Unmarried couples must take extra steps to reduce estate tax liability

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Unlike married couples, who can take advantage of the marital deduction, unmarried partners can’t transfer unlimited amounts to each other tax-free. To reduce their estate tax bills, they must take some additional steps.

One option is to make lifetime gifts using the $14,000 per year per recipient annual gift tax exclusion. If you start making regular annual gifts early enough, you can transfer a significant amount of wealth tax-free.

Another technique — which is available only to unrelated persons — is the grantor retained income trust (GRIT): You transfer some or all of your assets to an irrevocable trust, reserving the right to receive the trust’s income during its term. At the end of the term, the assets are transferred to your partner. If you die before the end of the trust term, however, the assets will be included in your estate. That is, they’ll revert to you.

When you contribute assets to a GRIT, you make a taxable gift to your partner. But the amount of the gift for federal tax purposes is deeply discounted by subtracting the actuarial value of your reserved income and reversionary interests from the value of the assets.

If you and your life partner are affluent enough to make gift and estate taxes an issue, you can enjoy significant tax savings with a little extra planning. Contact us with any questions