Five Common Pitfalls in Domestic Partner Estate Planning

In estate planning, domestic partners already have the cards stacked against them compared to married couples, but some of the most commonly-held beliefs about estate planning are actually adding to the problems. Like using milk to calm heartburn, there may be some perceived relief, but the acidic properties of milk will eventually magnify the pain and make things worse. So too some of the “easy” solutions making the rounds in the LGBT and domestic partner communities can actually make things worse.

 

Before addressing the five pitfalls in detail, it is important to note that there are typical domestic partner estate planning goals and appropriate ways to reach those goals. It is usually the misapplied use of certain tools to reach those goals that get people into trouble. And because we are dealing with life and estate planning issues designed to prevent problems, it is often years later after a death or after a problem occurs that we realize things were not done the right way.

 

Typical Domestic Partner Life and Estate Planning Goals

The three main domestic partner estate planning goals are:

• Combine all of the couple’s assets so they become the assets of one family unit
• Empower both partners to make medical and financial decisions for the other in case of an emergency
• Make sure that after one partner passes on that the surviving partner is cared for during their lifetime, and thereafter that the funds provide for friends, family members and/or charities

Often the goals of domestic partners are related to attaining the same rights married couples have and take for granted. For example, domestic partners believe a husband and wife can legally make healthcare and financial decisions for the other. Domestic partners believe a husband and wife will automatically inherit everything from each other. And domestic partners believe a husband and wife can combine all of their property so they own everything together.

 

The fact is these are only partially true when a couple marries. Married couples who have been around for a while will tell you, “try to refinance a mortgage and sign your spouse’s name.” Attorneys will tell you that without estate planning documents, a wife may or may not inherit everything from her husband depending on state law. (In my own home state of North Carolina, spouses do not automatically inherit everything from each other.) Nonetheless, these are the perceived benefits of marriage that domestic partners want to duplicate.

 

Combining property as one family unit: Domestic partners are not allowed to marry in most states, and in trying to protect each other and more firmly become one family unit they want to bring everything under one roof. Partners often want to confirm their relationship by making “what is mine is yours, and what is yours is mine.”

 

However, there is one huge bump in the road in the form of gift taxes. This tax is not widely known in the general public but is a constant irritant in the estate and tax planning communities. In short, the federal gift tax prevents people from giving more than $12,000 in any given year to an individual. While you can give away $12,000 gifts to many different individuals, anything more than $12,000 to the same person triggers the federal tax. This becomes a huge problem when partners want to combine everything since, unless it is done correctly, the IRS would probably state that each of you gave a gift of one-half of your assets to the other.

 

While the federal tax is a concern, there are also state gifts tax implications which need to be taken into consideration. We will go a little more deeply into how the gift tax is a pitfall below, but for more information and examples on the gift tax and how it operates in domestic partner planning, please read The Gay Marriage Alternative (Available at www.gaymarriagealternative.com).

 

Empowering both partners to make medical and financial decisions for the other. One of the biggest life planning concerns is making sure that both partners are empowered to make medical and financial decisions for the other if one partner becomes ill. The LGBT community has hundreds of stories of partners who were together for decades being locked out of the hospital room by family members, even though the family members may have been absent from their lives for years.

 

This is an all too common occurrence which is easily handled by properly drafted and legally executed healthcare powers of attorney. In addition, a properly drafted and legally executed financial power of attorney can make sure that all of the sick partner’s financial concerns are handled by their partner and not the “next of kin.” Emphasis on “properly drafted” and “legally executed.” However this is not always done, and there are far too many instances in the LGBT community where these documents were not accepted. This is not necessarily because the hospital or bank did not want to accept the power of attorney documents but because when partners tried to do it themselves or used an inexperienced attorney and the documents were defective.

 

Inheritance of assets for partner and then other chosen beneficiaries. As with any committed couple, domestic partner couples usually wish to ensure that their assets go first to their partner, or at the least they are available for their partner during their lifetime. After that, they wish for their assets to go to other beneficiaries of their own choosing rather than automatically going to other family members. In a case where the partners have children together, the beneficiaries are often the children. In other cases, the partners may wish to have certain assets go half to friends or family members on one side and half to the other. Regardless of the wishes, they need to be in writing.

 

However, the method of transferring assets may end up with significant, unintended problems, particularly if a Last Will and Testament is used rather than a revocable living trust. With a Will, there is guaranteed probate of the deceased partner’s assets which translates into loss of privacy, higher expenses in terms of money and/or time, a higher risk of the plans being contested, and longer delays in the partner having unrestricted access to the partner’s assets. In large part, the book Estate Planning for Domestic Partners reveals these problems. We will also delve into this subject below in the discussion on pitfalls. Another excellent resource on revocable living trusts, for domestic partners and married couples alike, is The Living Trust by Henry W. Abts III.

 

The Five Pitfalls in Domestic Partner Estate Planning

While more appropriately titled the five “main” pitfalls in domestic partner “life” and estate planning, these five major traps comprise the most common and costly mistakes that domestic partners fall into. By far, the greatest reason people fall into these traps is because a non-attorney friend or co-worker gave them legal advice. Or if they sought the advice of an attorney, the attorney either did not have the right experience or they were the wrong kind of attorney. (For more advice on choosing the right attorney, please visit the website for The National Institute for Domestic Partner Estate Planning at www.NIDPestateplanning.com).

 

The five biggest pitfalls are:

• Using joint property to combine separate assets
• Using a Last Will and Testament to transfer property to your partner upon death
• Using a limited liability corporations as a substitute for estate planning documents
• Do-it-yourself computer programs and forms
• Hiring an inexperienced attorney or the wrong kind of attorney

 Next, we will examine the pitfalls one at a time.

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