For unmarried couples, making a will is paramount, especially if they are sharing a home owned by just one member of the couple. If the homeowner dies without an estate plan, the other member of the couple could be out on the street. “The state will not protect your significant other,” says Russ Weiss, a certified financial planner in Doylestown, PA. “The children can kick her out right away.”
[Note: Randolph Wolfson, Esq. attorney at Insight Estate Planning Excellence in Sun City, Arizona recommends a trust centered estate plan is far superior to a will centered plan. An revocable or irrevocable trust centered plan should be strongly considered].
For partners who want to leave their homes to their children, one way to deal with this problem is to create a life estate for the surviving partner, says Austin Frye, a certified financial planner in Miami. This contract typically gives the survivor the right to live in the home until he or she dies or moves into a nursing home, at which time the house passes on to children or other heirs. In some cases, Frye says, the agreement will set aside money to cover maintenance and other expenses.
Although some couples remain unmarried to protect their estates, that strategy backfires if you end up paying estate taxes. If you’re married, you can inherit an unlimited amount of assets from your spouse without paying state or federal estate taxes. You can also give an unlimited amount of assets to your spouse while you’re alive without filing a gift-tax return.
That exemption doesn’t extend to unmarried couples. Estates of up to $5.43 million are exempt from federal estate taxes, but 13 states and Washington, D.C., have lower thresholds for their estate or inheritance taxes. In Pennsylvania, heirs who aren’t spouses or family members must pay 15 percent on their entire inheritance. Vincent Barbera, a certified financial planner in Berwyn, Pa., has a client whose partner of 10 years will owe about $350,000 in taxes if she inherits his estate. “My official recommendation to him is to seriously consider marriage, because there’s no other foolproof way to avoid paying the taxes,” he says.
The tax code also favors married couples when it comes to inherited IRAs. A spouse who inherits an IRA can roll the account into his or her own IRA. The surviving spouse can postpone taking required minimum distributions until age 70 1/2. In the meantime, the account will continue to grow tax-deferred. Spouses can also roll inherited Roth IRAs into their own Roth accounts; in that case, they’re not required to take RMDs.
The same option isn’t available to unmarried partners. However, an unmarried partner who is named as an IRA beneficiary can minimize taxes by rolling the account into an inherited IRA and taking distributions based on his or her life expectancy (see kiplinger.com/article/investing/T032-C000-S002-get-the-most-from-inherited-iras.html).