|
|
 |
|
| Best Practices: Family |
Unrecognized Unions
Jill Duman
03/01/2008
|
In your 20s, "living together" means sharing a futon and possibly an
impressive collection of music. You might lose your favorite CDs if the
relationship ends, but no significant assets. However, more-established couples
who live together without marriage risk losing far more.
Couples of all ages are choosing to cohabit, with the Census
Bureau reporting a 72 percent increase in the number of unmarried couples living
together between 1990 and 2000. Indeed, many affluent couples prefer the
apparent carefree simplicity of cohabitation over marriage. But attorneys and
financial planners warn these individuals of a plethora of legal and tax
ramifications that, if left unaddressed, could ruin their credit, finances and
reputations. Furthermore, cohabitation may unintentionally threaten family
wealth and harmony for those who have considerable assets held in family trusts
or businesses.
Unmarried couples living together face significant challenges
when drafting estate plans. Consider one pair, clients of Lisa Padilla, a New
York lawyer who specializes in financial and estate planning for nontraditional
families. Don, a 55-year-old hedge fund manager, has a personal net worth of $50
million. For 25 years he has lived with Barbara, a 52-year-old photographer with
no significant personal assets. Don also owns part interest with his brother and
parents in a family limited partnership worth $25 million.
Don sought Padilla’s advice in determining how to provide for
Barbara in his estate while avoiding the legal and tax pitfalls unmarried
couples often encounter. Don’s estate faces a $780,000 tax payment on the first
$2 million after covering funeral and estate administration expenses. (This
applies only if he avoids tapping the $1 million lifetime gift credit currently
allowed by federal tax law.) His estate would also owe a 45 percent tax on the
remaining amount over $2 million. And when Don dies, the IRS will factor in his
interest in his family’s limited partnership when calculating estate taxes.
Don’s estate planning dilemma underscores the complex issues
that cohabitants should discuss and address. When one partner’s wealth far
surpasses the other’s, each individual should consult a lawyer separately, says
Ralph C. Brashier, a professor at the University of Memphis’ Humphreys School of
Law and a contributing editor to the American Bar Association’s Probate and Property magazine. Such an arrangement becomes even more crucial if wealthy
individuals want to preserve the bulk of their wealth for themselves, their
children from prior relationships, or anyone besides their cohabiting
partners.
"There is no one-size-fits-all solution in asset planning for
cohabiting couples," Brashier says.
Beneficiary Trysts
Anyone who wants to leave assets to a life partner must find
creative ways to minimize estate taxes. One technique is to shift some of the
wealthier partner’s assets to the other partner—although the IRS limits annual
gifts to $12,000 before triggering federal gift taxes.
"When you have an unmarried couple and you have a situation
where all the assets are on one side of the ledger, it gets very, very
difficult," says Sverre Roang, an attorney for Whyte Hirschboeck Dudek in
Madison, Wis. "Often the game of tax planning for the unmarried couple is to
figure out how to equalize the estate to avoid those ultimate estate taxes."
|
|
|
|
|
|
|
