In today’s day and age many couples choose not to, but live together like they are, married. Unmarried couples do not have the same legal rights married couples have just because of their married status. Planning can reproduce the rights of married couples for these couples while avoiding unwanted income and estate taxes. This includes specific documents which everyone should have, such as durable powers of attorney, healthcare proxies, funeral arrangements and trusts, but also documents specific to unmarried couples, such as a Domestic Partnership Agreement.
When a couple share a home there are unwanted tax consequences. For example, when a homeowner adds a partner as a joint owner the partner’s right to the property may be a taxable gift or, if the partner buys half the house, the current owner may incur a capital gain tax on that purchase. Currently, this may not be an issue for the majority of domestic partners but with the proposed changes in the income and estate tax laws now before Congress you may find that a simple transfer of ownership may result in tens if not hundreds of thousands of dollars of taxes. Also, since domestic partners do not have the unlimited marital deduction for gifts between spouses, the inheritance of the interest in the property will be a taxable gift in the decedent’s estate.
The single biggest asset that couples need planning for is real estate, especially a primary residence. With the rising cost of housing, it makes sense that unmarried couples might pool their financial resources to acquire the home that they need. A home has both emotional and financial significance and, in today’s blended families, there is a desire to protect the lifetime interest of a partner without disinheriting children or others who are the intended remainder beneficiaries. There are three ways in which partners can formally share ownership of real estate, and the choice can have a big effect on how the property is treated after the death of one of the co-owners.
Tenants in common. Each partner owns a share as specified in the deed. At the first partner’s death, his or her share becomes part of his or her estate and is distributed along with the rest of the estate. If a portion of the estate will go to, say, family members, then the surviving partner will have to come to some agreement with them as to the disposition of the home because they will have a partial ownership in the property. (Note that when two or more owners are listed on a deed, the assumption is that they are tenants in common unless the deed specifies otherwise.)
Example: A and B own their home equally as tenants in common, A dies and in A’s will all property goes to A’s two children. B now owns a 50% undivided interest in the home and each of A’s children owns a 25% undivided interest in the home. Each is responsible for their share of the costs of the home and each has a right to occupy the home.
Joint tenancy with rights of survivorship. A Joint Tenancy is created when the deed specifically describes the owners as joint tenants. At the death of one of the joint owners, ownership of the entire interest of the deceased owner automatically goes to the surviving owner(s). This is often a preferable arrangement if the couple’s intent is for the surviving partner to have complete ownership of the home since this transfer is automatic by operation of law and not dependent upon a devise under a will.
Example: A and B own their home as joint tenants. At A’s death B receives A’s interest in the property, so having 100% of the ownership. At B’s death the entire interest in the home goes to whoever B devises the property under B’s will, or if there is no will to B’s heirs at law.
Ownership in Trust. Since neither tenancy in common nor joint tenancy addresses giving the surviving partner full use and ownership of the home, but ultimately passing the property to other family members such as children, then the real estate should be held in the name of a trust which spells out the terms of the ownership both during the owners’ lifetimes and after their deaths.
Ownership of real estate is only one aspect of planning for unmarried couples. Retirement account, life insurance, investment accounts and digital assets also pose a challenge. With the correct planning and a little foresight, many of the complications of recreating the rights of married couples can be eliminated.