Estate Planning for the Unmarried Adult (Portfolio 813)

Tax Management Portfolio, Estate Planning for the Unmarried Adult, No. 813-3rd, addresses a wide range of tax and nontax issues that face the growing number of American adults who, from choice, divorce, outliving a spouse, or legal proscription, are not involved in a marital relationship.

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Tax Management Portfolio, Estate Planning for the Unmarried Adult, No. 813-3rd, addresses a wide range of tax and nontax issues that face the growing number of American adults who, from choice, divorce, outliving a spouse, or legal proscription, are not involved in a marital relationship. This portfolio discusses the definition of who is a “spouse” or “family member” and situations in which a family-type relationship is recognized.
This portfolio also addresses “marriage penalties” and “marriage advantages” implicit in the tax law. For example, married couples often have a higher income tax liability than two cohabiting unmarried individuals (domestic partners) earning the same income and having the same deductions. On the other hand, a spouse can obtain employer-provided health insurance for his or her spouse without income tax consequences, unlike a domestic partner to whom income equal to the value of his or her partner's insurance premiums is imputed.
The recognition of a family, or nonfamily, relationship is critical in the transfer tax area. Because unmarried couples do not have the benefit of the unlimited gift and estate tax marital deductions, they cannot avail themselves of important estate planning strategies and must analyze financial transactions and property acquisitions for their transfer tax consequences. On the other hand, the Chapter 14 special valuation rules will not apply to domestic partners and other unmarried couples, making available estate freezing techniques, such as grantor retained income trusts, that are unavailable to traditional family members. Unanticipated generation-skipping transfer tax consequences also may arise if there is a great age disparity between domestic partners or if one partner wishes to benefit the child of the other partner.
This portfolio also discusses alternative financial arrangements unmarried adults can make, including the use of partnerships to acquire life insurance and real property and provide income to the less wealthy partner. The Worksheets include a sample cohabitation agreement that domestic partners can use to define their property rights, as well as a sample limited partnership agreement. Finally, this portfolio addresses the special problems a disabled or incompetent unmarried adult might face because of the lack of a legally recognized relationship with the individual designated as surrogate decision maker.
This portfolio may be cited as Horwood, Zaluda, Wolven and Hudgins, 813-3rd T.M., Estate Planning for the Unmarried Adult.

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Richard M. Horwood, A.B., Colgate University; LL.B., University of Pennsylvania Law School; M.B.A., American University School of Business; LL.M. (Taxation), George Washington University Law School; member, Illinois State Bar, Chicago Estate Planning Council, and Chicago Bar Association Trust Law Committee; advisory board member, Tax Management, Journal of Corporate Taxation, Journal of Taxation of Investments, and Personal Financial Planning; fellow, American College of Trust and Estate Counsel; contributor to numerous legal journals and other trade publications; frequent lecturer on various business, estate, and tax-related issues; formerly with National Office of the Internal Revenue Service in Washington, D.C.

Jeffrey A. Zaluda, B.A., magna cum laude, University of Massachusetts (Commonwealth Scholar); J.D., cum laude, American University Washington College of Law; fellow, American College of Trust and Estate Counsel; advisory board member, Tax Management Estates, Gifts & Trusts and Personal Financial Planning; advisor to families, closely held businesses, business owners, and other individuals on a wide variety of tax, estate, and business planning issues; frequent writer and lecturer on business and trust matters.

Lauren J. Wolven, B.A., magna cum laude with Departmental Honors, Indiana University (1996), Herman B Wells Scholar, Phi Beta Kappa; J.D., magna cum laude, University of Illinois College of Law (1999); contributor to numerous publications on estate planning and education funding; practice concentrated in areas of wealth protection, not-for-profit organizations, estate and business planning, education savings planning, and estate and trust administration and litigation; frequent lecturer and author on a variety of wealth protection and education planning issues.

Margaret L. Hudgins, B.A., Medieval Studies, University of Chicago; J.D., with high honors, Chicago-Kent College of Law; practice concentrated in areas of wealth protection, estate and trust planning, estate and trust administration, and litigation.


Detailed Analysis

I. Introduction

A. Purpose of this Portfolio

B. Issues Addressed

II. Marriage Penalty and Marriage Advantage

Introductory Material

A. Tax Laws

1. Tax Rates

2. Transfer Taxes

a. Marital Deduction

b. Lifetime Transfers

3. Phase-Outs, Exclusions, and Limits

a. Earned Income Tax Credit

b. Rental Property Losses

c. Net Capital Losses

d. Gain on Sale of Home

e. Alternative Minimum Tax

f. Social Security Benefits

g. Health Insurance

h. Standard and Itemized Deductions

i. Carry-Over Basis

j. Credit For the Elderly or Disabled

k. Child and Dependent Care Credit

l. Grantor Trust Considerations


a. Transfer of an Interest in an ERISA Qualified Plan

b. Rollovers

5. Joint Returns

B. Nontax Laws

1. Qualification for Public Aid Entitlements

2. Statutory Share

3. Spousal Communication Privilege

4. Wrongful Death and Loss of Consortium

5. Tenancy by the Entireties

III. Who Is a Family Member?

A. Who Is a Spouse?

1. As a Married Person

2. Judicial Recognition of Nonmarital Relationships

a. Unmarried Opposite-Sex Couples

b. Same-Sex Partners

c. The IRS Position

3. Qualification as a Dependent

B. Domestic Partner Classification

C. Who Are the Other Family Members?

1. Overview

2. Co-Parenting and Adopting Children

a. Second-Parent Adoptions

b. Two-Parent Adoptions

3. Inheritance Rights of Adopted Children

4. Children Born Out of Wedlock

5. Adopting Another Adult

a. Validity of Adoption

b. Inheritance Under Pre-Existing Testamentary Instrument

c. Loco Parentis Rule

6. Assisted Conception

a. Legal Consequences to Partners

b. Inheritance Rights to Semen Donor

c. Special Concerns With In Vitro Fertilization

IV. Transfer Tax Planning

A. Gift Giving

B. Generation-Skipping Transfers

1. Background

2. Generation Assignments

C. Freezes and Discounts - Chapter 14

1. Background

2. Family Members

a. Section 2701 Definitions

b. Section 2702 Definitions

3. Section 2701 - Transfers of Interests in Business Entities

4. Section 2702 - Transfers in Trust

5. Section 2703 - Valuation of Restrictive Agreements

6. Section 2704 - Lapsing Rights and Restrictions

D. Other Family Attribution Rules

V. Life Insurance

A. Determination of Need

B. Types of Life Insurance

C. Background to Income Tax and Estate Tax Consequences

D. Irrevocable Trusts

1. Comparison with an Outright Transfer

2. Avoiding the Gift Tax with a Crummey Power

3. Grantor Trust Status

4. Requirements for Exclusion from Gross Estate

5. Appointing a Trustee

E. Partnerships

1. Background

2. Formation of Partnership

3. Insurance Payable to Third Party vs. to Partnership

F. Insurable Interest

1. Overview

2. Application to Unmarried Persons

3. Who Can Contest?

G. Viatical Settlements and Accelerated Death Benefits

1. Overview

2. Income Tax Consequences

3. Estate Tax Consequences

VI. Benefits, Entitlements, and State Law Rights

A. ERISA Qualified Benefits and IRAs

1. Beneficiary Options

a. Trusts and Individuals

b. Future-Named Beneficiaries

c. Changing Beneficiaries

2. Separate Accounts

3. Distributions

4. Other Tax Implications

B. Employee Benefits - Health Insurance

1. Current Legal Status

2. Taxing Health Plan Coverage

3. Taxing Reimbursements


C. Entitlements

D. Statutory and Common Law Rights

1. Family Member

2. Statutory Heir

3. Statutory Share

4. Inheritance Tax

VII. Defining Property Rights

A. Introduction

B. Enforcement of Unwritten Agreement

C. Valid Consideration

D. Written Agreements

E. Tax Consequences During the Relationship

1. Gift or Income?

2. Joint Tenancy

a. Income and Gift Tax Consequences

(1) Joint Bank and Brokerage Accounts

(2) Other Joint Assets

(3) Risks

b. Estate Tax Consequences

c. Purchase of a House

3. A Partnership for Federal Tax Purposes

a. Partnership Classification

b. Tax Consequences

c. Guaranteed Payment

4. Additional Estate Planning Opportunities

a. Transfer Tax Opportunities

b. Other Opportunities

F. Tax Consequences on Termination of the Relationship

1. Property Settlements

2. State Law Impact

VIII. Disability and Incompetence

A. Durable Power of Attorney

1. Overview

2. Common Law and Durable Power of Attorney for Financial Affairs

a. Advantages

b. Selecting the Agent

c. Alternative to Guardianship or Conservatorship

3. Property Powers

4. Health Care Powers

a. Overview

b. Right to Refuse Medical Treatment

c. Exercising the Durable Health Care Power of Attorney

B. Health-Care Surrogate

C. Living Wills

D. Guardianships

1. Creation

2. Options

a. Guardian for One's Self

b. Guardian for a Child

(1) Standby Guardian

(2) Testamentary Guardian

c. Eligibility

3. Powers

E. Planning for Public Aid

1. Introduction

2. Need-Based Benefits: Supplemental Security Income (SSI) and Medicaid

a. Planning for One's Own Eligibility

b. Planning for Eligibility of Another

c. State Claims for Reimbursement

3. Contract Based Benefits: Social Security and Medicare

4. Trusts Established with the Disabled Person's Assets: Eligibility

5. Trusts Established for the Benefit of a Disabled Person with Another Person's Assets: Eligibility

6. Trust Drafting Considerations


Working Papers

Table of Worksheets

Other Sources

Worksheet 1 Family Attribution Rules Under Various Code Sections

Worksheet 2 Sample Cohabitation Agreement

Worksheet 3 Sample Limited Partnership Agreement

Worksheet 4 Sample Power of Attorney for Financial Matters and Affidavit of Attorney-in-Fact




Income Tax

Estate Tax

Gift Tax

Generation-Skipping Transfer Tax

Special Valuation Rules


Committee Reports:

Treasury Rulings:



Text and Treatises:

Tax Management Portfolios: