Unmarried Partners: Tax and More

Two adults who live together and plan to continue doing so may form a domestic partnership instead of getting married. The big question is how can they protect their joint estate? Click through for an introduction to the complex rules.

There are many reasons why two people stay together but don’t marry: family, profession, religion, a messy divorce history. Although marriage generally confers more legal and financial rights, some couples still opt for the partnership or civil union route.

Same-sex couples could not marry until 2015, when the Supreme Court ruled in Obergefell v. Hodges. Until then, same-sex couples were the prime candidates for domestic partnership status, which required specialized estate planning. Today, all those who prefer to remain unmarried must still make careful preparations to safeguard their estates.

Are you sure you are a domestic partner?

There are other elements beside cohabitation to qualify as a civil union. In fact, it is paramount that the mere state of living together is not alone sufficient. Moreover, state, county and municipal laws vary widely in establishing their own definitions. Does the pair intend to remain one another’s sole partner? Have they undertaken steps to be  financially responsible for one another? Have they drawn up a legal agreement spelling out their rights and obligations? Each state has its own rules for those contingencies. In some states, you must register the partnership formally, in others not. Relevant legal rights and benefits also vary from one state to another.

Inheritance is, in any case, always governed by state law. Therefore, if a domestic partnership has only been established under municipal or county laws, any provisions relating to inheritance probably will not hold up under state law. In those cases, the law of the partner’s home state will override local provisions and determine how assets are to be passed to heirs.

Suppose you faced a need to prove your domestic partnership status. What documentation should you have on hand to assert your rights? (A valid will ultimately ensures you will inherit assets bequeathed, but you may need to deal with other benefits too.) Together, these items constitute helpful supporting evidence:

• ID showing a shared address, like a driver’s license.
• Joint residential lease or mortgage.
• Joint bank or brokerage accounts in both names.
• Joint credit cards.
• Wills that reference one another as beneficiaries.
• Power of attorney.
• Health proxy.

Transferring your assets

A will or a trust is, of course, a solid foundation, but you can take additional actions to strengthen your estate plan. Pay special attention to any beneficiary designations, homes or minor children.

You can save your heirs headaches and expedite the probate process by setting up joint ownership of any physical real property, like homes and cars as well as financial accounts. In addition, it is simple to appoint your partner on all beneficiary designations, such as bank and brokerage accounts and retirement or life insurance policies, so they will immediately be able to take ownership after you die. (It is also easy to reverse or update the designation anytime while you are alive.)

For real property, like a house, you can put your partner’s name on the asset’s official title deed document. There are two ways to own common property: either as joint tenants or tenants in common. Joint tenants own equal stakes in the property, which passes automatically to the survivor. Tenants in common, however, do not obtain survivorship rights, and their share of the property goes to their estates.

Domestic partnership limitations

Civil partners enjoy fewer benefits than married spouses do. They may not be able to exert these types of rights:

• Government (including Social Security), retirement or insurance payouts.
• Marital deductions or exemptions for federal estate or gift taxes.
• Domestic partners, unlike married partners, cannot inherit unlimited sums free of federal tax.
• Child custody, unless they are the legal parent through birth or formal adoption.
• If a partner dies intestate, state default law gives the surviving spouse, and not the domestic partner, priority as executor.

Make sure you plug any holes to protect vulnerabilities. Remember that a partner unlisted on a home title deed might find themselves homeless!

This is just a summary of a wide range of laws. If you’re in a non-marriage partnership, work with an attorney to identify gaps in your plan and prepare necessary documents to address them.

©2023