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Transferring assets, both during life and at death, is a key part of financial planning. For legally married couples, there are a number of tax-advantaged ways that one may pass on wealth to a spouse.
Although unmarried domestic partners do not enjoy all of the same wealth transfer benefits as legally married spouses, there are some planning techniques that can allow for the transfer of property and other assets without incurring large gift- and estate-tax penalties or dealing with the time and expense of probate.
How an individual has their assets titled, and/or whether they have established a valid will (or will substitute) vehicles, will have a major impact on how and to whom their assets are ultimately transferred at death.
The Potential Pitfalls of Probate
In the state of Texas, if an individual dies without a valid will, their surviving spouse is always the first to inherit from that decedent’s estate. If an individual is not survived by a legally married spouse, then the state permits any surviving children to inherit his or her entire estate.
For those in the LGBT community—and especially those who have no children and are legally “single”—there could be some undesirable consequences should you wish for your partner to inherit your home or other assets.
Texas law states that if a decedent has no close heirs such as a spouse or children, then the individual’s parents are to inherit the entire estate. If the parents are already deceased, then the decedent’s siblings are automatically next in line.
This can be a particularly sticky situation for “unmarried” individuals who have minor children, as according to Texas statutes, all property passes to descendants, with those who are under age 18 being required to have a guardian for the funds.
The bottom line is that if you wish for an “unrelated” party to receive any or all of the assets from your estate, it is essential to have a will. Without proper planning to ensure that one’s assets and home go to the intended recipient, it could mean that the house you and your partner live in may end up becoming the property of your partner’s family.
Passing Property to the Intended Recipients
While all states have specific laws and rules for the passing of a decedent’s property, you can have much more in control if you have a plan in place long before it is needed.
When one passes away, there are two primary ways in which assets may be transferred—mainly by probate or a will substitute. There are variations within each of these methods.
Passing Assets via Probate
Probate is described as the process of proving who is entitled to receive a decedent’s assets if that individual did not, prior to his or her death, state through a valid will substitute who is to receive the assets.
There are two situations in which probate will come into play. These include:
• Last Will and Testament – Each state has control over who can create a valid will, as well as the minimum provisions that a will must have and the procedure for validly executing it. A person who does not leave a valid Last Will and Testament is said to have died “intestate.” In this case, the individual’s state will have a say in which assets go to whom.
• No Valid Will, or a Will that Does
Not Dispose of All Assets – If there is no will at all, or if there is a will that does not effectively dispose of all assets, then state statutes will likewise determine who is entitled to the decedent’s property, as well as in what proportions.
Passing Assets via a Will Substitute
Each state also determines which will substitute forms are recognized for the purposes of asset transfer at death. Will substitutes are meant to accomplish the same results as a will, but without the stringent execution requirements for a will, as well as without the administrative process that is required to carry out the provisions of a will.
Will substitutes typically transfer property through three methods,
• Right of Survivorship – Right of Survivorship essentially refers to the ownership of assets or property by two or more people in which the survivors will automatically receive the ownership portion of the decedent’s interest. There are two ways in which assets may be titled using Right of Survivorship. These include “Tenancy by the Entirety” and “Joint Tenancy with Right of Survivorship.”
With Tenancy by the Entirety, assets are held in equal proportions by legally married spouses. Conversely, Joint Tenancy with Right of Survivorship entails the holding of assets by an unlimited number of holders who do not need to be related.
It is important to note that if domestic partners deposit unequal amounts into an account or asset that is titled as Joint Tenants with Right of Survivorship, it could be deemed that the partner who deposited more has made a gift to his or her partner, and such a gift could be subject to gift tax. Even so, this tax could be a small price to pay in return for ensuring that partners will not be left without the home or other assets that were meant for them.
• Beneficiary Designation – Bene-ficiary designation involves having the owner of an asset state who is to receive the asset upon death; however, this form of will substitute is limited only to certain types of assets. These can include life insurance, certain annuities, some forms of funded trusts, and various pension plan benefits.
• Transfer on Death (T.O.D.) Accounts – A Transfer on Death account holds deposits of securities that are payable to a designated beneficiary upon the death of the depositor. These accounts provide a means of transferring assets to domestic partners outside of probate, while still allowing the depositor complete control over the funds during their life.
One of the many advantages of using one of the above types of property and asset transfer is that the designation of a recipient in a will substitute form will even prevail over a contrary designation in an individual’s will.
Titling Property for a Domestic Partner’s Benefit
When titling property and other assets between domestic partners, it may be most beneficial to utilize certain will substitute forms in order to most efficiently transfer such items at one partner’s passing.
Because Tenancy by the Entirety is restricted only to legally married spouses in most states, this form of will substitute is not an option for unmarried domestic partners. Therefore, the use of Joint Tenancy with Right of Survivorship and/or beneficiary designation, as well as T.O.D. accounts, are likely the best ways to go.
Not only do these forms of ownership avoid probate, but they also allow for equal ownership of the underlying property or assets by the partners and the automatic passing of a decedent’s portion to other joint owners at death.
Likewise, when using beneficiary designation, the owner of an asset is essentially performing the same basic task as in a will. In many cases, such as with the proceeds of a life insurance policy, stated assets will pass directly to the person or persons named as beneficiaries on that particular policy. It is important to note that although certain assets may bypass probate, they could still be included in the decedent’s overall estate for the purpose of estate taxation.
In any case, all planning for asset transfers between domestic partners should be done through a qualified legal professional who is well versed in these types of issues. To ensure the outcome that you desire, it is best to have both a lawyer and your financial professional working together to achieve the very best results.
Editor’s note: This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Grace S. Yung, CFP, is a certified financial planner practitioner with over 18 years of experience in helping domestic partners to plan their finances. She is a principal at Midtown Financial LLC in Houston.
See other MoneySmart columns:
Protecting the Things that Matter (July OutSmart)
How those in the LGBT community can use life insurance planning strategies
When ‘I Do’ Becomes ‘I Don’t Anymore’ (June 2012 OutSmart)
Ensuring both partners’ fair share with a Domestic Partnership Agreement
Retirement (May 2012 OutSmart)
Using annuities can provide lasting income for both domestic partners: When depending on a partner’s retirement income, annuities can offer the perfect solution
Financial and Tax Planning Issues for Domestic Partners (April 2012 OutSmart)
Is Uncle Sam getting a bigger chunk of your income and wealth?
The Real Cost of Long-term Care (February 2012 OutSmart)
How LGBT caregivers are paying the price
Gay Money Matters (part 1)(February 2010 OutSmart)
Domestic Partners: Estate and Tax Planning
Gay Money Matters (part 2)(February 2010 OutSmart)
Protecting your assets . . . even when the rules don’t