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ESTATE PLANNING FOR NON-TRADITIONAL FAMILIES_ PART 1 First Run

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ESTATE PLANNING FOR NON-TRADITIONAL FAMILIES_ PART 1 First Run Powered By Docstoc
					ESTATE PLANNING FOR NON-TRADITIONAL FAMILIES, PART 1
First Run Broadcast: May 16, 2006
1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)

Estate planning for non-traditional families is a substantial challenge for estate planners, and the challenges are
becoming increasingly common as the number of unmarried couples increases. Although the same principles of
law still generally apply, their consequences for non-married couples can be dramatically different than for
married couples – and much more financially adverse. Remarriages, children from previous marriages and
current marriages, single couples with and without children, and same sex couples have given rise to a host of
new issues and challenges for estate planners, including: How to transfer retirement benefits? Who makes
medical decisions upon incapacity? How to handle children from multiple marriages? This program is
designed to provide estate planners with a detailed discussion of several major issues involved in counseling
non-traditional families in the preparation of their estate plans.

   •   Adverse death tax consequences for unmarried couples
   •   Planning IRAs, 401(k)s, and retirement benefits
   •   Use of will substitutes – beneficiary designations, transfer on death and payable on death clauses
   •   Living trusts and life insurance trusts
   •   Special issues related to providing for children of multiple marriages
   •   Incapacity issues

Missia Vaselaney is a partner in the Cleveland office of Kahn Kleinman, LPA, where her practice focuses on
estate planning for business owners and individuals. She has worked with clients to both plan and administer
estates that have ranged from the very modest to the large and sophisticated. Ms. Vaselaney has also
represented clients in probate litigation matters and before federal and state taxing authorities. She is a featured
speaker both nationally on estate planning and other related matters on behalf of banks, brokerage firms and
other professional associations. Ms. Vaselaney is also a Certified Public Accountant and a member of the
American Institute of Certified Public Accountants. She has been a member of the Steering Committee of the
AICPA's National Advanced Estate Planning Conference since 2001. She is a member of the Estate Planning
Council of Cleveland and a former Trustee. Ms. Vaselaney earned her B.S. from the University of Dayton and
her J.D. from Cleveland-Marshall College of Law
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                                                    May 16, 2006




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 PROFESSIONAL EDUCATION BROADCAST NETWORK




Estate Planning for Non-Traditional Families, Part 1 and Part 2

                       May 16-17, 2006




                       Missia Vaselaney
                       Kahn Kleinman
                       (216) 736-3323
                mvaselaney@kahnkleinman.com
               Estate Planning for Remarrieds, Unmarrieds

                         And Same Sex Couples



                              Presented by:

                           Missia H. Vaselaney
                              Kahn Kleinman
                           2600 Erieview Tower
                            1301 East 9th Street
                        Cleveland, Ohio 44114-1824

                        Direct Dial: (216) 736-3323
                           Fax: (216) 623-4912




{MHV\K0479498.1}
                       Estate Planning for Remarrieds, Unmarrieds

                                        and Same Sex Couples

I.      Introduction

        There are many similarities and significant differences in the planning for “first married”

        couples and the planning for remarried couples, unmarried couples and same sex couples

        (hereafter sometimes referred to as “non-traditional” couples). Usually planners tend to

        focus on estate planning for the traditional couple and family. When non-traditional

        couples seek advice, many professionals approach the planning for these couples and

        families from the perspective of their experience with traditional couples and families.

        Treating non-traditional couples the same as first married couples (“the Ozzie and Harriet

        couple”) may produce an estate plan that does not address the non-traditional couples

        unique issues and may ultimately result in missed tax planning opportunities and

        contention among family members and heirs.       With the changing demographics of our

        society non-traditional couples may soon far outnumber traditional couples. For this

        reason estate planners need to become much more familiar with the planning

        opportunities and pitfalls that exist regarding planning for non-traditional couples.

        Finally, with the uncertainty regarding the continued existence of the estate tax, the non-

        tax planning required for these non-traditional couples may produce a practice

        development opportunity.




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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
II.     Comparing and Contrasting Estate Planning for Traditional and Non-

Traditional Couples

        A. Generally. Most couples, whether traditional or non-traditional, have similar basic

        estate planning goals. An individual first and foremost will want his or her dispositive

        wishes fulfilled. Secondary goals will generally include reducing estate taxes and

        avoiding probate. Estate planners, especially in planning for non-traditional couples,

        must keep these goals, particularly the satisfaction of the client’s dispositive wishes,

        upper most in his or her mind. Estate planners sometimes tend to let the tax issues drive

        an estate plan to the detriment of the clients other goals, the achievement of which may in

        fact be more important than reducing estate taxes.

        B. Traditional and Remarried Couples vs. Other Non-Traditional Couples.

        Traditional couples and remarried couples have distinct advantages over other couples.

        The institution of marriage has always been highly regarded by American society. In

        1888, in the case of Maynard v. Hill, 125 U.S. 190, 203 (1888), Justice Field defined

        marriage as “creating the most important relationship in life, as having more to do with

        the morals and civilization of people than any other institution”.       Due to society’s

        reverence for the institution of marriage, the law confers many rights and benefits on

        married couples that are unavailable to other couples (other than the Federal Income Tax

        “marriage penalty”). Rarely does the law distinguish between first married couples and

        remarried couples in bestowing these rights and benefits.

                1. Rights and Benefits.

                        a) Marital property rights (community, dower etc.)

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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                        b) Preference in intestate succession.

                        c) A spouse has priority regarding appointment as other spouse’s

                        guardian in the case of incompetency.

                        d) Spouse has priority with regard to the appointment of an Administrator

                        of spouse’s estate.

                        e) Court supervision of property rights on the termination of the

                        relationship.

                        f) Federal (and sometimes state) estate tax unlimited marital deduction

                        and gift tax exemptions.

                        g) Spouses may file joint income tax returns.

                        h) Corporate benefits such as family health insurance coverage and

                        survivor pension benefits are available for married couples, but are rarely

                        allowed to non-married couples. However, some municipalities and some

                        corporations have amended their plans to include same sex or Domestic

                        Partners. (Some states allow same sex and opposite-sex couples who meet

                        certain criteria to register as Domestic Partners.)

                        i) Social Security survivor benefits.

                        j) Stepparent adoption allowed.

                        k) Communications between spouses are protected by the spousal

                        communication privilege.

                        l) A spouse can sue for loss of consortium, emotional distress and

                        wrongful death for injuries to the other spouse.


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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
        C. What Marriages are Recognized

                1. States. The legislature of each state has the right to prescribe what constitutes

                a valid marriage and thereby who will marry. Vermont is currently the only state

                to recognize any form of same-sex union, however the arrangement does not rise

                to the level to be considered a marriage under federal law. Massachusetts appears

                poised, as of the writing of this outline, to recognize full marriage for same-sex

                couples. Other subdivisions of states have embarked in civil disobedience of state

                laws prohibiting issuance of marriage licenses to same-sex couples, and the courts

                will undoubtedly be asked to sort out the consequences of such purported

                marriages.

                2. Common Law Marriages. State legislatures also have the power to decide if a

                “Common Law Marriage” should be recognized as a legal marriage.               Mere

                cohabitation by an opposite-sex couple does not constitute a common law

                marriage. Generally, to be recognized as a common law marriage, in a state that

                recognizes common law marriages, the couple must have (1) manifested an intent

                to be husband and wife (own joint property, filed a joint income tax return); and

                (2) held themselves out to the public as husband and wife. Due to the increased

                cohabitation by unmarried opposite-sex couples, several states have changed the

                existing statutes recognizing common law marriages. Most statutes “grandfather”

                common law marriages that existed on the date of the statutory change, but deny

                recognition to relationships that would have qualified for common law marriage

                treatment, where such qualifications were met, after that effective date of the

                change to the law.
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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                3. Conflicts of Laws Issue. First Restatement (Second) of Conflict of Law, 283

                (1988), states that “ a marriage is valid everywhere if the requirements of the

                marriage laws of the state where the marriage takes place are met, except in rare

                instances.”    These rare instances include situations where recognition of the

                marriage would go against strong public policy.

                4. The Defense of Marriage Act (“DOMA”). In 1996, in response to several

                attempts by gay and lesbian couples to challenge existing laws, in several

                different states, which did not clearly prohibit same sex marriages, the DOMA

                became law. The Act denies federal recognition of same-sex marriages leaving

                the states with the option of refusing or recognizing these marriages within their

                borders should they become legal in other states. A majority of the states swiftly

                passed laws that refused to recognize same-sex marriages. It appears now that

                Vermont and Massachusetts recognize “civil unions” and same-sex marriages,

                respectively; a “full, faith and credit” constitutional challenge may be brought.

                The challenge would exist if a same-sex couple who were residents of Vermont

                and/or Massachusetts, married and later relocated to another state, which refused

                to recognize such marriage as valid.

                5. IRS Position. The current position of the IRS is that it will recognize a

                relationship as a valid marriage, if the applicable state does so. The IRS appears

                to make no distinction between same-sex or opposite-sex marriages.

        D. Unmarried Opposite-Sex Couples and Same-Sex Couples. Many same-sex couples

        feel the disadvantages they suffer under the law are the direct result of their same-sex

        status. However, the lack of rights and privileges is not derived from their status as a
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Missia H. Vaselaney, Esq.
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        same-sex couple; so much as it is from the fact that they are unmarried. As stated above,

        the difference is that unmarried opposite-sex couples have the choice of whether or not to

        marry.

III.    Estate Planning for Remarried Couples

        A. Generally. For purposes of this discussion, a remarried couple is one where at least

        one of the partners has at least one child prior to the marriage, whose natural parent is not

        the other partner. This classification of remarried couples may include couples, where

        neither couple has actually ever been married and may not include remarried couples

        where neither party has had a child or children in his or her previous marriage. The

        following discussion of planning for remarried couples may also apply to marriages

        where both partners have no children and desire to have their respective assets left to

        their respective families. (The following discussion assumes no antenuptual agreement

        has been executed.)

        B. Guardianship. A spouse has priority if an individual becomes incompetent. This

        may not be this individual’s desire, especially in a short-term second marriage. In this

        circumstance the client should consider having a funded living trust supplemented by a

        power of attorney naming the party the client wants to handle his or her affairs should he

        or she become incompetent. In some jurisdictions, a power of attorney alone may avoid a

        guardianship, however a trust may provide more structure especially in the circumstance

        of a non-traditional couple.

        C. Intestate Succession. One statistic has placed the figure of people who die without

        even a simple will at 75%. For this reason, states had to enact laws which govern the


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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
        distribution of these individuals property. Intestate succession statutes vary from state to

        state, but usually they provide for a pattern of distribution similar to the following:

                1. A married individual’s property will pass 100% to the surviving spouse if

                there are no children.

                2. If a married individual has a child or children. The spouse will receive a

                percentage of the estate while the children will share the balance. (Some states

                have changed their statutes to distribute 100% to the surviving spouse, where the

                surviving spouse is the natural parent of all the decedent’s children.) A typical

                distribution scheme in this situation is that after the spousal allowance, that the

                balance of the net estate, if there is only one child, is divide 50/50 between the

                spouse and child. If there is more than one child, the net estate is divided 1/3 to

                the spouse and 2/3 to be divided among all children.

        D. Administrator. When a married individual dies without a will (or a will where a

        named executor is unable to serve), the surviving spouse generally has first priority to

        serve as Administrator.      (An executor is the individual named by the decedent; an

        administrator handles the same task but is chosen by the court.) This may not be the

        decedents intent, especially where 2/3 of the assets are for the benefit of the children.

        Also, if the decedent has a family business, and has not done other planning, the spouse

        may end up controlling such business as Administrator of the estate.

        E. Simple Wills. Simple wills in a remarriage are the “he who lives longest wins” plan.

        Many remarried couples try to use a first marriage distribution plan. They execute simple

        wills which leave everything to each other and then to their joint children. The flaw in

        this plan is that there is usually nothing to prevent the surviving spouse from executing a
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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
        new will which leaves everything to his or her children only. Another frequently seen

        defective plan involves each spouse executing a simple will, which leaves everything to

        his or her respective children. In this circumstance, it is not uncommon for the surviving

        spouse to elect against the estate of the first spouse to die. The spousal election is usually

        equal to 1/3 of the probate estate. The decedent may have designated the surviving

        spouse as the beneficiary of certain non-probate assets, while intending that the balance

        of the assets pass to the children. The spouse would receive the non-probate assets and

        the spousal election.

        F. Probate Avoidance Techniques.

                1. Distinction Between Assets Subject to Probate and Assets Includible in

                Taxable Estate. An asset may be included in the decedent's estate for death tax

                purposes, but not be includible in the probate estate. For example, the decedent's

                assets held in joint tenancy, in a bank account, or in a funded revocable living

                trust will be included in the decedent's estate for tax purposes, but are not subject

                to probate. Moreover, if the decedent retained any of the incidents of ownership

                in a life insurance policy on the decedent's life, or transferred such ownership

                within three years of death, the proceeds will be includible in the decedent's estate

                for tax purposes (see I.R.C. §§2035 and 2042), but if payable to a beneficiary

                other than the decedent's estate, the proceeds will not be subject to probate.

                Assets which have been gifted by the decedent in such a way that the decedent

                retained a prohibited right or power (see I.R.C. §§2036 through 2038) will also be

                included in the taxable estate, but not in the probate estate. It is important to keep

                in mind that avoiding probate does not necessarily avoid estate taxes. It is also
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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                important to keep in mind that these techniques should not be utilized without

                thorough evaluation, especially by non-traditional couples, as they may produce

                unintended results.

                2. Methods of Avoiding Probate.        There are a number of methods for planning

                an estate that will avoid the probate process and the disadvantages regularly

                associated with such process, without causing any great risk that the asset or

                proceeds will not be distributed as the decedent desired. The remainder of this

                section reviews those important alternatives.

                        a) Joint Ownership with Rights of Survivorship. Ownership of real and

                        personal property in joint tenancy is the most common method of avoiding

                        probate. Joint tenancy is an estate in real or personal property held by two

                        or more persons jointly with rights to share in its enjoyment. Upon the

                        death of a joint tenant, the entire estate passes immediately to the

                        surviving joint tenant or tenants. The survivor(s) automatically own(s) the

                        entire asset without the need for probate or any other form of court

                        intervention. The death certificate of the deceased joint owner is all that is

                        necessary to establish the title of the surviving joint tenant(s). Often there

                        is a presumption against the creation of a joint tenancy in real or personal

                        property other than bank accounts, unless the legal instrument transferring

                        the property states that the property is conveyed or transferred in joint

                        tenancy. The safest way to establish joint tenancy is to state clearly on the

                        deed, assignment, or other document creating title, "in joint tenancy," "as

                        joint tenants," or "as joint tenants with right of survivorship and not as
                                                      9

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                        tenants in common." The absence of such language will ordinarily create

                        a tenancy in common, which does not have the survivorship feature. A

                        joint tenant's share of the estate may be conveyed by a joint tenant at any

                        time, thereby terminating the joint tenancy. If the joint tenants cannot

                        agree on how to divide the property, either may bring a partition suit and

                        ask the court to divide the property. No one can destroy or affect the joint

                        tenancy or prevent the entire interest owned by the deceased joint tenant

                        from passing to the survivor.

                                (i)      Advantages and Disadvantages of Joint Tenancy. The

                                following summarizes the advantages and disadvantages of joint

                                tenancies:

                                         (I)    Advantages

                                                (A) Joint tenancies are easily understood.

                                                (B) Joint tenancy can be used to avoid probate,

                                                although joint tenancy property is required to be

                                                included in the estate tax return.

                                                (C) Joint tenancy property is often free from the

                                                claims of creditors of the deceased joint tenant if no

                                                prior lien was attached.

                                         (II)   Disadvantages

                                                (A) Joint tenancy property cannot be passed by the

                                                will of the joint tenant dying first; instead, the


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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                                               property passes to, and is subject to disposition by,

                                               the surviving tenant.

                                               (B) The estate may be deprived of liquid funds

                                               necessary to pay death costs, claims, and taxes.

                                               (C) Joint tenancy property may be caught up in

                                               discord between spouses because of the inability to

                                               reach agreement on management of the property

                                               and the right of noncontributing spouse to acquire

                                               one-half of the property through partition or

                                               severance.

                                               (D) If the joint tenancy property is subject to a

                                               mortgage, the property will pass to the surviving

                                               joint tenant, but the estate may be required to pay

                                               the mortgage out of the residue, thus frustrating the

                                               decedent's family giving plan.

                                               (E) Creditors of either joint tenant may attach the

                                               person's interest in the property during life.

                                               (F) There may be unfavorable gift and estate tax

                                               consequences depending on the specific facts of

                                               each case.

                                (ii)     Example.   An example of a misplaced joint savings

                                account was created by a widowed mother of three. She transferred

                                her life's savings into a joint account with one nearby daughter for
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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                                convenience. Upon the widow’s death, her one daughter received

                                the entire account. It did not matter that the widow’s will provided

                                all three children were to share the money equally.

                                (iii)    Tax Issues and Traps of Joint Ownership with Rights of

                                Survivorship. There are many tax issues and traps for the unwary

                                that develop from joint ownership with rights of survivorship,

                                including the following:

                                         (I)     The creation of a joint tenancy between spouses

                                         does not create a taxable gift because of the unlimited

                                         marital deduction.

                                         (II)    The creation of a joint tenancy with a non-spouse

                                         creates a taxable gift when the contributions are unequal.

                                         When a donor conveys to himself or herself and a donee as

                                         joint tenants and either party has the right to sever the

                                         interest, there is a gift to the donee in the amount of one-

                                         half of the value of the property. The gift usually occurs

                                         when the non-contributor claims or takes a portion of the

                                         joint interest.

                                         (III)   In the case of the property held in joint tenancy

                                         between spouses, only one-half of the value is included in a

                                         deceased joint tenant's estate.   The deceased's one-half

                                         interest acquires a stepped-up basis. Compare this with

                                         community property states where both halves acquired
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Missia H. Vaselaney, Esq.
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mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                                         stepped-up basis. This adjustment to the surviving spouse's

                                         basis is a major incentive for classifying property as

                                         community property, and creates complex tax issues when

                                         moving from a community property state.

                                         (IV)   In the case of property held in joint tenancy with a

                                         non-spouse, termination may trigger gift tax consequences.

                                         The entire interest of the property is included in the estate

                                         of the joint tenant who dies first, unless the estate is able to

                                         prove the amount of consideration furnished by the

                                         survivor. The contribution of the survivor must not be

                                         traceable to the decedent. There is an exception where the

                                         property was acquired by the decedent through inheritance.

                                         (V)    Use of joint tenancy may frustrate other tax

                                         planning. For example, use of joint tenancy can result in

                                         over-qualification of the marital deduction, resulting in

                                         property being taxed a second time.

                        b) Insurance, Savings, and Retirement Plans and Annuities. Insurance

                        policies, annuity contracts, profit-sharing and pension plan accounts,

                        Keoghs, and individual retirement accounts (IRAs) are just some examples

                        of assets that may be passed by contract, agreement, or beneficiary

                        designation and avoid probate. Contingent beneficiaries should be named

                        in the event the primary beneficiary named does not survive to receive the

                        benefit. Mistakes and neglect in properly designating and changing
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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                        beneficiaries result in many problems in estate administration. Many

                        beneficiary designations are made and forgotten in the files of insurance

                        companies and banks. Later marriages, divorce, births, deaths, financial

                        needs, and estate planning goals are not taken into consideration. Imagine

                        the surprise when a former spouse turns up as the beneficiary after a bitter

                        divorce (In many states divorce acts to treat the former spouse as

                        predeceased in any existing will or trust agreement, however this does not

                        usually remove the former spouse as a beneficiary on non-probate assets).

                        or an after-born child is forgotten. Beneficiary designations should always

                        be signed and reviewed when any family or planning changes occur. If no

                        beneficiary designation exists, most policies, plans, or accounts have an

                        automatic designation. If your estate is large enough to be subject to

                        federal estate taxes, coordinate the designation with tax planning.

                        c) Retirement Plan Distributions. Since December 31, 1984, there is no

                        estate tax exclusion for qualified profit-sharing, pension, Keogh, IRA, and

                        other employee benefit plans. This means that they may be subject to both

                        income tax and estate tax. The income tax rules governing these plans are

                        very complex and vary depending on design of the plan, source of

                        contributions, and conditions at death. In addition, tax laws, rules, and

                        regulations are changing constantly.     In the event of the death of an

                        individual who has money remaining in a retirement account, expert tax

                        advice should be obtained before any distributions are made. Written

                        retirement plan beneficiary designations are important estate planning
                                                   14

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                        documents to assure the eventual flow of assets to pre-selected

                        beneficiaries with the minimum amount of tax impact.               Often the

                        retirement plan distributions become the estate's largest asset.

                        d) Payable on Death Accounts. In most states an individual may enter

                        into a contract with a bank or other institution authorized to receive money

                        whereby the proceeds of the owner's account may be payable to another

                        person upon the owner's death, notwithstanding the provisions of his or

                        her will. Such accounts as "payable on death" or "payable on the death of"

                        may be abbreviated to "P.O.D." During the depositor's lifetime, he or she

                        has the sole control of the account and may withdraw it or change the

                        beneficiary at will. From a tax and estate planning point of view, this

                        form of holding title is similar to a bank account in joint tenancy created

                        with one tenant's separate funds. The outstanding difference is that the

                        non-contributing party (and his or her creditors) has no right of withdrawal

                        during the depositor's lifetime. If the P.O.D. trust is not revoked during the

                        depositor's lifetime, the beneficiary will receive the proceeds on the death

                        of the depositor.

                        e) Transfer-on-Death Deed. Some states have enacted legislation to

                        provide for a transfer-on-death deed, adding to the arsenal of methods to

                        avoid probate administration of estates, which include payable-on-death

                        bank accounts, joint ownership of personal and real property with rights of

                        survivorship, transfer on death designation for securities, and beneficiary

                        designation for life insurance and qualified retirement plans. The most
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Missia H. Vaselaney, Esq.
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mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                        important advantage of a transfer-on-death (TOD) deed is that the

                        beneficiary or beneficiaries have no interest in the property during the

                        lifetime of the owner of the interest. The interest of the named transfer-

                        on-death beneficiary is not subject to attachment by such beneficiary's

                        creditors, is not transferable through the estate of the named transfer-on-

                        death beneficiary if such beneficiary precedes the owner's death, and the

                        spouse of the named transfer-on-death beneficiary has no interest in the

                        property during the life of the owner of the interest. The owners of the

                        interest may change or revoke the deed, and may sell or do anything with

                        the property during the owner's life without the consent or signature of the

                        designated transfer-on-death beneficiary.       To change the designated

                        transfer-on-death beneficiary or add a new beneficiary, the owner need

                        only execute another deed in which a new or no transfer-on-death

                        beneficiary is named. Generally, the owner of real property may create a

                        transfer-on-death interest in either the entire or any separate interest in the

                        property. Such interest may be designated to one or more individuals

                        including the owner (grantor). Finally, such deed need not be supported

                        by consideration and need not be delivered to the transfer-on-death

                        beneficiary to be effective.

        G. Trusts

                1. QTIP Trusts. Remarried couples have the perfect tool, as opposed to other

                non-traditional couples, for planning their estates. A Qualified Terminal Interest

                Property Trust (“QTIP”) allows an individual to provide for his or her surviving
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Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                spouse, while still controlling the ultimate distribution of the assets contained in

                the trust.    A QTIP also qualifies for the unlimited marital deduction, if

                requirements are met. (A technical discussion of these requirements is beyond the

                scope of this outline. Please see Tom Austin’s outline from the 2001 conference

                for a detailed discussion.) The basic requirements are that the surviving spouse

                must be the only beneficiary of the trust during his or her lifetime and the spouse

                must receive at least all the income from the trust for life. In most states income is

                defined as interest and dividends but not capital gains. Due to the manipulation of

                income that may be possible, the choice of Trustee should be carefully

                considered. One option is to have the surviving spouse and one of the decedents

                children act as Co-Trustees. The client may wish to structure the trust as an

                “income only” trust, particularly if the surviving spouse is likely to enter a nursing

                home. Placing all assets in trust for the surviving spouse, where the trust allows

                for principal distributions for the surviving spouse’s health, maintenance and

                support, may deprive the children of any inheritance.

                2. Lifetime QTIP. QTIP Trusts also can be used during life to equalize assets, in

                order not to waste a “poorer spouse’s” credit.

                3. A/B QTIP Trust. Generally, a client’s estate plan is structured as an A/B

                trust, so as to take advantage of both the Unified Credit Equivalent (“the credit”)

                and the unlimited marital deduction. In the case of a remarried couple the A Trust

                should be structured as a QTIP. Many times it turns out the A Trust has been

                structured as an Outright Marital Trust or a Power of Appointment Trust, thereby

                giving the surviving spouse complete control. This mistake is usually made by
                                                 17

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                either an inexperienced estate planner or an estate planner who is only focusing

                on obtaining tax saving and not on the family situation. In structuring the A/B

                Trust, consideration should be given to either distributing the B Trust to the

                decedent’s children or holding it for the children’s benefit, even if the spouse

                survives. The needs of the surviving spouse should be considered, but so should

                the age of the spouse in relation to the ages of the children. The client may wish

                to only give a portion of the B Trust to the children, or on the other hand,

                especially in a larger estate, the client may not want to maximize the marital

                deduction. With the changing credit amount, careful drafting is necessary to

                avoid unintended results.

                4. Life Insurance and Individual Retirement Accounts. In some situations so

                as not to complicate the drafting of the client’s trust agreement, Life insurance

                and/or Individual Retirement Accounts (IRA’s) can be left directly to the children

                or to a trust for their benefit. Careful consideration should be given to both the

                income and estate tax consequence of such an arrangement. If the client has a

                taxable estate, the life insurance should be owned by an irrevocable trust to

                minimize and/or eliminate the transfer tax consequence. An Irrevocable Life

                Insurance Trust can leave a much greater sum of money to the children, while still

                maximizing the marital deduction.     Leaving an IRA directly to the children

                generally will result in continued income tax deferral, and may attain income tax

                savings, if the children are in lower brackets. (Qualified Plans at many companies

                will make only deferred payments over the life of the surviving spouse, therefore

                naming the children as beneficiaries of such plans may result in income tax
                                                  18

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                acceleration. In addition, in order to name children as beneficiaries of such a plan

                requires the spouse’s consent.)       One benefit of designating the children as

                beneficiaries of the client’s IRA or as beneficiaries of the client’s life insurance

                (not owned by an Irrevocable Life Insurance Trust), is that the client can change

                the beneficiary without the expense of redrafting the estate planning documents.

                However, the client should keep the planner informed to avoid any unintended

                results.

                5. “Anti-hovering” Money. Whether a client leaves a portion or the entire B

                Trust to his or her children, or makes them the beneficiaries of life insurance or

                other non-probate assets, it is a good idea to leave something to the children, even

                if the spouse survives. This gesture may minimize potential conflict between the

                spouse and the children. It may keep the children from hovering, waiting for the

                spouse to die to inherit what they feel is rightfully theirs.

                6. Funded Trust. In some states it is possible to disinherit a spouse. Normally

                the statutory spousal election only applies to probate assets. Anything that passes

                outside of probate is not subject to that election. Making sure that all assets avoid

                probate will, in effect, disinherit a spouse. It may be difficult to transfer real

                estate to a trust without the knowledge of the other spouse, even if the real estate

                is only held in the trust grantor’s name due to dower rights and community

                property rights which exist in some states. A fully funded trust may be an

                alternative to an antenuptual (only for death not divorce) in these states, especially

                if the trust is fully funded prior to the marriage.


                                                       19

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
IV.     Estate Planning for Opposite–Sex Couples and Same Sex Couples

        A. Generally. Opposite-sex couples choose not to marry for a number of reasons.

        Previously divorced clients may be marriage shy. Older individuals may not want to risk

        their assets should the other spouse enter a nursing home. They may not want to lose

        social security or other benefits that may result should they remarry. The couple may not

        want to be subject to the income tax “Marriage Penalty.” Same-sex couples, as discussed

        previously, are prevented from marrying. The estate planning for these couples can be

        very similar to the estate planning for married couples, except that the tax benefits and

        priority rights do not exist. These couples may resemble traditional couples in the fact

        that they have children together and there are no children outside this relationship. They

        may resemble remarried couples in that one or both have children from prior marriages.

        B. Guardianship. The partner will have no priority with regard to the appointment of a

        guardian and because of not being related by blood will have little chance of being

        appointed. At least a Power of Attorney should be executed to remedy this problem. In

        addition, a health care power of attorney should be executed to ensure that the partner is

        not prohibited from being involved in healthcare decisions or prevented from seeing the

        other partner by biological family members. This is particularly important in the case of

        same-sex couples, where families may be much more unaccepting of their family

        member’s lifestyle, especially in the case of AIDS.

        C. Intestate Succession. The partner will not be included at all and will have no priority

        regarding appointment as Administrator.




                                                   20

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
        D. Wills. Using simple wills in these situations may leave the estate plan subject to

        attack by the natural objects of the decedent’s bounty, those who would have inherited

        had the decedent died without a will. The surviving partner will not have any statutory

        protection. (If there are only children from this union, this probably will not be an issue.)

        A partner’s will may be subject to claims, by family members, of undue influence by the

        other partner. Caution must be used in following all formalities regarding the execution

        of the will. Heirs-at-law should be specifically mentioned in the will and disinherited.

        Some commentators suggest including heirs in the will, who would potentially contest

        the will and also include a “no-contest” clause. This may not work because, if the will is

        declared invalid, so is the clause.     It may, however, deter some uninformed heirs.

        Opposite-sex and same-sex couples should update their wills regularly to demonstrate

        their continued desire to benefit each other. All prior wills should be retained and

        marked as superceded. A client may also want to include funeral instructions in the will.

        Although the will is not admitted to probate until after the funeral, it demonstrates the

        decedent’s intent. Prepaid funeral arrangements also should be considered to prevent

        biological family members from taking control of the situation.

        E. Probate Avoidance Techniques. As discussed above, joint and survivorship and

        other non-probate estate planning strategies are very risky due to their unintended tax and

        legal consequences. If these mechanisms are used, the client should clearly document his

        or her intent to avoid any challenge after death. The advantage of using these probate

        avoidance techniques, including fully funded living trusts, are that they are usually more

        difficult to challenge and the transfers are not a matter of public record. However, in

        some cases, appearing secretive can make other heirs, particularly children, more
                                              21

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
        suspicious of the situation leading to increased legal action. Again clearly documenting

        the client’s intent should reduce these risks.

        F. Trust. Much the same as in the case of a married couple, a trust can be used to

        support a partner while leaving the ultimate distribution of the assets in the control of the

        grantor. Sometimes there is no desire to control the ultimate distribution of the assets. In

        such an instance, the easiest course of action would be an outright distribution to the

        other partner. Unless the estates are modest this will result in double taxation of the

        transferred assets and the loss of one partner’s Credit. These trusts, however, are not

        eligible to defer estate tax on assets in excess of the Credit, until the surviving partner’s

        death. The advantage non-married couples have over married couples is that these trusts

        do not have to be structured as QTIP Trusts. The trust may have more than one

        beneficiary, does not have to pay all income and may terminate at a desired event such as

        the marriage of the surviving partner. Other types of trusts beyond the scope of this

        article may be used to leverage one partner’s Credit and annual gift tax exclusions to

        provide greater income to the other partner.          Such trusts may include Charitable

        Remainder Trusts, Charitable Lead Trust, Grantor Retained Annuity Trusts and Grantor

        Retained Income Trusts. Same-sex couples in particular may wish to execute and fund

        living trusts for privacy reasons. Not only will such trust avoid probate and being a matter

        of public record, the trust can be named as the beneficiary of a partner’s employee

        benefits, such as life insurance and qualified plans. A trust certificate can be created and

        provided to the plan administrator, which contains the minimum information necessary to

        meet the requirement for naming a trust as a beneficiary of a qualified plan.


                                                         22

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
        G. Gifting. The ability of these couples to equalize assets, to take advantage of both

        partners’ Credits, is severely restricted due to the unavailability of the unlimited marital

        exclusion. In addition, gifts between these partners may be reclassified as taxable income,

        subject to both regular income tax and self-employment tax, to the partner receiving the

        gifts. This may happen in a situation where one partner works and the other partner

        provides domestic duties. Also, if one partner owns the home and the other lives there

        rent free and is the one who provides domestic services, half the rental value of the home

        may be deemed taxable income to the non-owner partner.

        H. Life Insurance. As long as a partner is still insurable, life insurance can be used to

        provide for the other partner. In cases where it is likely that disinherited relatives are

        likely to enter into litigation, a client can chose to leave all his assets to his heirs-at-law,

        while providing for the partner through life insurance. In order to minimize the tax

        consequences, the insurance should either be owned by the other partner or by an

        Irrevocable Life Insurance Trust. If the partner owns the insurance to the extent the

        proceeds are not consumed during the surviving partner’s life, they will be taxable on his

        or her death. If the non-insured partner should predecease the other partner, any cash

        surrender value would be taxable in his or her estate and the disposition of the policy

        would be governed by such partner’s estate plan. In these situations, there also may be an

        issue of whether or not the partner has an insurable interest with regard to the other

        partner’s life. Life insurance especially, for same-sex couples may not be feasible due to

        insurability issues.

        I. Guardianship of Children. If children result from an opposite-sex relationship, the

        fact that the couple is not married will not prevent the other partner from becoming
                                                  23

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
        guardian of the children, as he or she is the natural parent. In situations involving both

        opposite and same-sex couples, where one partner is the only natural parent of a child or

        children and this partner wants to name his or her other partner as the guardian of this

        child or children, the partner should execute a will naming the other partner as guardian.

        If this action is not taken, the blood relatives of the children may be appointed guardian

        by the court and prevent the surviving partner from having contact with the child or

        children. This is particularly tragic in the case of lesbian couples, where the child or

        children were conceived during the relationship by artificial insemination.1 Adoption by

        the other partner, without severing the natural parent’s (the other partner’s) parental

        rights, is usually precluded by state law, regardless of whether the unmarried couple is an

        opposite-sex or same-sex couple. Only step-mother or step-father may adopt a child

        while preserving his or her spouse’s parental rights.

V.      Non-Estate Planning Remedies Available to Unmarried Couples.

        A. Cohabitation Agreement. Where marriage is not an option, a non-traditional couple

        can enter into a cohabitation agreement. Such an agreement fulfills the same function

        that an antenuptial agreement does in a marriage. Such an agreement may address issues

        such as:

                 1. The treatment of income earned by either party during the relationship.

                 2. What property was owned and what debts are owed prior to the relationship.




        A.
        1
         Popular culture is starting to recognize these trends – note on NBC’s “ER” program, in the Spring, 2004
        season, Dr. Carrie Weaver’s partner Sandy Lopez, the biological parent of an infant child, was killed, and
        Dr. Weaver is now litigating with the child’s blood relatives over custody.
                                                            24

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
                3. The rights with regard to property acquired during the relationship by

                purchase, gift and inheritance.

                4. How different debts incurred during the relationship should be handled.

                5. What any change in ownership or the purchase of joint property during the

                relationship means.

                6. How living expenses and household responsibilities are to be shared. (Income

                tax consequences must be considered.)

                7. How property is to be divided if the relationship terminates.

                8. Agreement to transfer property on death and/or option to purchase property

                from the other’s estate.

                9. If arbitration is to apply to the agreement.

        B. Creating a Partnership.            An unmarried couple may, with the proper purpose,

        establish a partnership. The benefits of such an arrangement may include enforceable

        property rights, reduction in income and estate taxes, deferral of income, valuation

        discounts for transfer tax purposes, and such an arrangement would create an insurable

        interest for each partner on the other partner’s life.

        C. Adult Adoption. Adult adoption has been used by some couples, especially same-sex

        couples, as an estate planning tool. One partner may adopt the other partner, thereby

        making the adoptee an heir-at-law of the adopting partner.          Care must be taken in

        undertaking such a course of action. An adoption is irrevocable. However, the adopting

        partner could still disinherit the adopted partner, but such partner would still be an heir-

        at-law, and in a position to challenge such “parent’s” will. Another important factor in

        considering adult adoption is the fact that the adoptee loses all his or her rights as a child
                                                     25

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
        of his or her natural parents. Many states allow for adult adoption only under very limited

        circumstances such as where the adoptee is mentally retarded or permanently disabled, or

        where a step or foster parent relationship was established prior to the adoptee attaining

        majority. Finally, adult adoption is sometimes considered where one partner is the

        beneficiary of a Dynasty or “Bloodline” Trust. By adopting his or her partner, a client

        could make him or her the beneficiary of such trust. However, many carefully drafted

        trusts anticipate this situation by defining children or descendants, as including adopted

        children, but only if they were adopted as minors. Another option similar to adoption is

        available in some states. Each partner can make the other partner his or her designated

        heir.

        D. Remedies at Law. Even if no formal planning is undertaken, at the termination of a

        relationship, either during life or at death, a partner may still recover some benefit from

        the other partner or such partner’s estate. Marvin v. Marvin 18 Cal. 3d 660 (1976),

        established contractual rights and equitable remedies for individuals involved in an

        intimate cohabititing relationship.   Some states have chosen not to accept the view

        proposed in Marvin, while other states have chosen to extend it to same-sex couples.

        Other actions have been brought in these situations based on the theories of quantum

        meruit, unjust enrichment and the theories of constructive and resulting trust.

VI.     Ethical Considerations

        A. Who is Your Client? When either a traditional couple or a non-traditional couple

        approaches an estate planner for legal advice there is always a question of who is the

        client and can the planner ethically represent both partners. Although this issue is obvious


                                                    26

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
        in the case of a non-traditional couple, this issue is sometimes ignored in the case of the

        “Ozzie and Harriet” couple, but should never be ignored in any other type of couple.

        Even in situations involving first married couples, not addressing this issue can cause

        serious consequences. Even these couples can have different goals. One partner may

        disclose information to the planner, which he or she says should not be shared with the

        other partner. Such a situation would put the planner in an ethical dilemma. If an estate

        planner is to represent both partners, it is essential that a clear engagement letter be used

        which should contain a waiver of conflicts and confidentiality of communications

        between each individual partner and the planner, however, not a waiver of confidentiality

        between the couple and the planner. A planner should be cautious in agreeing to represent

        both partners, even if a waiver is obtained. If it appears that an actual conflict exists

        between the partners, despite their representations to the contrary, the planner should

        refer one of the partners to another planner.

        B. Asset Gathering. It is essential in all situations that a complete listing of all client’s

        (clients’) assets, including the exact titling of such assets be obtained from the client

        (clients). A planner must also obtain a thorough knowledge of the client’s (clients’)

        heirs-at-law, especially in the case of a non-traditional couple. It is generally a good

        practice to have this information contained in a completed client questionnaire that the

        client (clients) signs off on, which states that the information provided is a clear and

        complete representation to the best of the client’s (clients’) knowledge.

        C. Fee Payment. In the case of a non-traditional couple, a planner should be wary of

        one partner paying the fee, as this may give the appearance of undue influence and

        unethical conduct on the part of the planner.
                                                    27

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}
VII.    Conclusion

        Estate planning for non-traditional couples can be interesting and creative engagements.

        These couples share many of the issues and concerns of traditional couples and other

        issues and concerns that are unique to them.      Working with these couples can be

        rewarding for a planner who is sensitive to these couples’ needs and fully aware of the

        planning options available.




                                                  28

Missia H. Vaselaney, Esq.
1-216-736-3323
mvaselaney@kahnkleinman.com{MHV\K0479498.1}

				
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