Unmarried couples face some unique financial and estate planning issues. While married couples typically use life insurance to provide funds to help replace income upon the death of a spouse, unmarried couples may have an even greater need for replacement income, since the surviving partner is ineligible for spousal benefits from Social Security and may also be ineligible for many defined benefit pension plans. In addition, both partners’ estates may have a greater need for cash to help pay estate taxes, since unmarried couples are not entitled to the unlimited marital deduction for property bequeathed to one another.
With proper planning, life insurance may provide you with the cash you need to help meet your financial responsibilities as an unmarried couple. It may also offer a way to provide for your partner beyond a will, which carries the potential to be contested by family members.
Income Replacement
There are two ways to structure life insurance to help provide replacement income. You can either cross-own policies or own individual policies with the other partner named as the beneficiary.
Cross-owning policies. Let’s suppose that you each own a policy on your partner’s life. When one partner dies, the surviving partner uses the death benefit proceeds to help provide income. Since the policy is owned by the surviving partner, not the deceased, it is not included in the deceased’s estate and therefore, is not subject to Federal estate taxes.
To cross-own policies, you may need to demonstrate an insurable interest. Spouses are automatically assumed to have an insurable interest on one another. As an unmarried couple, be prepared to prove insurable interest with evidence of jointly owned assets, and possibly, copies of wills or trust documents.
Individual policies with the partner as beneficiary. In this scenario, you each own a policy on your own life, naming your partner as beneficiary. The surviving partner uses the death benefit proceeds to help provide income. However, since you each own your own policy, the proceeds are included in the deceased partner’s estate and may be subject to estate taxes.
Cash to Pay Estate Taxes
Married couples qualify for a special tax break¾the unlimited marital deduction¾that allows them to transfer unlimited assets to each other during their lifetime, or at death, free of gift and estate taxes. Since unmarried couples are not eligible for this deduction, the value of any property you leave each other above the applicable exclusion amount may be subject to Federal estate taxes. Some states may also levy estate taxes. Life insurance provides cash that can be used to help pay estate taxes. You can either cross-own policies or create an irrevocable trust.
Cross-Owning Policies. With cross-owned policies, you each purchase insurance in the amount of the estimated taxes. As mentioned above, one advantage of this approach is that you each own the policy on your partner’s life. Consequently, the proceeds are not included in your partner’s estate.
Irrevocable Trusts. With irrevocable trusts, a trustee buys and owns the life insurance policy, and each insured furnishes the trust with the funds to pay the premiums. However, irrevocable trusts must be structured properly to avoid adverse tax consequences. They are costly to set up, and as the name implies, they cannot be revoked if circumstances should change in the future.
Life insurance has long provided a valuable option for many married couples who may need cash to help replace income and pay estate taxes at the death of a spouse. As an unmarried couple without the legal protections of marriage, your need for cash at the death of a partner may be even greater. As with all insurance and estate planning concerns, be sure to consult qualified professionals to discuss your unique circumstances and to help ensure that all arrangements are structured properly.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
This article was prepared by Liberty Publishing, Inc.
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