While estate planning is important for everyone, the stakes are even higher for unmarried couples. Unmarried couples who fail to formalize an estate plan run a major risk of disinheriting their partner, leaving a legacy of heartache and discord.
Fortunately, setting up an estate plan is easier than you think. Whether you have a massive, complex estate, or a small and simple one, every estate plan has four key parts:
- A durable power of attorney
- A living will
- A letter of instruction regarding funeral and burial plans
- A last will and testament
A Durable Power of Attorney
If you become incapacitated and are unable to handle your affairs, your partner will need special authorization to legally act on your behalf. Your partner would need permission to manage your assets, access your medical files, and speak with healthcare providers to make important decisions. You can confer the necessary authority by issuing a durable power of attorney to your partner.
Without a power of attorney, that authority would fall to your next-of-kin, such as parents or siblings. While these family members should hopefully have your best interests in mind, there will inevitably be disagreement between your partner and your family, as each party will think they know what’s best for you.
A Living Will
A living will—also known as an advance healthcare directive—is where you can clearly state your healthcare and treatment preferences. Should you become incapacitated and unable to communicate important medical decisions, your healthcare providers can refer to the instructions in your living will. This may seem redundant if you have a healthcare proxy with a power of attorney, but it’s still great to have as a reference in case anyone is unsure of what to do in an unexpected situation, or if anyone objects to your healthcare proxy’s decisions.
A Letter of Instruction for Funeral and Burial Plans
Many people include their funeral and burial plans in their last will and testament. This is perfectly fine, but it can be problematic if your family doesn’t open your will until after your funeral. Write down your plans in a formal letter of instruction, indicate if you’ve purchased any pre-needs services from a cemetery or crematorium, and specify which accounts or assets should be used to cover the bill for services you haven’t prepaid for.
A Last Will and Testament
Your last will and testament is the backbone of your estate plan. Unmarried couples should pay special attention to the following topics in their will:
- Nominate your partner to be your personal representative and handle your estate
- Direct which assets should transfer to your partner
- If you have minor children, name a guardian to care for them
If you don’t nominate your partner to serve as your personal representative, a probate judge will appoint next-of-kin to do the job. Your partner could contest this, in which case the judge will appoint a neutral, third-party administrator instead. While the administrator should be counted on for fair, unbiased estate management, they will be bound by the law, and the law doesn’t treat unmarried partners very favorably.
Your will can only offer instruction for your assets that are subject to probate, such as individual bank or brokerage accounts, and property owned individually or as tenants in common. The following assets are exempt from probate, and don’t need to be addressed in your will:
- Bank or brokerage accounts with a transfer-on-death (TOD) or payable-on-death (POD) beneficiary
- Retirement accounts (401k, IRA, etc.)
- Life insurance policies
- Property held in joint tenancy or tenancy by the entirety
Finally, you’ll need to appoint a guardian for your minor children, especially if the children are from a previous relationship and you want your current partner to care for them in your absence. In that situation, your partner would have little chance of receiving custody of your children without formally being named as guardian in your will. Instead, the court will default to next-of-kin.
What Happens if My Partner Dies Without a Will?
When you die without a will, you die “intestate,” and your estate will be distributed according to your state’s intestacy laws. This can be extremely problematic for unmarried couples, as the law does not recognize the inheritance rights of a partner. In the state of Arizona, your property would be gifted to your heirs in the following order:
- Your biological children
- Your parents
- Your siblings
- Your grandparents
- Your extended family (aunts, uncles, cousins, etc.)
Should My Estate Plan Include a Trust?
Trusts are incredibly valuable additions to an estate plan, although they are widely misunderstood. Where your will offers direction for your assets, a trust actually takes possession of your property and transfers it to your beneficiaries. Trusts are initially more expensive to establish than a will, but in the long run they may save you money by allowing your assets to bypass probate.
You can establish a living trust if you’d like to maintain control over the assets during your lifetime, or you can direct a testamentary trust be established after your death. If the trust is revocable, you have the freedom to amend or dissolve the trust during your lifetime; if the trust is irrevocable, the terms of the trust cannot be altered.
For unmarried couples with considerable wealth, an irrevocable trust may be a useful tool to minimize or avoid estate taxes. Married couples can claim an estate tax exemption of up to $11 million dollars, but unmarried individuals can only claim $5.49 million. If you transfer assets to an irrevocable trust, those assets are permanently removed from your estate, thus minimizing your final estate value.
Additionally, a living revocable trust may be beneficial for unmarried partners who want to leave assets to their partner without compromising assets that should eventually pass to their beneficiaries when the surviving partner dies. To do this, set up a trust with yourself as the trustee, you and your spouse as the primary beneficiaries, and the heirs who should receive any residual value when your partner dies.
When you die, a successor trustee will step in to manage the assets in the trust and provide income for your surviving partner. The trustee will ensure your partner is provided for, while guaranteeing that your estate isn’t needlessly squandered. Then, when your partner dies, the trustee will distribute the remaining assets to your beneficiaries.
Call our Estate team at (480)467-4325 to discuss your case today.