Estate of the Union : Unmarried Couple Need to Protect Considerable Assets

Investors Steve Schullo and Dan Robertson have let the stock market grow their savingsinto retirement shape.

But now the Los Angeles couple need to make sure their nest egg doesn’t crack. They need a portfolio overhaul to protect themselves against a major market downturn. And they need estate planning to see that their wealth will go to the other when one of them dies.

Estate-planning issues are particularly important for unmarried pairs. If it is not done properly, it costs time and money for the surviving partner, said Steve Kelton, a registered investment advisor in West Los Angeles who specializes in planning issues for unmarried couples.

Schullo, 49, and Robertson, 55, who have been together 21 years, have made a mistake common to many investors: They have focused on creating retirement wealth but not on the tough issues involved in estate planning.

“Get your estate-planning house in order first,” Kelton said. “If that foundation is not solid, it doesn’t matter how much you make on the Dow because it will be out of your control and in the hands of the probate courts and the government just when you need it.”

Schullo and Robertson have taken a three-year ride on the stock market without the help of advisors or planners, but now it’s time to make sure they won’t be excessively hurt if the market comes crashing down.

The pair began investing in a few mutual funds when the Dow Jones industrial average was around 3,600. In 1993, they took all their funds from other investments--more than $285,000--and put the money on Wall Street. As the Dow has climbed to record highs, topping 6,500 recently, so has the value of their investments.

The couple now have $460,000 in 24 mutual funds, some of which have earned average annual returns of more than 40%. In the last two years their portfolio has earned about $100,000, and they have invested about $25,000 each of the last three years.

“It started out simple with a few funds and it just snowballed. It’s been a fun hobby,” said Robertson, who added that the nest egg wasn’t created overnight. When the couple met in Big Bear in the mid-1970s, they had nothing. But regular saving, along with an inheritance of $20,000 and frugal living, helped them amass their wealth. They also have not had the expenses associated with children.

Still, to get where they are, they’ve invested in some very aggressive stock funds, and those may now be especially vulnerable in the event of a market pullback.

“We are concerned about the market,” Schullo said. “It’s so nice when it keeps going up, but summer was a wake-up call.” The worth of their investments temporarily dropped $50,000 when stocks took a brief but scary dip in July.

Kelton said the pair face two challenges if, as they wish, they want to retire in eight years on $80,000 a year.

First, they need to make the estate preparations.

Second, they need to safeguard their portfolio against any turbulence in the stock market and to continue to save and invest aggressively in the short term.

“Gay people have some extra work to do when it comes to saving for retirement,” Kelton said. “Many won’t have the financial or emotional support system in their old age that comes from children or grandchildren.”

But, Kelton said, Schullo and Robertson are already in good financial shape for retirement since they’ve invested their savings aggressively and put aside money regularly.

Here’s where they are now:

Schullo teaches third and fourth grade, and Robertson is a job-training director. Both hold PhDs. Together they make $130,000 annually.

Besides the $460,000 in investments, they own a condominium in Palm Springs worth $85,000 that they rent out during part of the year for $6,000. They also inherited 60 acres in Wisconsin worth $18,000.

They live in a three-bedroom home in the Los Angeles area worth $325,000. They still owe $97,000 on the house at a 6.01% interest rate, meaning they have $228,000 in home equity, which will help them meet their retirement goals. Their monthly payment is $861.

The couple’s take-home pay is $5,500 a month, and they have about $3,200 in monthly expenses (including their mortgage). They are carrying $2,500 in credit card debt at 13.9%. They keep no cash reserves, believing that even a few thousand dollars is better put to use in the stock market.

The couple currently put aside nearly $1,600 a month from their salaries into their individual retirement account and 403(b) retirement funds. They also invest the $6,000 from the condo rent, bringing the total amount saved for retirement each year to about $25,000.

With wealth like this, it’s vital that Schullo and Robertson get their estate in order, said Kelton.

Estate planning is often poorly understood by most unmarried couples, who can lose big time if they don’t make the right moves, Kelton said. Without the government-provided benefits of marriage, neither partner has an automatic right to inherit the retirement funds, nor the ability to speak for the other in a medical crisis.

This is a common problem in California, where there are more than half a million unmarried couples, about 7% of them same-sex couples, according to the U.S. Census Bureau. The ratio of unmarried couples to married couples in California is 1 to 11, nearly twice as high as the rest of the nation.

For those unable or unwilling to officially wed, the first thing to do is obtain some partnership protection documents such as living wills, living trusts, joint tenancy agreements and powers of attorney for health care and financial matters.

Schullo and Robertson have already done the right thing by naming each other as a beneficiary of the other’s IRA and employer pension plan. If it were a married couple with such assets, the plan’s proceeds would automatically go to the surviving spouse, even if he or she had not been designated. But that’s not how it works for unmarried couples; the money automatically goes to next of kin.

They also have a living will, which designates each as the person who has control over medical decisions should the other not be able to make such decisions. The living will can discourage a hospital’s limiting access to a patient on grounds that he or she is not a family member, Kelton said.

Schullo and Robertson hold all their assets in joint tenancy, which means they jointly own the home and condo and all other assets. Both names are on their checking accounts.

One of the most important protections for an unmarried couple to have is a revocable living trust, which holds and transfers certain assets to a partner. This will make it much more difficult to challenge the living will and will help the surviving partner bypass probate court.

Schullo and Robertson have set up such a trust. The only problem? They haven’t put all their real estate assets or mutual funds into the trust.

“The trust isn’t worth the paper it’s written on if the assets aren’t inside it,” Kelton said.

All the couple’s assets, including real estate and any investments, should be in the trust. This is important, Kelton said, because it means the assets will be distributed the way the couple want. It also helps them avoid probate, which can be a costly, time-consuming process. The more money in an estate, the more in fees a lawyer can charge to take it through probate.

They will not be able to avoid taxes, however. Estate taxes are assessed on any assets above $600,000 per person. This is also true for married couples.

But life insurance can help with the inheritance-tax burden, Kelton said.

Although the pair already have a $50,000 policy on Robertson’s life and a $100,000 policy on Schullo’s, they could benefit from additional insurance to cover both estate costs and taxes down the road, assuming their portfolio continues to grow. As for health insurance, both have coverage through their jobs.

For a married couple, tax laws allow a spouse to leave as much as he or she wants in death without the beneficiary’s having to pay gift taxes. For gifts from anyone else to anyone else in all other situations, the limit is $10,000 a year. So Schullo and Robertson can offset the effects of higher estate taxes with the additional insurance.

It’s important for such couples to explain to at least one family member what they’ve drawn up, so there’s not complete surprise regarding the distribution of the estate. That’s no problem for Schullo and Robertson, who have already discussed their plans with their families.

“We have the longest relationship of anyone in our families, even our parents,” said Schullo. “We’re really the parents now.”

After strengthening their legal and tax foundation, the couple will want to protect their investments if the market’s seemingly unstoppable rise suddenly falters. How, they wonder, do they keep their nest egg safe from any market corrections in the future?

“Steve and Dan are right to be concerned, given their [aggressive] portfolio,” Kelton said. “They are way out on a limb here. They are taking more risk than they need for their goals. They can pull back on the limb and accomplish their objectives.”

The couple’s portfolio in employer-sponsored pension funds is too heavily weighted in U.S. large-company stocks--about 85%, in fact, with the remaining 15% in U.S. small companies. Of their non-pension investments, about 55% is in large-company stocks and 45% in small companies.

That should change, said Kelton. They can remain aggressive but hedge their bets better with 53% in U.S. large-company stock funds, 24% in international growth funds, 19% in U.S. small-company funds and 4% in high-yield bond funds, such as AIM High Yield (current yield of 9.80%, five-year average annual return of 12.9%) and IDS Extra Income (five-year average annual return of 14.4% and current yield of 13.2%).

Though their portfolio may still decline if the market plummets, they will be in a better position if the market continues to perform well long-term. Given that Schullo and Robertson are comfortable with risk and say they would be willing to ride out even a 15% to 30% market correction, Kelton is leaving their portfolio fairly aggressive. For risk-averse investors, he would recommend a higher percentage of bonds.

Kelton recommends several international funds for the pair, such as Putnam Europe Growth (five-year average annual return: 15.7%) and Templeton Foreign (12.8%).

Still, he says, the couple have made some very smart moves with the funds they’ve chosen, including Kaufmann (five-year average annual return: 22.6%) and PBHG Growth (30.9%), both small-company funds.

They should continue monitoring their portfolio of 24 funds, which is not too many for this couple, as they are actively involved in their investing strategies, Kelton said. As some of their funds start to perform poorly, those should be sold and the money put into international and bond funds.

Getting a more diversified portfolio will help them prepare for retirement in eight years, said Kelton. That would be on $80,000 a year, considering a 4% inflation rate and no Social Security. With life expectancies of 85, they’ll need at least $1 million, aside from their real estate, at the time of retirement. They also must continue their current savings habits and see that their portfolio is diversified in a way appropriate for their stage of life.

“At some point you will want to move to less aggressive growth and into asset preservation,” said Kelton. That should be done within the next five years, he said. A higher percentage of funds in fixed investments such as bonds, fixed-rate annuities and longer-term certificates of deposit would help them accomplish these goals.

Once that’s done, Schullo and Robertson should be able to move into retirement with ease. A healthy nest egg and the comfort of knowing their estate is well taken care of should enable them to enjoy their retirement years.

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This Week’s Make-Over

Investors: Dan Robertson and Steve Schullo

Ages: 55 and 49

Occupations: Training director and teacher

Combined annual income: $130,000

Primary investment goals: Safeguard their $460,000 mutual fund portfolio from stock market downturns. Retire in eight years. Complete estate planning needed as an unmarried couple.

Current Portfolio

The couple own 24 mutual funds, among them:

Fidelity Mid-Cap Stock

Fidelity Equity Income II

Fidelity New Millennium

Invesco Funds Technology

Kaufmann

PBHG Growth

Bond Funds: None

Cash: None

Recommendations

Mutual fund investments: Portfolio is much too risky. Restructure so that 24% is in international equities, 53% in large U.S. companies, 19% in small U.S. companies and 4% in junk bonds.

Retirement: If they continue current investing and saving practices, the couple should be able to retire in eight years with an income of $80,000 a year. Their investments should be more diversified, however.

Estate planning: As an unmarried couple, they need to be especially aggressive in estate planning. They did a smart thing in setting up a revocable living trust, but they need to put their real estate and investment assets into it. That should be done immediately, or one of them could face a big tax bill should the other die unexpectedly.

Recommended Portfolio

Stock funds:

International:

Putnam Europe Growth, (800) 225-2465

Templeton Foreign, (800) 632-2180

Large U.S. companies:

Invesco Funds Technology, (800) 241-5477

Fidelity New Millennium, (800) 544-8888

Small U.S. companies:

Kaufmann, (212) 922-0123

PBHG Growth Fund, (800) 433-0051

Bond funds:

AIM High Yield, (800) 347-1919

Cash reserve: Have three months’ expenses in cash reserve.

Meet The Planner

Steve Kelton is a registered investment advisor in West Los Angeles who specializes in planning for unmarried couples. He is a graduate of Emerson College in Boston. He is an investment advisor agent of American Express Financial Advisors, and he also advises small businesses.