What Happens If an Unmarried Partner Dies?

If you, like so many others, found yourself settling the affairs of a loved one in the last 18 months, you may be well aware of the challenges created when there is no estate plan. The lack of planning can create an enormous headache for loved ones, explains a recent article titled “3 Estate Planning Tips for Same-Sex Couples” from The Street. If this is true for married couples, then it’s even more important for unmarried couples.

Planning for incapacity and death is not fun, but unmarried couples in serious relationships need to plan for the unknown. Even married same-sex couples may face hostility from family members, including will contests and custody battles over children. There are three key issues to address: inheritance, incapacity and end-of-life care and beneficiary designations.

If a partner in an unmarried relationship dies and there is no will, assets belonging to the decedent pass to their family, which could leave their partner with nothing. With no will, the estate is subject to the laws of intestacy. These laws almost always direct the court to distribute the property based on kinship.

A will establishes an unmarried partner’s right to inherit property from the decedent. It is also used to name a guardian for any minor children. Concern about the will being contested by family members is often addressed by the use of trusts. When property is transferred to a trust, it no longer belongs to the individual, but to the trust. A trustee is named to be in charge of the trust. If the surviving partner is the trustee, he or she has access and control of the trust.

A trust helps to avoid probate, as property does not go through probate. A will also only goes into effect after the person who created the will passes away. A revocable living trust is effective as soon as it is established. Trusts allow for more control of assets before and after you pass. The trustee is legally bound to carry out the precise intentions in the trust document.

Establishing a trust is step one—the next step is funding the trust. If the trust is established but not funded, there is no protection from probate for the assets.

Incapacity and end-of-life planning allows you to make decisions about your care, while you are living. Without it, your unmarried partner could be completely shut out of any decision-making process. Here are the documents needed to convey your wishes in an enforceable manner:

Healthcare power of attorney (proxy). This document allows you to name the person you wish to make healthcare decisions on your behalf. You may be very specific about what treatments and care you want—and those you don’t want.

Healthcare directive. The healthcare directive lets you designate your wishes for end-of-life care or any potentially lifesaving treatments. Do you want to be resuscitated, or to have CPR performed?

Durable financial power of attorney. By designating someone in a financial power of attorney, you give that person the right to conduct all financial and legal matters on your behalf. Note that every state has slightly different laws, and the POA must adhere to your state’s guidelines. You may also make the POA as broad or narrow as you wish. It can give someone the power to handle everything on your behalf or confine them to only one part of your financial life.

Beneficiary designations. Almost all tax-deferred retirement accounts and pensions permit a beneficiary to be named to inherit the assets on the death of the original owner. These accounts do not go through probate. Check on each and every retirement account, insurance policies and even bank accounts. Any account with a beneficiary designation should be reviewed every few years to be sure the correct party is named. Estranged ex-spouses have received more than their fair share of happy surprises, when people neglect to update their beneficiaries after divorce.

Some accounts that may not have a clear beneficiary designation may have the option for a Transfer on Death designation, which helps beneficiaries avoid probate.

Review these steps with your estate planning attorney to ensure that your partner and you have made proper plans to protect each other, even without the legal benefits that marriage bestows.

Reference: The Street (June 2, 2021) “3 Estate Planning Tips for Same-Sex Couples”

What Do I Need to Know about Roth IRA Conversions?

People with large tax-deferred accounts they intend to leave to their children can eliminate a tax burden on their heirs, by converting the tax-deferred money over time. By doing the conversion this way, says a recent article from The Wall Street Journal entitled “Roth IRA Conversions: What You Need to Know,” the cost is manageable and the heirs won’t have to pay taxes.

For a Roth conversion, the owner pays income tax on every dollar converted, which makes sense for people who retire early and want to avoid higher taxes in the future, or when children inherit the assets.

Recent changes require account owners to start taking required minimum distributions at age 72. The withdrawals can be costly in two ways: pushing household income into a higher tax bracket and forcing Medicare premiums higher.

Withdrawals from a Roth IRA, on the other hand, are not taxed and have no required distributions. It is tax-free money, since taxes are already paid. It can be a cash fund as needed, or a tax-free legacy to heirs.

The interest in Roth conversion increased since Congress tightened rules for inheriting tax-deferred assets. In the past, heirs had a lifetime to take withdrawals from inherited IRA accounts. Now, only surviving spouses and a small group of other individuals have this option. For everyone else, there’s a ten-year window to empty the account, which means increased income tax bills, especially for heirs who are already in high tax brackets.

Those who do the conversion over an extended period of time eliminate a tax timebomb for heirs and funds can be invested more aggressively to maximize growth.

In the simplest type of conversion, the owner notifies the custodian of the account of their wish to move assets from the tax deferred account to the Roth account. They need to specify how much they want to move, what funds they want to move and what date they want the transaction to happen. When taxes are filed the next year, all of the money transferred is treated as ordinary income.

Doing this during a market decline is a smart move. One investor moved $200,000 of stock mutual funds during the market downturn, which cost him about $85,000 in federal and state taxes. The converted funds have since bounced back to around $320,000, above where they were before the market decline. Those gains in a tax-deferred account would have been taxable, but now, they are tax free.

Seniors who have low taxable income, but large tax-deferred accounts, might consider doing a conversion every year before reaching age 72, when they must begin taking required minimum distributions.

Reference: The Wall Street Journal (Nov. 19, 2020), “Roth IRA Conversions: What You Need to Know,”