(This article is the last in a three-part series which relates to estate planning paying special attention to non-marital relationships.  The author, Kristin D. Arnett, is a Lansing attorney specializing in estate planning. She can be reached at KArnett@HubbardLaw.com.)

Balancing the Estates: Ways to Shift Wealth

It is often the goal in estate planning to balance the estates of both the members of the couple to pay less overall Estate Taxes. For a married couple, the transfer of wealth between spouses is covered under the unlimited marital gifting. However, the same will not apply to an unmarried couple. The unmarried couple is limited to the annual exclusion and the $1,000,000 lifetime exclusion for gift-giving.

One important consideration is that outright gifts to a partner result in the loss of control over the asset for the gifting partner and gain of control to the partner receiving the gift. This may cause some concern to the one making the gift. Therefore, other means of transferring property may be more desirable. Some of the ways in which property transfers can be accomplished without relinquishing too much control are discussed below.

Limited Liability Companies

Using a Limited Liability Company (“LLC”), a partner who has assets can transfer assets to the LLC and gift interests in the LLC to his or her partner instead of the actual property being gifted. Through the Operating Agreement of the LLC, the partner who is receiving the interests in the LLC could be prevented from withdrawing funds from the LLC. In addition, the partner making the gift may be able to claim a discount on the gift, thus bringing down the value and allowing for more to be transferred.

With the LLC approach, creditors of the partner receiving the interests in the LLC may not be able to reach the partner’s interest until the partner received a distribution. Finally, the Operating Agreement could provide that should the couple terminate their relationship, the partner gifting the interests in the LLC could buy-out the partner receiving the interests under very favorable terms.

Grantor Retained Income Trusts

Under a Grantor Retained Income Trust (“GRIT”), the partner making the gift appears to retain a phantom income stream from the GRIT based on the current 7520 Rate. The size of the gift will be based on the donor’s age, the 7520 Rate, and the term of the Trust. The size of the gift may be reduced thus again, allowing for a great amount of property to be transferred. GRITs are not available to married couples.

Qualified Personal Residence Trusts

A Qualified Personal Residence Trust (“QPRT”) works exactly the same as a GRIT, except that the trust must be funded with the residence of the partner transferring the property. This is a means of transferring the residence to the partner.

Grantor Retained Annuity Trust

A Grantor Retained Annuity Trust (“GRAT”) is similar to a GRIT except that with a GRAT a distribution must be made to the partner making the gift on an annual basis. As with the GRIT and the QPRT, the same factors (the 7520 Rate, the age of the gifting partner and the term of the trust) will impact the size of the gift. With the GRAT, the donor can also impact the gift by deciding how much the fixed annual annuity from the GRAT should be. In addition, there may be discounts that can be taken for lack of marketability and lack of control if the interest was in a LLC.

If any of the techniques above are used to transfer property to a partner during the lifetime of the grantor partner, the partner making the gifts will need to file a gift tax return. Therefore, it will be necessary to have appraisals done to value the gifts properly.

Gift, Real Estate and Transfer Taxes

If an individual adds a joint owner to a piece of property the IRS looks at that as a gift to the added owner. For a same-sex or unmarried couple, the IRS will include the entire value of the property in the estate of the first partner to die, unless the surviving partner can show that less than the full value should be included. Proving this would require detailed record keeping unless a gift tax return had been filed.

Generally, in Michigan, if real estate is transferred there will be transfer tax and/or an uncapping of the taxable value. It may be possible to avoid a transfer tax based on the married status of the parties but there is no comparable provision for un-married co-owners. It is also possible to avoid the imposition of a transfer tax based on a statement of the consideration for the transfer being made being less that $100.00. However, that gets the unmarried couple back into the gift tax issue mentioned above. However, it is possible, with care, to make a conditional transfer of an interest in real estate to a partner which could avoid uncapping the property until the death of the grantor and avoid the imposition of a transfer tax.

Inherited IRA’s

Under the Pension Protection Act of 2006 – a non spouse beneficiary can roll the plan participant’s IRA over to an “inherited IRA (a traditional IRA)” and have it distributed over the beneficiary’s life expectancy instead of the 5 year period. However, a partner in a same-sex or unmarried relationship cannot roll the IRA into his or her own IRA, as a spouse would be able to do. Distributions must begin right away – i.e. even if the beneficiary is not 70 ', the distributions will have to begin immediately.

Agreements to Arbitrate/Mediate the Dissolution of a Relationship

In Michigan, implied agreements are not recognized. If you wish to have such an agreement, it should be in writing and evidence permanence in the relationship and legal consideration. This may be especially important to people who do not have the option of marriage at this time. This is an agreement that should be done by an attorney and each party should have separate representation. Although there is no guarantee that the agreement will be upheld, you can take steps to ensure it is as bullet-proof as possible. Some suggestions are as follows:

' Both partners should disclose all of their assets and liabilities;

' The partners should each attach their last three years’ tax returns to the agreement as part of the disclosure of assets;

' The partners should have separate legal counsel review the agreement;

' The agreement should determine how common expenses will be paid;

' The agreement should focus on the parties as “partners” rather than as “lovers”; and

' The agreement should cover how property is to be divided upon a termination of the relationship (other than by death of one of the partners).

As an unmarried couple, same-sex partners do not have the same protections when they split up or divorce, as would a married couple. For example, when a married couple gets divorced, their status as fiduciary for one another is revoked by law (patient advocate designation, personal representative and agent). This also includes relatives of a former spouse. There is NO automatic revocation for an unmarried couple. Therefore, after a relationship is terminated, those who were in an unmarried relationship must revise their estate plans immediately.

I realize there is a long way to go for equality. Even with certain benefits conferred on those who are in a civil union, in states that recognize such as union, Federal benefits are not included, such as social security benefits, immigration privileges, or the marriage exemption to federal estate tax. Therefore, it is important that you take the necessary steps to protect you, your loved ones and your estate.

I hope that you have a better understanding about what an estate plan is, the position you and your loved ones are in if you do not have an estate plan, the tools used to create an estate plan and how a comprehensive plan can provide for you and your loved ones.

(The information above is meant to illustrate aspects only.  It is not meant to be construed as legal advice.  Prior to taking action, you should consult directly with an attorney for specific advice based upon full disclosure of your own legal situation.  The above information shall not be reproduced without specific authority obtained from the author of this article.  © 2010 Kristin D. Ar