Domestic Partners: Estate and Tax Planning
by Kimberly A. Shockley, MBA, CPA
While estate planning is important for any couple, partners in same-sex relationships need to dot more i’s and cross more t’s than heterosexual married couples do, in order to ensure that their wishes are respected after a death occurs. Despite the fact that your mother gushes over your dompart (domestic partner) when you bring him home for Thanksgiving, she may not feel the same way about him if you leave this life before she does. Even good people act strangely and unpredictably when confronted with death. Without the proper protections, your surviving partner could be ordered out of a house the two of you share, or a family member could dispose of your estate in a way you would not approve. Without taking the proper security measures, your family might not honor wishes they had agreed upon before your death.
Despite having a domestic partner agreement and/or having honored your partnership with a ceremonial marriage, LGBT unions lack the protections and benefits of a legal same-sex marriage, especially when it comes to estate planning. Your best approach to LGBT estate planning is to prepare a domestic partner agreement and supplement it with other legal documents and instruments.
One estate-planning instrument is a JTWROS, an acronym meaning “property held in joint tenancy with rights of survivorship.” Forbes’ Investopedia.com website describes this as “[a] type of brokerage account which is owned by at least two people, where all tenants have an equal right to the account’s assets and are afforded survivorship rights in the event of the death of another account holder.” A JTWROS can apply to any property with a title, such as real estate, vehicles, bank accounts, stocks and bonds, and mutual funds.
In general, joint tenants with right of survivorship share equal ownership of property. Most states recognize the right of survivorship, but many do so only if it is explicitly stated in the title or deed. Both signatures are required to sell the property as a whole. If your relationship ends, or if one of you becomes incapacitated without having delegated power of attorney to the other, you could face difficulty selling the property. If you deed half the property to your partner and your relationship ends, you may have no recourse for transferring the deed back to your name without the consent of your partner. However, you can always sell your interest without your partner’s consent or file for partition to make it possible to identify your piece for sale or to force the sale of the entire parcel.
It may be difficult for a creditor to collect a claim against jointly held property, since you don’t actually own a separate share; rather, you and your partner own equal rights to the entire property. Laws regarding the right of creditors to make claims against jointly held property vary from state to state.
Put Your Joint Ownership Agreement in Writing
If you purchase property as joint tenants with right of survivorship, you should document in writing how much you’re each contributing. In the eyes of the law, you are each equal owners of the property. If you die, your partner becomes the sole owner. If your relationship ends, you are each viewed as equal owners, and your partner could possibly get half the value. Unless you have a side agreement explicitly stating your individual contributions, there is no way for a court to know if you actually paid for 75 percent of the property while your partner only paid for 25 percent. At death, the portion of the property included in your estate is based on your individual contribution.
Strengths of a JTWROS
A JTWROS is easy to set up. You simply list both names on the title or deed and explicitly state that ownership is by JTWROS. Also, be sure to list both names on your homeowners’ insurance policy to ensure that you are both covered.
An important feature of a JTWROS is that it avoids probate. At your death, the property automatically passes to your joint owner, rather than to your next of kin. By transferring ownership in this way, it is hard to contest, as it could be if you devised the property in a will. In fact, the right of survivorship listed on a deed is strong enough that most written contracts, including domestic partner agreements or wills, cannot contradict this type of ownership.
Tradeoffs of a JTWROS
It does not allow for predisposition of the property
Once ownership passes to your partner at your death, he or she alone controls any further disposition. Any contrary wishes you expressed prior to your death will hold no legal weight.
It may be subject to estate tax
Although such jointly owned property avoids probate, it does not avoid estate tax. The entire value of property that you, as an unmarried couple, hold jointly is included in the gross taxable estate of the first to die, unless records can prove the surviving partner contributed all or a portion of the cost of the property, thereby excluding that piece. In other words, your estate must prove that your partner’s share of the property wasn’t a gift. You should keep accurate records of your payments on jointly held property to verify your share of the ownership.
It may be subject to gift tax
Any property you transfer to your partner for less than its fair value may be considered a gift subject to federal gift tax (and perhaps state gift tax as well) on any amount over the annual gift tax exclusion amount ($13,000 for 2009), and in excess of the $1 million lifetime gift tax applicable exclusion amount. Although you may think of a gift as something you give, expecting nothing in return, the IRS considers gifts to include uneven exchanges of property.
Example: In 2009, Tim and John purchase a $300,000 house together as equal owners. Tim contributes $200,000, while John pays $100,000. The IRS will consider that Tim gave John a $50,000 gift (the difference between half the purchase price of $150,000 and the $100,000 John actually paid). The IRS may tax Tim on $37,000 (the $50,000 gift less the $13,000 annual gift tax exclusion) unless Tim has a portion of his $1 million gift tax exemption available to offset the gift.
Even if you simply add your partner’s name to a deed, if there is not an exchange of fair value, the IRS may consider this a gift subject to tax.
Example: In 2009, Tim owns a house worth $300,000 and adds his unmarried partner John’s name to the deed with no fair exchange of value. The IRS considers this a $150,000 gift. Tim is taxed on $137,000 ($150,000 less the $13,000 exclusion) unless Tim has a portion of his gift tax applicable exclusion amount available to offset the gift.
Keep accurate records to prove how much of the property you own.
Joint bank accounts can be frozen at death
The bank, estate executor, or family of your partner can freeze a joint bank account if there is any question about who actually owned the account. Even if your ? name is listed on the account, it’s possible that it’s only there for the convenience of cosigning checks and you haven’t actually contributed to the funds. A freeze can be put on the funds until this is sorted out. Even if you actually contributed half of the money, you could be left without access to the account until this matter is settled.
Joint ownership of a car exposes you to liability
It’s best to avoid owning a car together. Joint ownership exposes you both to liability if one of you is involved in an accident. If a judgment is awarded against one of you, it could jeopardize your other shared assets, such as your house or savings account. Shared ownership of a vehicle by two unrelated people may also make it harder to obtain auto insurance or may require you to purchase it at higher rates. Even if only one of you owns the car, if a judgment is entered, your shared assets may be jeopardized.
How to prepare a tax return with a JTWROS brokerage account
Tax preparers can butcher a couple’s individual federal tax returns if they do not understand how to claim the interest, capital gains/losses, dividends, qualified dividends, etc., on the two federal tax returns for partners having a brokerage account held as joint tenancy with right of survivorship. Despite the fact that several states recognize gay marriages, the federal government does not; thus, each partner in a same-sex union must file as “single,” assuming no children are involved, on each partner’s Form 1040.
The JTWROS brokerage account can be split between the two partners, but it must be done properly. It helps if the same person prepares both of the federal tax returns.
Texas doesn’t have a personal state income tax, nor does the Lone Star State recognize same-sex marriages or unions. We LGBT Texans who live together don’t have to worry about filing as single for state purposes and then filing married-filing-jointly for federal purposes—yet.
Material from Forefield Inc.’s Property Ownership Issues That Concern Unmarried Couples has been used with permission.
Kimberly A. Shockley, MBA, CPA spent 10 years as an associate, senior, manager and senior manager in tax at PricewaterhouseCoopers, Deloitte, and Ernst & Young. She is the principal of Shockley Tax Advisory in Houston, offering services to individuals and small businesses. For more information visit shockleytax.com.
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