David Helverson, Vice President Investment Officer, who holds the Accredited Domestic Partnership Advisor Designation, with Wells Fargo Advisors, LLC in Chicago, seeks to address the unique financial challenges faced by domestic partners. This is the ninth article in a continuing series.
In past articles, we’ve discussed the importance of Domestic Partnership Agreements (or DPAs) for unmarried couples, for clarifyingamong other considerationsownership and division of assets, responsibility for liabilities, and respective contributions of income to household expenses. However, even if the DPA allows or calls for joint ownership of property, this form of ownership and wealth transfer is often misunderstood and fraught with unforeseen consequences.
Joint tenancy with rights of survivorship is a very popular form of ownership. Many people, married and unmarried, choose to register bank accounts, investment accounts, real estate and other assets in this form, as it is considered nonprobate property. In other words, if one joint tenant dies, the property held in this form passes to the surviving tenant(s) directly and does not pass through the deceased’s probate estate. This could save on time, expenses and administration, and may be helpful and efficient in allowing the survivor(s) control of and access to assets that could be restricted or encumbered in processing the estate. However, a portion or even all of the joint property will be included in the deceased’s taxable estate, and this is where some unexpected problems can arise.
One of the financial advantages of marriage is the ability to transfer an unlimited amount of wealth from one married individual to the spouse without incurring a federal transfer or gift tax. This benefit is known as the Federal Gift and Estate Tax Marital Deduction. The rules for those who are not married are quite different. Individuals are allowed to transfer $14,000 per year to another nonspouse individual without incurring gift tax, but for any value conveyed above this limit, the donor must file a federal gift-tax return. An individual is allowed a lifetime gift exclusion of $5,250,000 in 2013 for amounts that exceed the annual exemption; so while the gift-tax liability is not immediate, the donor must still file the gift return. Many couples may not realize that merging property from individual ownership to joint tenancy could result in an unreported gift.
Let’s take, for example, a couple in which one partner owns considerable assets or, as someone who is highly compensated, acquires substantial assets during the course of the relationship. If this property is held jointly but acquired through the financial contribution of one partner exclusively, the 50 percent share owned by the other partner is considered an undeclared gift. The total value of the property would therefore be considered part of the deceased’s taxable estate. While the lifetime exemption limit is high enough that most unmarried couples will not be subject to estate or gift taxes, failure to file proper returns could result in penalties, administrative expenses, confusion and delays.
There are also nontax disadvantages to joint property ownership too. If one partner has a legal judgment or liability, the judgment creditor can place a lien against joint property and effectively force a sale or restrict the use of the property. While the nonjudgment owner would receive his or her respective 50 percent value, a sale would by definition force the joint owner to surrender the property, possibly at a less-desirable or below-market price.
As with so many other issues that may have financial implications, when same-gender couples are considering how assets are to be legally registered and titled, it’s a good idea to have a thorough and frank conversation with your trusted and experienced financial professionals, attorneys and the rest of your team, to ensure you are making decisions that could help avoid unexpected consequences.
Wells Fargo Advisors is not a tax or legal advisor. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and separate nonbank affiliate of Wells Fargo & Company, No. 25 in the 2013 DiversityInc Top 50.