Estate Planning for Unmarried Partners: What You Need to Know

Estate planning for unmarried partners can start with adding your partner as a joint owner on an account or piece of property. Making your partner a joint owner is one of the easiest ways to give your partner immediate access to and control over an account or property. As long as the account or property is owned jointly with the right of survivorship, your partner will automatically become the sole owner upon your death with no involvement by the probate court. However, this option has its shortcomings. Because your partner will become the sole owner at your death, your partner, not you, gets to choose what will happen to the account or property upon their death. You have to trust that your partner will make a decision you would have supported. In addition, once your partner becomes a joint owner of the account or property, your partner’s debts become your problem. Should your partner become subject to a creditor’s claim or lawsuit, the creditors could seize your jointly owned account or property to satisfy any outstanding judgment. Finally, if you and your partner break up, removing your partner’s name from your accounts or property could be problematic and lead to costly and emotional litigation if your partner is unwilling to cooperate.

Most retirement accounts and life insurance policies have beneficiary designation forms that allow you to dictate who will receive your retirement account balance or the death benefit when you die. In many cases, the instructions ask you to name a primary beneficiary and a contingent beneficiary (as backup in case the primary beneficiary is deceased or does not want the money). Adding your partner as a beneficiary is another easy solution to get money to your partner at your death without jeopardizing your ability to control the account or policy during your lifetime. However, should your partner be sued, that money could be available to satisfy any judgments against your partner. Also, if there is any money remaining when your partner dies, it is your partner that chooses who will receive it. In addition, you have no control over how the money will be spent. Your partner could spend it all on a lavish vacation or an expensive sports car.

Naming your partner as the pay-on-death (POD) or transfer-on-death (TOD) beneficiary of an account has the same pitfalls as naming them on a beneficiary designation form. Although the POD or TOD option allows you to maintain control of the account during your lifetime after the account has been transferred or the funds paid to your partner at your death, the account or money will become your partner’s. The money then becomes subject to any creditors or judgments your partner may face, it can be spent on frivolous items, and your partner gets to decide what happens to any remaining amounts. Another downside of the POD or TOD option is that your partner will have access to the money in these accounts only upon your death. Should you become incapacitated (unable to make your decisions), the accounts would still be deemed yours and your partner could not access the funds, absent additional estate planning measures.

A Last Will and Testament allows you to specify what money and property (owned solely in your name and not automatically passing to a surviving joint owner or beneficiary) your partner will receive and how your partner will receive it (for example, as a lump sum or as installments over time). If you choose to leave money or property to your partner, these items are vulnerable to the risks mentioned above, because your partner owns them outright. However, with a will, we can create a testamentary trust to provide extra protection for the money and property you leave to your partner. You must remember, however, that if you use a will, your partner will have to go through the probate process to get the money and property at your death and the probate process could be under court supervision until your partner receives the final amount. In addition, a will is effective only at your death. It will not provide any instructions or benefits to your partner if you become incapacitated.

A revocable living trust (RLT) is a trust you create during your lifetime that can be changed until your incapacity or death. While you are alive and can make decisions for yourself, you are both the current trustee (the person or entity who manages, invests, and hands out the money and property) and the current beneficiary (allowing you to continue enjoying the money and property during your lifetime). In the trust agreement, you determine who manages the trust and who receives the benefit of the money and property during your lifetime and at your death. You can specify how your partner should be financially provided for during any period of your incapacity, what accounts or property your partner will receive, and when and how your partner will receive the money and property at your death. Under a carefully drafted RLT, the accounts or property can be used to support your partner after your death and even while you are alive and unable to manage your affairs. Also, anything you want your partner to receive can be protected from your partner’s creditors or judgments and from your partner’s spending the money or selling the property to buy extravagant items. The accounts and property owned by the trust will avoid probate, a significant benefit that allows you to keep your private matters out of court and away from prying eyes.

Note, however, that if, after your death, your trust owns any accounts that generate income that is not given to the beneficiaries, the trust will be taxed on the income, usually at a higher rate than what an individual would pay on the same income. Also, the longer the trust exists, the longer it needs to be managed, so there could be ongoing fees associated with the trust such as tax preparation, investment, and management fees, depending on who is the trustee.

Estate planning for unmarried partners doesn’t need to be complicated, and it doesn’t have to be intimidating. As you can see, there are several different ways to provide for your partner during your incapacity or when you die. We are here to help you craft a plan that addresses your concerns and help you ensure that your partner is taken care of during all phases of life. Call us today to schedule, (480) 699-7992.