OCT.  16, 2000

Estate Talk
The Unmarried Penalty?

In his article "The Unmarried Penalty: Gift, Estate Tax, and Other Planning Considerations for Unmarrieds," Chris Yates, director of gift and estate planning at California Institute of Technology in Pasadena, CA, points out some disadvantages unmarried couples have in terms of estate planning. Most states have spousal protection laws that grant the surviving spouse significant legal rights over the property of the deceased spouse. In general, these laws do not apply to unmarried partners.

As for federal estate and gift tax laws, here are some examples of disadvantages unmarried couples face:

Married partners may make unlimited transfers (either during life or at death) between each other. This allows the couple to take advantage of various estate planning techniques. For example, no matter which spouse actually owns the marital property, the couple can take advantage of both spouse’s $675,000 unified credit because the couple can "split" the assets between them. Unmarried couples do not receive a marital deduction.

This disadvantage manifests itself in many forms. For example, many couples decide to hold property in joint tenancy, with one partner originally owning the property, then granting joint tenancy to the other partner. If the couple is married, this will cause no gift taxation. However, if the couple is not married, the transfer of the one-half interest conveyed to the other partner will be a taxable gift.

By splitting gifts, married couples can take full advantage of each spouse’s $10,000 annual exclusion even if one spouse owns all the couple’s assets. This option is not available to unmarried couples.

Qualified terminable interest property (QTIP) trusts allow married couples to delay the estate taxation of the assets of the first spouse to die until the death of the second spouse. The trust entitles the surviving spouse to receive income from the property at least annually, with the assets going to designated beneficiaries after the surviving spouse’s death. Properly structured, a QTIP trust will qualify for the marital deduction, even though transfers of terminable interests generally do not. However, to qualify as QTIP, the property must pass between spouses, so unmarried couples cannot take advantage of QTIP trusts.

Estate planning for unmarried couples requires special consideration. Always consult a qualified estate planning attorney before making any such decisions.