Estate Planning for Unmarried Couples: What You Need to Know

Shawn Plummer

CEO, The Annuity Expert

If you are in a committed relationship but are not married, you need to take steps to protect yourself and your partner. Without proper estate planning, your loved ones could be left fighting over your assets after you die. This guide will discuss the basics of estate planning for unmarried couples.

Life Insurance For Unmarried Domestic Partners

In the last decade, the number of adults living with an unmarried partner has risen by almost 30%. On the other hand, estate planning hasn’t always kept up with developments. Unmarried couples, including same-sex unmarried and cohabitating couples, who face particular financial issues that aren’t addressed by marriage’s structure, should take careful estate-planning measures to organize their assets strategically.

Marriage provides spouses a variety of legal protections, such as the right to receive spousal Social Security benefits and inherit property automatically, as well as the power to make healthcare and financial decisions for their partners. In addition, many state inheritance rules and basic estate-planning guidelines prioritize surviving spouses and biological children.

However, this can cause difficulties for unmarried couples since the surviving partner may not be recognized as an heir by law or by the deceased partner’s family. This situation might result in conflict and financial hardship when things should be going smoothly.

The advantages of life insurance are numerous.

These issues may be addressed through life insurance, which can be more effective when coupled with a trust. However, it is necessary to establish insurable interest, which varies by state, to use this approach. Each unmarried couple may have to produce evidence such as joint property ownership, business stakes, and wills to establish insurable interest in each other.

The irrevocable life insurance trust (ILIT) is one of the unmarried partners’ post-death options when insurable interest has been established. An irrevocable life insurance trust can be set up by one of the unmarried partners, usually, the one who desires to be insured (ILIT). Then, when a partner dies, their ILIT can receive a payment from their policy’s death benefit.

The ILIT’s assets are intended to benefit the named recipients. This structure eliminates any ambiguity about who will get the assets. This characteristic may assist in preventing family conflict over how to distribute the deceased partner’s property. An ILIT may also provide surviving partner an opportunity to obtain the money that would otherwise go unnoticed by typical inheritance laws.

Funding The ILIT

An ILIT can be funded with annual cash contributions to pay policy premiums, which are not taxable. Unmarried couples cannot transfer assets to one another tax-free in the same way married couples may do through conventional marital deductions. If the gifts qualify for the annual exemption and/or lifetime gift tax exclusion, they should not be subject to gift taxes.

If the ILIT is funded and set up correctly, the trust will receive a tax-free death benefit from the life insurance death benefit funds upon the insured person’s death. Those assets might be able to help you reduce the estate tax bill if the deceased partner’s estate is large.

Individual Life Policies

In most circumstances, proceeds from an individual life insurance policy are paid out tax-free. Therefore, each partner could purchase an individual life insurance policy on themselves with the other partner as the designated beneficiary (not the estate).

Term and permanent life insurance are the two most common kinds of life insurance.

Term life insurance

A term policy lasts for a predetermined number of years (the term) as long as the premium is paid. When the term expires, you are no longer protected by the policy. To continue coverage, you can either shop for a new policy or convert your existing one to permanent life insurance. Term life insurance has a death benefit in the form of a lump sum of money paid out to a beneficiary when you die.

Term life insurance is the cheapest form of life insurance.

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Permanent life insurance

Life insurance policies that do not terminate are referred to as permanent life insurance. Unlike term life insurance, which offers death benefit protection for a set number of years, permanent life insurance may endure the insured person’s lifetime as long as premiums are paid according to the policy’s conditions.

These policies might also have the ability to accumulate cash value. The cash value of permanent life insurance plans grows tax-deferred, which means you won’t pay taxes on any profits until you withdraw income and as long as the policy is valid.

Find The Best Life Insurance Coverage At The Cheapest Cost!

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In most states, death benefits from annuities avoid probate. Rolling or transferring qualified retirement plans such as an IRA or 401(k) into a qualified annuity and naming the other partner (not the estate) the designated beneficiary could help with the transfer of assets smoothly and quickly.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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