by Archie M. Richards, Jr., CFP^®
August 22, 2005

If you're living with someone of the same or opposite sex to whom you are not married, you may encounter serious estate planning problems.

Some issues can't be solved, at least not directly: For example, if you're the main money earner and you die:

• Social Security pays nothing to your unmarried partner.

• Neither does the military.

• Your company pension plan is unlikely to benefit an unmarried partner.

• Health insurance acquired under COBRA after your job is terminated won't benefit an unmarried partner. (If termination or layoff would cause your group health insurance coverage to cease, COBRA requires your employer to offer the opportunity to continue the coverage temporarily.)

• Transfers between unmarried partners in excess of $11,000 a year may be subject to federal gift taxes. Married partners can transfer property in any amounts without paying such taxes.

• To obtain Medicaid for nursing-home support, you must own no more than a few thousand dollars worth of cash or securities. If you're married to someone with whom you hold real estate jointly and you die, the value of the real estate is attributed to the spouse, keeping your estate desirably low for Medicaid purposes. But in most states, real estate held jointly with an unmarried partner is considered owned by you. Until you sell the house and spend the proceeds, you're prevented from receiving Medicaid.

• If you and an unmarried partner both require nursing-home care, you're likely to be placed in separate rooms. Married partners are kept together.

• If you become incapacitated and unable to express your wishes about medical care, hospital staff members are likely to accept direction from a family member. But an unmarried partner may not even be able to visit, let along direct your medical care. Make sure that you and your partner have health care proxies, giving each the right to speak for the other regarding care.

• Some states prevent you and an unmarried partner of the same sex from adopting a child together. One partner must first adopt the child. Then, in a separate proceding, the other adopts the child as well.

The best way to deal with many of these issues is to accumulate enough investments to support your unmarried partner after your death. Acquire term insurance to take up the slack, in case you die prematurely and the investments have not attained sufficient size.

Transfers of property by wills may bring unexpected problems for unmarried partners. The probate process includes the right to contest a will. Any relative who would have inherited under the state's law if there had been no will is allowed to present to the probate court reasons why they should inherit and the named beneficiary should not.

For unmarried partners, this can cause problems. Sharon, for example, introduced her sister Phylis to her long-time partner Joan. (Not their real names, of course.) Phylis and Joan became good friends, getting together many times.

Good friends, that is, until Sharon died, leaving $400,000 in her will to her partner Joan. Had Sharon died without a will, Sharon's sister Phylis would have inherited. Phylis therefore contested Joan's inheritance. Inexcusably, the probate judge decided in Phylis's favor, leaving the unmarried partner destitute.

This misfortune would not have occurred if Sharon had set up a living trust. A trust is treated as a separate person by the courts. On Sharon's death, her trust would have avoided probate jurisdiction because it would not be considered to have died.

In her trust provisions, Sharon could have provided for Joan as she pleased. She could have kept the $400,000 in trust for Joan's benefit for life or left the money to Joan outright. As long as Sharon transferred her property into the trust's name (for example, the Sharon Jones Living Trust dated August 22, 2005) during her life, the trust's dispositions would likely have prevailed.

Unmarried partners confront special problems. Some can be overcome by accumulating sufficient funds to provide for the partner who dies second. To assure the desired inheritance, a living trust is key.