When Walker Aultz's domestic partner of 10 years died of a heart attack last September, Aultz thought they had planned their estates adequately. On the advice of a financial adviser, they had purchased a joint co-owner annuity contract seven years ago, thinking that if one of them died, the benefit would pass to the other, and that if both died at the same time, to a designated beneficiary. But when the 70-year-old Quogue (N.Y.) resident contacted the insurance company, he learned that the $330,000 annuity passed to the children of his partner's niece. According to the contract, if the joint co-owner is not a spouse, the death benefit passes to the beneficiaries. So Aultz has gone to court. "I'm grieving, and I'm trying to protect what is mine," he says.
Unmarried couples face estate planning issues that their married counterparts do not. For starters, unmarrieds take a much bigger hit in estate taxes. When a married person dies, the estate can pass tax-free to the spouse upon death, regardless of the amount. An unmarried partner can only leave up to $675,000. Anything above that so-called unified tax credit is subject to the estate tax. (The credit rises over time, reaching $1 million in 2006.) Moreover, Social Security benefits pass only to spouses and minor children.
LIVING TRUST. So as long as society still favors traditional husband-and-wife pairings, unmarried couples must put extra effort into estate planning. Amy Neil and Lynda Hornada of Albany, Calif., are doing just that. Neil, 37, works for United Behavioral Health in San Francisco, and Hornada, also 37, teaches fifth grade. They own their home jointly with the right of survivorship, meaning if one dies, the surviving partner inherits the house.
The pair are setting up a revocable living trust as a way to ensure that their assets pass on to the partner. Many planners recommend a living trust for unmarried couples, even though trusts are more complicated and expensive than wills. But trusts don't go through probate, and wills are more likely to be challenged in probate with an unmarried couple. Neil and Hornada each also have a backup, or "pore-over," will to cover assets left out of the trust. Otherwise, assets pass to the unmarried person's biological family.
The two have designated each other as beneficiaries on all their accounts. They've signed a financial durable power of attorney that gives a partner access to funds in an emergency, and a health-care proxy so one can make medical decisions if the other becomes incapacitated. To increase their retirement savings, both Neil and Hornada are maximizing contributions to their 401(k) and 403(b) plans. And they're each buying life insurance equal to five times their annual earnings, naming the other as beneficiary.
Retirement benefits are also a big concern for Brian Bretan and Janice Barnikel of Smithtown, N.Y. The two have been together for six years and jointly own their $350,000 home. Bretan, 57, a drug salesman, has an income of more than $100,000 and assets over $1 million. Barnikel, 40, is a flight attendant and earns $71,000 a year.
The couple has set up a revocable living trust in which Barnikel receives the first $250,000, in addition to the house, and the balance goes to Bretan's two grown children. Once Bretan retires in three years, he plans to roll over his pension plan to an IRA and name his children and Barnikel as beneficiaries. Until then, he is stuck because the Internal Revenue Service will not allow non-spouses to roll over pension benefits, which defers taxes. "Understand that the world operates in a marriage mold," says Michael Kresh, a certified financial planner in Hauppauge, N.Y., who is advising Bretan. "There are no inherent protections for unmarried partners." So you need to use all the estate planning techniques at your disposal.
By Ann Wozencraft