Blog: Gay or Straight, Unmarried Couples Need Estate Planning

Same sex marriage was recently approved in Maryland, making it the 8th state to adopt such legislation.  The law is still subject to political maneuverings, so whether it will go into effect next year remains to be seen.  Whatever the outcome, the adoption of this legislation highlights the many advantages that same sex couples can derive from legal marriage. A critical financial benefit is treatment given to married couples under the Estate Tax and Inheritance laws. 

Unmarried couples (same sex or not) do not have the same legal protections regarding inheritance rights enjoyed by married couples.    An unmarried couples’ financial and estate wishes may not be followed if a proper estate plan is not in place. That is why it is vital for all unmarried couples take specific steps to ensure that their plans are given legal recognition and protection. 

Wills:  Under Maryland law, if a married person dies without a will (that is, dies  “intestate”), their spouse is entitled to at least a portion of their assets  (for example, if the deceased is survived by a spouse and adult children, the spouse gets $15,000 plus half of the balance).   Even this modest protection is not given to unmarried partners: the partner of someone who dies without a will is not entitled to anything.   A simple will or trust can ensure that the unmarried partner is protected.

Taxes:  One crucial difference in the treatment of married and unmarried couples is the way in which Estate and Inheritance Taxes are imposed.  In Maryland, a married person can inherit an unlimited amount from a spouse without being subject to such taxes.  An unmarried partner does not get this benefit.  Anything that an unmarried partner inherits in excess of $1 million is subject to the 16% Maryland Estate Tax (popularly referred to as a “death tax”). (The threshold for a Federal Estate Tax hit is currently $5 million.)  In addition, Maryland imposes a 10% Inheritance Tax on property inherited by anyone other than a spouse, parent, grandparent, child, grandchild or sibling.  These taxes are even imposed on property owned as joint tenants, including a jointly owned house or bank account.  This means that, even though the unmarried partners may have owned a house together (or may have owned bank accounts, cars or other assets jointly), the survivor must pay taxes on the half that he or she inherits.

Real Estate Title:  When unmarried partners own a home as joint tenants with a right of survivorship, upon a partner’s death, the surviving partner will inherit that home, without it having to go through probate.  However, the value of the inherited half of the house will be subject to the 10% Maryland Inheritance Tax (and possibly Federal or Maryland Estate Taxes, depending on the value of the estate).   The Inheritance Tax hit on a jointly-owned residence can be avoided by unmarried couples who have a legal domestic relationship agreement as part of their estate plan.  This results in significant tax savings.               

Beneficiary Designations:    Banks, brokerage and retirement accounts usually allow you to transfer the account to a beneficiary upon your death.  In the absence of a beneficiary designation or a will, the accounts will be distributed under the intestacy laws.  Without such a “transfer on death” designation, the high probability is that an unmarried surviving partner will not receive anything.  Another advantage to naming a beneficiary is that the account usually will not have to go through probate, although it will be subject to Estate and Inheritance Taxes. 

Durable powers of attorney: Every person should have a Power of Attorney for health care, and one for finances. These documents allow you to name someone to handle your affairs and make decisions for you if you become incapacitated.  Without these documents, your family and loved ones may have to go through an expensive and emotionally painful proceeding so that a guardian can be appointed by a judge.   

In short, whether being in an unmarried couple is your choice or is dictated by the law, having an estate plan that is specifically designed for your situation can avoid, or at least reduce, estate and inheritance taxes,  and can ensure that the person you have chosen to spend your life with is financially protected after your death.