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The Wall Street Journal.
Sep 18, 2005. p. 3
Family Finances: For Unmarried Partners, Planning Is Key
By Andrew Blackman
Marriage confers many financial advantages, from pension and health
benefits to exemption from the estate tax.
But although several states have passed laws granting some rights to
same-sex and unmarried couples, their extent is limited.
The laws in most states still generally regard gay and unmarried
straight couples more as business partners than domestic partners,
meaning that contract law applies, not family law. And along with the
defeat of gay-marriage proposals in several other states last year,
Gov. Arnold Schwarzenegger of California is expected to veto a bill
aimed at legalizing gay marriage in the state.
"Marriage equality really is an economic issue," says Jennifer Hatch,
managing partner of Christopher Street Financial, a New York firm
specializing in financial advice for same-sex couples. "People like to
make it into a symbolic thing, but it's really very practical."
Handling financial matters between unmarried partners, then, requires
good planning. Here are some key areas to focus on:
-- Estate planning. Estate laws tend to be geared toward "traditional"
families, and same-sex couples need to take steps to avoid leaving most
of their money either to a relative not of their choosing or to Uncle
Sam.
A relative can end up as the beneficiary because a gay partner legally
isn't considered next of kin. If there is no will or if the will is not
clear, then any assets will pass to a parent, sibling or other family
member, not the partner.
Then there's the "unlimited marital deduction." It's a powerful
estate-planning tool for married couples, allowing one spouse to pass
on as much money as he or she wants to the other -- free of estate tax.
Unmarried couples do not have this right, so they can get hit with a big
tax bill. Many experts advise taking out life-insurance policies on
each other to compensate.
-- Property ownership.
Things can get financially complicated when a gay couple jointly owns a
house or other major property.
Even making sure the partner inherits the house can be difficult if it
isn't titled correctly. The default status for jointly owned homes is
"Joint Tenants in Common," but that designation could see the house
passing to a family member instead of the partner.
"It's an inheritable asset that could pass to the next of kin," says
Derek Lenington, a fee-only financial adviser in Los Angeles. "It could
be disastrous for the surviving partner if they have to negotiate with
the next of kin, or even buy them out."
Ms. Hatch says that 70% of cases she comes across have this problem.
Titling the house "Joint Tenants With Rights of Survivorship" usually
ensures a smooth transition to the surviving partner. Such a move can,
however, create tax problems.
"If you're in the estate-tax range, you need to make sure your
documentation on who contributed to what is very good," says Ms. Hatch.
"If you own something 50/50, it'll be included 100% in the estate of
the person who died unless you can prove otherwise."
That means that the surviving partner will pay estate tax not only on
the other partner's share, but also on the portion he or she already
owns. The solution: Keep meticulous records of who made the down
payment, who paid the mortgage and so on.
-- Tax planning. The gift tax also is a factor for unmarried couples.
If your partner comes to live with you, for example, and you add him or
her to the deed, then you've just made a gift of half the value of the
house, and you'd need to report that for tax purposes.
The same goes for creating joint bank accounts, brokerage accounts or a
host of other financial arrangements. Since the two people are
considered legal "strangers," most transactions between them are seen
as gifts that must be reported if they amount to more than $11,000 in a
year.
Tax planning can also be more complicated because unmarried couples
have to file separately. While that can create opportunities to reduce
taxes by making sure the right person takes each deduction, it also can
be confusing for couples who think of their money as all belonging to
the same pot.
"Most couples will think, 'Who cares who pays the mortgage?"' says Jill
Hollander, a financial planner in Berkeley, Calif. "But the reality is
that the person who pays the mortgage should be taking the deduction."
-- Splitting up. What happens if things go wrong and unmarried couples
break up? The divorce laws do not apply, so there has to be some other
way of coming to an agreement. Problems can often arise, for example,
if one partner has contributed more income to the partnership while the
other has saved separately for retirement. A domestic-partnership
agreement -- a bit like a prenuptial -- is important in setting out who
gets what.
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WSJ: For Unmarried Partners, Planning Is Key
