Retirement Planning Strategies for Domestic Partners and Nontraditional Families

Question 1

Domestic Partner

Answer 1

(1) Designated a couple different from legally married spouses. (2) If an opposite-sex or same-sex couple has not been legally married in any jurisdiction, they are considered domestic partners for state and federal purposes. (3) Same-sex marriage is recognized federally for some purposes, but not others if in a state non recognizing their marriage. (4) Domestic partner can include 2 unmarried people who live together, but do not have any romantic or sexual attraction.

Question 2

Defense of Marriage act

Answer 2

(1) Congress passed the Defense of Marriage ACT IN 1996. (2) DOMA defined marriage as a legal union between one man and one woman as husband and wife, and (3) the word spouse refers only to a person of the opposite sex who is a husband or wife. (4) After DOMA was declared unconstitutional, same-sex couple are treated the same as opposite-sex couples for tax purposes.

Question 3

Effect state law has on financial planning for domestic partners

Answer 3

(1) Some states may not sanction or recognize same-sex marriage. (2) These states may or may not afford the same benefits to same-sex marriage as they do for opposite sex.

Question 4

Two main differences between between JTWROS and TIC

Answer 4

(1) JTWROS avoids probate when one tenant dies, while the other does not. (2) JTWROS property is equally owned by all tenants unless specifically allowed by state law, TIC property can be owned unequally.

Question 5

Tax consequences of domestic partners using JTWROS

Answer 5

(1) If the parties did not equal contribute, the person who contributed more will have made a gift to the partner who contributed less. (2) If there are ongoing expenses, additional gifts are made if contributions are not equal. (3) When one partner dies, his or her estate will have to include 100%, unless contributions by the surviving partner can be proved. (4) At worst, this could mean that the value of the property would be taxed in both estates. (5) This record of contributions is imperative.

Question 6

Tax consequences of domestic partners using TIC

Answer 6

(1) There will be a gift if the contributions are not identical to the tenant’s interest. (2) Ongoing expenses do not entail gifts if the unequal contribution is balanced by adjusting interest. (3) When one partner dies, his estate will have to include his percent of ownership.

Question 7

Nontax disadvantages of domestic partners jointly owning property

Answer 7

(1) Each partner’s interest is subject to be seized by that partner’s judgement creditors to satisfy debts. (2) jointly owned assets can create problems upon the breakup of the partners, especially if they failed to enter into a Domestic Partnership agreement.

Question 8

Methods of voluntarily transferring wealth

Answer 8

(1) During Life: gift and sale, (2) Death: Probate and will substitute.

Question 9

Probate transfer methods

Answer 9

(1) Wills, and (2) Laws of intestate succession.

Question 10

Tax and nontax benefits of using a trust

Answer 10

(1) Allow trust to benefit multiple beneficiaries, (2) management expertise, (3) avoid probate, and (4) asset protection.

Question 11

Two tax factors that make transfer of wealth more costly for domestic partners than legally married spouses

Answer 11

(1) Domestic partners cannot split gifts, and (2) they are not eligible for the gift tax marital deduction. (3) During death, domestic partners are not eligible for the federal estate tax marital deduction for transfers to the other domestic partner.

Question 12

Estate of Domestic Partner more subject to will protest than estate of legally married

Answer 12

(1) Family members who do not approve of the relationship may go out of there way to prove testamentary incapacity, (2) that the will was improperly executed, or that (3) the testator was under duress or undue influence.

Question 13

Strategies for “Bulletproofing” a domestic partner’s will

Answer 13

(1) Document the testaro’s age at the time of signing, (2 Use a will form approved by state statute, (3) Have a sufficient number (2-3) of disinterested witnesses, (4) include a self-proving clause if authorized by state statue. (5) document that the testator had testamentary capacity, (6) follow state execution requirements precisely, (7) use different attorneys to draft the wills of the domestic partners, (8) execute the wills on different days without the other partners present (9) In terrorem clause that will direct anyone who contests the will to get nothing.

Question 14

Intestacy

Answer 14

(1) Means dying without a will. (2) Especially undesirable for domestic partners as most state intestacy laws are biased against surviving spouses. (3) Because these are controlled by state law, these statutes may be amended as social attitudes change.

Question 15

Will Substitutes

Answer 15

(1) JTWROS, (2) irrevocable inter vivos trust, (3) U.S. government savings bonds, (4) recovable living trust, (5) Payable on death, (6) Totten trusts, (7) transer on death accounts pension benefits, IRAs, annuities, and life insurance.

Question 16

Benefits of using a revocable living trust as a will substitute

Answer 16

(1) Ideal for planning for incapacity, (2) Grantor does not have to give up control of assets, (3) Can be amended to name different beneficiaries, (4) less susceptible to challenge by disgruntled family members, (5) assetsare protected from beneficiary creditors until distribution of trust property. (6) Because it is revocable, it is not subject to gift tax.

Question 17

Methods of Lifetime transfers for nonmarried couple

Answer 17

(1)Transfers exempt from gift tax (education, medical and gifts under exclusion amount), (2) Irrevocable life insurance trust, (3) annuity, (4) Grantor remainder interest trust, or (5) wealth replacement trust. *ILIT, GRIT, WRT, or annuity.

Question 18

ILIT

Answer 18

(1) With ILITs there may be a small gift tax liability when funding the account, but this pails in comparison to the death benefits. (2) The death benefits will not be incuded in the decedent’s gross estate, and death proceeds can be loaned the to the decedent’s estate or used to purchase Illiquid assets.

Question 19

Annuities

Answer 19

(1) The joint and survivor annuity option of annuities can be appealing to domestic partners. (2) Also, any payments made after the annuitant’s death are outside of probate. (3) These can also be used to help pay estate taxes.

Question 20

Grantor Remainder Trust

Answer 20

These trusts are designed to: (1) allows the grantor to have continued use of the trust assets during the trust term, and (2) this keeps assets out of the grantor’s gross estate if the grantor survives the trust term.

Question 21

Methods of Post-death transfer for nonmarried couples

Answer 21

(1) Charitable remainder trusts, (2) Charitable lead trust, or (3) Pooled income funds

Question 22

Estate Tax implications of Testamentary Charitable Remainder trust that names decedent’s surviving domestic partner as sole income beneficiary

Answer 22

(1) The decedent’s estate must include the assets of the trust in the gross estate, but (2) will not receive a marital deduction for the present value of the partner’s income interest. (3) The estate will receive a charitable deduction for the present value of the charity’s remainder interest.

Question 23

How CRT and PIF can reduce estate taxes and benefit the

Answer 23

(1) The deceased partner would give the surviving partner the sole income interest in the trust. (2) The income interest is taxable, but the deceased partner’s estate tax liability will be reduced by the charitable deduction. (3) This reduces the surviving partner’s estate tax liability as only unused funds will be included in his or her estate.

Question 24

Elements of Federal Gift Tax not usable by domestic partners

Answer 24

(1) Gift splitting, and (2) Gift tax marital deduction

Question 25

Tax planning Techniques for Domestic Partners

Answer 25

(1) Timing transactions so that income or capital gains are not recognized until the subsequent year. (2) Accelerate payment of deductible items to the current year. (3) Make more charitable deduction of highly appreciated assets, (4) Take capital losses to offset capital gains. (5) Monitor AMT, (6) report capital gains on installment basis of assets sold on installment basis, or (7) max contributions to tax deferred accounts

Question 26

Social Security Benefits for Domestic Partners

Answer 26

(1) Surviving widow does not get one-time $255 death benefit, (2) No spousal, divorced, mother or father benefit, or disability benefit.

Question 27

Major Goals of a DPA

Answer 27

(1) To arrive at mutually agreeable answers to questions that may come up during their relationship. (2) Another goal is to fill the void of laws concerning the rights of the partners in the event of disagreement or termination of the relationship. (3) A final goal is to protect each partner from situations that might be financial harmful.

Question 28

Court-ordered management

Answer 28

(1) Court-ordered management should be avoided for a domestic partner client (2) because it is highly unlikely that the client’s partner would be appointed as conservator or guardian.

Question 29

Pre-planning Steps for Domestic Partners

Answer 29

(1) If the applicable state has a method by which a person can appoint the person who has authority to make his or her funeral arrangements, the client should take advantage of this method and name the partner. (2) Particularly if the domestic partner hasn’t been named the durable power of attorney for health care, the partner should be designated as a person with access to the client in: the home, hospital, nursing home, or private hospice facility.