What Is Planning For Non-Traditional Relationships?

1. What Is Planning For Non-Traditional Relationships? • Some domestic partners of the opposite sex do not get married • Some states permit domestic partners of the same sex to enter into civil unions • Such relationships are not recognized for federal tax purposes • Special planning is required to manage assets in the event of incapacity and to benefit each other during life and after death

2. When Is Use Of Planning For Non-Traditional Relationships Appropriate? • When, absent planning, a domestic partner would likely be excluded from inheriting from the other partner • When two unmarried individuals are in a committed relationship and wish to provide for each other in the event of incapacity or death • When the net worth of two domestic partners differs substantially • When there are children from a prior relationship • When domestic partners co-parent a child who is related to only one of the partners

3. What Are The Requirements? • For federal tax purposes, domestic partners of same sex who are otherwise unrelated are treated as unrelated • Domestic partners of opposite sex should examine state law on common-law marriage, may be treated as married • Current state of residence • States of prior residence

4. Tax Implications • Spouses receive some benefits that non-spouses do not • Transfer tax opportunities for unmarried couples • Income tax strategies

5. Tax Implications (cont’d) • Spouses receive some benefits that non-spouses do not • Gift and estate tax marital deductions • Split gifts • Generation-skipping transfer tax assignment of spouse to same generation as transferor

6. Tax Implications (cont’d) • Spouses receive some benefits that non-spouses do not • Joint tenancy • One-half estate tax inclusion for spouses (for others, generally full inclusion except to extent consideration furnished by survivor is shown) • Marital deduction if gift of joint interest between spouses • Creditors

7. Tax Implications (cont’d) • Spouses receive some benefits that non-spouses do not (cont’d) • Joint tenancy (cont’d) • Domestic partners should consider • Use of tenancy in common • Use of co-ownership agreements • Use of POD accounts • Affect of form of title

8. Tax Implications (cont’d) • Spouses receive some benefits that non-spouses do not (cont’d) • IRAs and qualified plans • Spousal rollovers • Marital deduction • Terminating relationships • Special gift and income tax rules for spouses on divorce • May be gift or income tax issues for domestic partners

9. Tax Implications (cont’d) • Transfer tax opportunities for unmarried couples • Use annual exclusion gifts and unified credit • Use credit shelter bypass trust • Avoid double taxation using trust for domestic partner which avoids surviving partner’s estate • Life insurance • Use of trust • Insurable interest issue

10. Tax Implications (cont’d) • Transfer tax opportunities for unmarried couples (cont’d) • Domestic partners are generally treated as unrelated for purposes of Sections 2701, 2702, 2703, and 2704 • Chapter 14 valuation freeze rules don’t apply • e.g., grantor retained income trust can still be used by domestic partners

11. Providing For Children • Child may be biological or adopted child of one or both domestic partners • Trusts for children of prior relationship • Domestic partners and adoption issues • Refer to child by name in estate planning documents • Guardianship issues • Nomination of other domestic partner as guardian, possibly in will

12. Income Tax Strategies for Transferring Wealth • Domestic partners are not treated as related • Certain related party income tax rules don’t apply to domestic partners • Disallowance of losses (Section 267) • Installment sale rules (Section 453) • Like-kind exchanges (Section 1031) • Denial of depreciation deduction or capital gain treatment for certain transfers with trusts for related persons

13. Issues In Community Property States • Some states grant community property rights to domestic partners • May wish to enter into cohabitation agreement setting forth how property will be owned and managed • Gift or income tax implications to community property status for domestic partners? • Federal law treats domestic partners as unmarried