couples?
For married couples, the federal estate tax exemption is often utilized through a marital bypass trust, sheltering a certain amount of assets from estate tax upon the first spouse’s death. The surviving spouse then receives income from the trust and can use their own estate tax exemption to further reduce taxes. For unmarried partners, this automatic transfer is not possible. Instead, the trust must be specifically drafted to address the lack of marital rights. This means clearly defining the beneficiary designation, outlining the trustee’s powers, and ensuring the trust complies with all
applicable state and federal laws. A key consideration is the ‘gift tax’—transfers to a trust for the benefit of a non-spouse can be considered a taxable gift, potentially triggering immediate tax implications if it exceeds the annual gift tax exclusion. Careful structuring can mitigate this risk, potentially using techniques like installment sales or lifetime gifting strategies.
How does co-ownership with right of survivorship impact bypass trust planning?
While a bypass trust is a crucial tool, it's often combined with other estate planning strategies for unmarried partners. Co-ownership with right of survivorship—often used for real estate or bank accounts—allows assets to pass directly to the surviving partner upon death, bypassing probate. However, this method doesn't offer the same tax advantages as a bypass trust. Assets passing through right of survivorship are included in the surviving partner's estate for estate tax purposes, whereas assets in a properly structured bypass trust can remain sheltered from estate tax. Approximately 30% of unmarried couples utilize a combination of both joint ownership and trust arrangements to achieve a balanced estate plan, maximizing both efficiency and tax benefits. The best approach often depends on the specific assets involved, the size of the estate, and the longterm goals of the couple.
What happens if we don’t establish a bypass trust – what are the risks?
Without a bypass trust or other comprehensive estate planning, unmarried partners face significant risks. Upon the death of one partner, the surviving partner may have no automatic legal rights to the deceased partner’s assets. This can lead to lengthy and costly probate proceedings, potentially involving family members contesting the distribution of assets. Even worse, the surviving partner could receive nothing if the deceased partner did not have a will or if their will does not specifically address the situation. In California, probate can be expensive, potentially costing 4-8% of the estate’s value. This is a significant financial burden that can be avoided with proper estate planning. Furthermore, the estate could be subject to estate taxes, potentially depleting the assets available to the surviving partner and other beneficiaries.
I remember a client,
Sarah
and Ben, who thought “common law marriage” protected them…
Sarah and Ben had been together for fifteen years and believed, mistakenly, that because they had lived together for so long, they were considered “common law married” in California. They hadn't bothered with wills or trusts. When Ben passed away unexpectedly, Sarah was devastated, not only by the loss but by the legal battle that ensued. Ben's family contested his estate, arguing that Sarah had no legal rights to his assets. It was a painful and protracted legal fight, draining Sarah emotionally and financially. She ultimately prevailed, but only after incurring significant legal fees and
enduring months of stress. The idea that long-term cohabitation automatically confers marital rights is a common misconception, and it highlights the importance of formal estate planning, regardless of marital status.
Thankfully,
I also had a couple, David and Emily, who took a proactive approach…
David and Emily, although unmarried, were diligent about estate planning. They consulted with our firm and established a bypass trust, along with a comprehensive will and durable power of attorney They meticulously funded the trust with their jointly owned assets and clearly designated each other as the primary beneficiaries. When David was diagnosed with a terminal illness, they had the peace of mind knowing their affairs were in order. Upon his passing, the trust seamlessly transferred assets to Emily, avoiding probate and minimizing estate taxes. The process was smooth and efficient, allowing Emily to focus on grieving and rebuilding her life. This proactive approach saved her considerable time, money, and emotional distress, demonstrating the immense value of proper estate planning, even for unmarried couples. The trust even included provisions for a future charitable donation, reflecting their shared values and long-term goals.
What documentation is crucial for unmarried partners creating a bypass trust?
Establishing a bypass trust for unmarried partners requires several key documents. First, a comprehensive trust agreement outlining the terms of the trust, including the trustee’s powers, beneficiary designations, and distribution provisions. Second, a will, even if the majority of assets are held in trust, to address any assets not specifically covered by the trust. Third, a durable power of attorney, allowing each partner to designate someone to manage their financial affairs if they become incapacitated. Finally, a healthcare proxy, allowing each partner to designate someone to make healthcare decisions on their behalf. These documents should be carefully drafted by an experienced estate planning attorney to ensure they comply with all applicable state and federal laws and accurately reflect the couple’s wishes. It's also essential to regularly review and update these documents to account for changes in their assets, relationships, or legal circumstances.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.
2305 Historic Decatur Rd Suite 100, San Diego CA. 92106 (619) 550-7437
Map To Point Loma Estate Planning Law, APC, a trust attorney: https://maps.app.goo.gl/JiHkjNg9VFGA44tf9
Ocean Beach probate attorney
Sunset Cliffs estate planning attorney
Ocean Beach estate planning lawyer
Ocean Beach probate lawyer
Sunset Cliffs estate planning lawyer
About Point Loma Estate Planning:
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If you have any questions about: What types of financial transactions can my agent handle with a Power of Attorney? OR
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Oh and please consider: What challenges can arise even with a will in place?
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