Nontraditional advice

Minnesota Investor column

They go by the term "nontraditional couples" -- otherwise known as "domestic partners" -- and they represent a growing portion of all U.S. households. But the estate laws that govern the financial obligations of nontraditional couples and the disposal of their assets are far less explicit than the rules for married couples.

The 2000 U.S. Census Bureau figures tell the tale of a changing domestic landscape. About 6 million unwed couples -- heterosexual and gay or lesbian -- are sharing a home today, or about 10 percent of all households. That's up from about 2.9 million households in 1990. Traditional families -- married couples with children -- now total 21.7 percent of all U.S. households, while about 27 percent of households are home to single individuals.

"Nontraditional couples present a unique problem," according to Tim Davis, an estate attorney with the Eden Prairie law firm of Hellmuth & Johnson.

"While married couples can rely on statutes that govern their financial matters and the dissolution of their marriages, there is no case law for nontraditional couples. It's more the law of equity -- what's fair and equitable. That's why nontraditional couples have a much greater need for estate planning than traditional married couples."

For instance, in Minnesota and most other states, there is no provision for maintenance or support of a needy partner in a nontraditional relationship as there is with married couples. In fact, the Legislature enacted a statute that specifically denies support payments for nontraditional couples unless there is a written contract that specifies support.

If a married couple gets divorced, the terms laid out in the couple's will are automatically nullified. Not so with a nontraditional couple. Even after a breakup, the will stands as written until the partners draft a new one.

Nontraditional couples might also be out of luck if one of the partners dies -- unless they've put together a will and an estate plan that specifically lays out their intentions. For instance:

No will, no luck. Laws of intestacy (statutes that dictate what becomes of a person's estate when they die) guarantee that a surviving spouse will receive a certain share of the estate if there is no will or if the spouse has been omitted from the will. There is no such provision for nontraditional couples. If there is no will or trust, the surviving partner gets nothing.

Living will. Davis said that a health-care directive (living will) is critical for domestic partners: "Without that, an ill partner's next of kin are likely to become the spokespersons for health-care decisions, including end-of-life issues, and the domestic partner may be totally excluded from contact with the ill partner."

Will challenges. Even domestic partners who have a will could face a court challenge from the family, who may insist that the terms of the will were the result of undue influence by the partner or lack of mental competency.

Joint-tenancy complications. Some partners use a joint tenancy title to ensure that assets are passed on to the surviving partner. However, the surviving partner would then be able to dictate where those assets go after he or she dies -- which may not necessarily comply with the wishes of the other partner. One solution, Davis says, is to set up a trust that would give the surviving partner access to the funds to cover expenses, but would provide for the transfer of assets to the beneficiaries of the original partner after the second partner dies.

Pension provisions. Pension survivorship benefits automatically favor the next of kin, rather than the surviving domestic partner. "You need to get your beneficiary forms in place and signed if you want your partner to receive your pension benefits in the event of your death," Davis said.

Tax issues

The other problem area that domestic partners face is the area of taxes:

Estate tax. Domestic partners are denied the use of the marital deduction, which provides traditional married couples with the opportunity to defer estate taxes until the other spouse dies.

Gift tax. For gift tax purposes, no "gift splitting" is allowed for domestic partners, as it is for married couples. Married couples each can gift as much as $12,000 a year -- or $24,000 total from either spouse -- without incurring gift taxes. Domestic partners can gift $12,000 each, but neither partner can gift more than that without reducing their death tax exemptions.

Retirement assets. No spousal rollover of retirement fund assets, such as IRAs and 401(k)s, is allowed for domestic partners. However, other deferral strategies are now available if the partner is named as the beneficiary.

Estate planning tools

Domestic partners can resolve some estate issues through proper planning. For instance, a written cohabitation agreement, similar to a prenuptial agreement, can help ensure that assets are divided equitably in the event that the relationship ends.

Domestic couples can also set up revocable trusts that would help avoid the cost of probate -- and the unwanted publicity that a court battle could bring.

"Non-probate transfers, such as payable-on-death or transfer-on-death agreements, beneficiary designations and life estate or remainder agreements can be effective transfer tools," Davis said.

He also recommends that domestic partners use an irrevocable trust with life insurance to assure that the surviving partner is able to maintain his or her lifestyle. By putting the life insurance in a trust, the insurance payout would be excluded from estate taxes.

Nontraditional partners will face more estate obstacles than married couples, but with proper planning, they can help ensure a smoother transition when death or dissolution pulls them apart.