. . . with your domestic partner
by Grace S. Yung, CFP
It happens more often than you might think. Two people meet, they fall in love, they decide to share everything—and then, unfortunately, things begin to go south. While we hope for the best, sometimes things don’t always turn out the way we’d like. And if you have property or shared investments together, you may have to spend some time getting things untangled before moving on.
There are many couples who purchase things together such as a house or car, as well as making financial investments like saving for retirement. Today, it isn’t difficult to do so. However, in order to protect ourselves and each other, these assets need to be titled in such a way that they won’t be lost to probate or a partner’s blood relatives in case of an unfortunate passing.
Property Ownership and the Protection of Domestic Partners
Throughout the years, because same-sex couples have typically had to turn to alternative forms of financial planning in order to protect each other, various types of property ownership and “will substitutes” have been used so as not to leave one partner destitute upon the death of the other. Unfortunately, upon the breakup of a domestic partnership before death, the unraveling of these joint assets needs to take place.
Some of these property ownership forms include the following:
- Tenancy in Common (TIC)
With “tenancy in common” ownership, each individual owns a specific percentage interest in the property or asset—and each can do whatever they like with their portion of the asset. Ownership of tenancy in common property can be divided however the owners choose. Therefore, you and your partner can own equal shares, or one of you can own 80 percent while the other owns 20 percent, or perhaps something in between.
- Joint Tenancy with Right of Survivorship (JTWROS)
With this type of ownership, each partner owns the entire property or asset, along with the other. In other words, each of you owns undivided percentages of the asset. When one owner dies, the surviving owner (or owners) will automatically inherit the deceased owner’s share.
- Payable on Death (POD)
POD accounts are accounts in which an individual deposits funds at a financial institution, and the funds are payable on the death of the depositor to a named beneficiary. These types of accounts provide a means of transferring cash-equivalent assets to domestic partners outside of probate, while at the same time allowing the depositor to control the assets during his or her life. This control—plus the fact that the beneficiary designation is revocable—can make POD accounts much more attractive than making an outright gift of the assets or funds.
- Transfer on Death (TOD)
TOD accounts work in a similar manner as POD accounts, except that a TOD designation is typically limited to the registration of publicly traded securities and debt obligations. With TOD accounts, the registering owner has complete control of the securities or the security account until his or her death. At that time, the securities or account balance will be transferred to the designated payee. With a TOD account, the beneficiary designation is also revocable.
- Power of Attorney (POA)
While the above options can give a surviving partner access to funds or assets, having a “power of attorney” is actually written authorization to represent or to act on a living partner’s behalf in private or business affairs, as well as in various other matters. In some cases, this can even be done against the wishes of the other person. There can be both pros and cons to having your partner act as your power of attorney. Certainly in some healthcare situations, this can be beneficial—especially when family relations are strained between a partner and his or her blood relatives. In other instances, it may not be the wisest choice. Therefore, it is important to determine if this is indeed your best course of action.
What If It Isn’t Happily Ever After?
While partnerships can enjoy various protections for probate and death, what about protecting yourself if the relationship should end? For instance, what if you and your partner share a home that is in your name, and your partner puts money toward your dwelling every month?
There are some things you can do. First, if you and your partner are making shared purchases or investments, it’s a good idea to write up an agreement that reflects who owns what percentage of each asset. This is especially important if your contributions are not equal. Even if only one partner takes out a loan to finance a purchase, you can both be on the title as the legal owners—if that is what you
In some cases, couples may even draw up a “living together” agreement. Here, you can spell out how you will deal with issues such as property and assets that were owned separately before you moved in together, property and assets that are acquired during the relationship, and even how you will deal with expenses that are incurred on a regular basis such as the rent/mortgage, groceries, and utilities.
Some couples may opt to contribute monetarily in proportion to their incomes. This “income pooling” can work especially well for couples who have large discrepancies in their salaries. For instance, if one partner earns $150,000 per year and the other earns $50,000, the partner with less income would have a difficult time keeping up. With income pooling, the expenses could be divided on a percentage basis.
One thing to be careful of when pooling income, though, is that this could end up triggering gift taxation issues for the higher-earning partner. With that in mind—especially if there is a large difference in income amounts—it may be a good idea to talk with a tax or financial professional before moving forward with a specific plan of action regarding how you and your partner will officially share your income and expenses.
Keeping It All Fair in Love
Even for couples who do stay together happily ever after, it is important to keep things fair—regardless of which side of the “financial fence” you are on. For example, in many cases, one partner has accumulated a significant amount of equity in a home prior to the relationship. In order to protect your partner, adding his or her name on the deed can make sense.
However, if or when the home is sold in the future, it is also important that the partner who purchased the home protects his or her initial investment. With that in mind, earmarking a certain dollar amount or a percentage of the proceeds should be considered.
In any case, all scenarios are different, so the best plan is the one that both you and your partner are the most comfortable with, and the one that will work from a tax, legal, and financial standpoint in your specific situation.
Personal finance-related questions may be e-mailed to [email protected].
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly.