Friday, 14 June 2024

Estate Planning: Tips for unmarried couples

Unmarried persons in a committed relationship often desire to provide for one another upon death and to allow each other control over financial and health care matters during periods of disability.

A discussion of unmarried couples must distinguish between two categories: persons who live

together (whether heterosexual or homosexual partners) and persons who are registered domestic partners (i.e., "RDPs").

Since 2005, under California law, RDPs have legal rights and responsibilities like married couples; but not so under federal law. Let's examine each category separately.

Unmarried persons who just live together – notwithstanding their confidential relationship – are "legal strangers" under the law. All property is each partner's separate property, even joint tenancy property.

Mutual contractual arrangements – such as cohabitation agreements and tenants in common agreements – govern each partner's rights and responsibilities to each other.

Reasonable and detrimental reliance by one partner on the other partner's promises, fair play under common law, often decide the outcome of any lawsuit for breach of contract.

Durable powers of attorney and health care directives must be in place to allow each partner control over the other partner's financial affairs and health care decisions during disability. Otherwise, avoidable legal battles (e.g., court conservatorships) over control may ensue between one partner's natural family and the other partner.

If real property is owned as tenants in common, a tenant's in common agreement is very advisable to

help manage their undivided property rights. Each partner may transfer their property rights into their own living trust. Joint tenancy may be used but it has significant drawbacks.

Next, RDPs, as of 2005, California RDPs have the same rights and Responsibilities to each together as married people. But the contrary remains true under federal law.

The Defense of Marriage Act ("DOMA") still treats California RDPs as legal strangers. The federal/state disparity has created some interesting challenges.

For example, although RDPs now have community property ("CP") rights just like married persons – with each RDP entitled to equal control over the CP assets – nonetheless, under DOMA, it appears that the creation of community property between RDPs would be treated as gifts as between legal strangers, and so subject to the Gift Tax.

Accordingly, IRS gift tax returns are required when such annual gifting exceeds the federal annual gift tax exclusion amount (i.e., $13,000 in 2009).

Moreover, RDPs do not get the "double step-up in basis" on CP assets when the first RDP dies, and so the surviving RDP may have to pay capital gains on appreciated assets sold shortly after the first RDP dies (whereas heterosexual married persons might avoid this due to the double step up in basis).

Also, unlike living trusts created by heterosexual married couples, living trusts created by RDP's must have taxpayer identification numbers and file federal annual income tax returns (i.e., IRS Form 1041's). Married couples, however, simply report trust income on their annual tax return(s) using their social security numbers.

The foregoing difficulty can be solved if each RDP creates his/her own living trust to hold title to each RDPs own property rights. If CP assets are involved, the other RDP must still be co-trustee to ensure that each RDP has joint control over the CP assets as required by California law.

Furthermore, RDPs who are joint tenants must keep meticulous records of their contributions towards purchasing joint tenancy property. Whereas a surviving married spouse is presumed to have contributed half of the purchase costs of a jointly held asset, federal law presumes that the deceased RDP paid everything.

Lastly, there are some planning opportunities available to RDPs which are unavailable to married persons. Specifically, as RDPs are not married the IRS will not make RDPs prove that sale transactions between themselves are at fair prices.

Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 1st St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235.

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