Cohabitation outside of marriage has become increasingly common.

For seniors, cohabitation often is intended as a way to enjoy the companionship of a partner without risking the loss of assets for children and grandchildren. However, in the attempt to save property, cohabitating couples often do not realize the risk of asset loss to their partner and beneficiaries.

First, when a cohabitating individual dies, there is no default legal protection for the surviving partner like there is for a surviving spouse. When a married individual dies, the surviving spouse has a property interest in the decedent’s estate, even if the decedent did not have a last will and testament. Although a spouse is not the primary beneficiary under Kentucky intestate laws, the spouse is at least listed in the order of succession. An unmarried partner is not, which means that without a last will and testament, property never will pass through probate to a partner.

Second, and much more concerning, is the loss of tax exemptions. Although at the federal level we currently have a federal estate tax that allows for the first $11.7 million per individual estate to be exempt, in Kentucky we have an inheritance tax with much lower exemption amounts.

Whereas an estate tax is a tax on the estate’s right to give property to beneficiaries, an inheritance tax is the tax on the beneficiary’s right to receive property.

Instead of simply allowing a blanket amount that can be given to anyone, such as the federal estate tax, the Kentucky inheritance tax is based on the classification of the relationship between the decedent and the beneficiary.

For those who have the closest familial relationships, such as spouses and children, there is no inheritance tax. These inheritance-tax free beneficiaries are considered Class A beneficiaries. Class B beneficiaries have slightly more distanced familial relationships, and Class C beneficiaries include everyone not listed in Class A or Class B.

Because a cohabitating partner is neither a spouse nor a close family member, the partner is considered a Class C beneficiary. Any inheritance is only exempt from inheritance taxes for the first $500, and the rest is taxed at a rate between 6 to 16 percent. A partner inheriting property may find that the ability to receive that inheritance comes at a high cost.

Third, cohabitation does not offer the robust protections under Medicaid rules that marriage does. The broad rule in Medicaid is that an individual must have less than $2,000 in resources to qualify for institutionalized Medicaid. However, this rule has many exceptions, which allow for the protection of assets.

Some of the best exceptions are those pertaining to Community Spouses. When an institutionalized individual has a spouse who still resides at home, public policy dictates the Community Spouse cannot be left destitute from care costs for the institutionalized spouse. Because of this policy, there are significant allowances for Community Spouses.

Community Spouse exemptions do not include provisions for unmarried partners. The allowances specifically are for spouses, often resulting in full protection of the couple’s property.

For single individuals, protection of property in a crisis case may allow crisis planners to save part of an individual’s property, but rarely all of it.

Cohabitating couples should carefully consider the purpose of cohabitation. If the intent is to protect assets, careful planning through other tools usually offer better protection without the costly risks. Like all estate planning, understanding the consequences of every option ensures the best plan for your own individual circumstances.

Cynthia T. Griffin is an elder law and estate planning attorney at Burnett Casey Griffin PLLC in Elizabethtown. She can be reached at cynthia@bcglawcenter.com.

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