifestyles, they are often not afforded the same privileges as married couples, particularly as regards financial and estate planning.

There are remedies. By planning ahead, same-sex and unmarried couples can protect their assets and employ a tax-efficient transfer of wealth, especially with the help of permanent life insurance policies and the careful creation of an irrevocable trust.

The law and the solution

Respecting taxes assessed at the death of a partner, estate laws favor married couples over all others. Under current statutes, a dying spouse’s wealth and assets may be transferred to a surviving spouse estate tax-free. There is no assessment on the federal or state level.

Same-sex or unmarried couples, however, do not receive the same favorable treatment under the tax code. Essentially, both partners in same-sex and unmarried unions are treated–and taxed–as individuals. Absent careful legal planning, a partner may be no better off than a stranger under the law. Consider the implications for an unmarried couple who fails to draft explicit authorizations to receive information about a partner’s medical conditions under HIPAA or who fails to leave explicit powers under an advance medical directive.

A deceased partner’s assets above the current federal exemption of $2 million are taxed heavily. The federal government can currently take a 45% share of the deceased’s estate, including all property and investments. In addition, many states add on their own levy–as much as 16% above the federal assessment in some cases. Furthermore, while same-sex and unmarried couples can gift assets to one another, the federal government doesn’t waive gift taxes on the transfer, forcing the couple to use annual exclusion gifts or their lifetime exemption to avoid a current gift tax.

A common solution is to create an irrevocable trust that holds permanent life insurance policies benefiting the other partner. Whole life or universal life policies are the preferred funding vehicles for this arrangement. Placing the insurance in the irrevocable trust removes the death benefit from the insured’s estate, thereby reducing the estate value and the estate tax assessment upon the death of one partner.

The insurance will provide liquidity to the surviving partner, an important feature when survivors need to gather up funds to pay for estate taxes on other assets to fund funeral costs and to replace the economic loss suffered from the partner’s death. Under this plan, the trust is equipped with an asset that grows in value over time, and a distribution at the time of one partner’s death that need not be diminished by federal and state death taxes.

With a properly funded permanent life insurance policy, distributions can be made to a partner under circumstances defined in the trust, including those needed to maintain health or provide income under pre-defined conditions. Funding can take place in small, affordable increments over the years, and can be accomplished confidentially.

For professionals such as doctors or lawyers, trusts may be armed with an additional protection from lawsuits, thus keeping assets out of the reach of courts and creditors.