Estate and Life Planning for Non-Traditional Families

Estate and Life Planning for Non-Traditional Families

FEDERAL ESTATE TAXES

The Federal Government grants every individual an exemption from Federal Estate and Gift Taxes. This is known as the Federal Exemption and it applies to gifts made during one's lifetime as well as to bequests made by one's will at death. The Federal Exemption for tax year 2003 is $1,000,000. All amounts in excess of $1,000,000 are subject to Federal Estate Taxes that range from 37% to 49%. The Federal Government also gives married individuals the benefit of an Unlimited Marital Deduction, which means that all lifetime gifts and inheritances between spouses are exempt from Federal Estate Taxes regardless of the amount of the gift or inheritance. However, this deduction is not available for bequests or gifts made between Life Partners.

NEW JERSEY INHERITANCE TAXES

New Jersey has an Inheritance Tax that applies to all property, real and personal, left to one's heirs at death. While there is no monetary exemption from New Jersey Inheritance Taxes, New Jersey does exempt all transfers made by an individual to his or her spouse, children, parents, or grandchildren. These individuals are known as Class A Beneficiaries. Life Partners are considered non-relatives and are Class D beneficiaries. A transfer to a Life Partner would be subject to an Inheritance Tax at the rate of 15% of the value of the property for the first $700,000 of assets transferred and at the rate of 16% for all assets in excess of $700,000.

FEDERAL GIFT TAXES

Federal Gift Taxes creates a serious burden for gifts between Life Partners. As noted above, married couples can transfer an unlimited amount of assets back and forth between each other without triggering any gift tax consequences. In addition, everyone is permitted to gift up to $11,000 per person per year without tax. This is known as the 'Annual Gift Exclusion' and there is no limit on the number of gifts made each year.

Unfortunately, the Marital Deduction does not apply to gifts between Life Partners. Thus, if living expenses are not split equally then one Life Partner will likely be deemed to have made a gift to the other and if the gift is in excess of the $11,000 then gift taxes are due by the donor-partner.

Gift Giving issues also becomes a concern in home ownership between Life Partners. If one Life Partner owns a home and the other Life Partner wishes to buy an interest in his or her partner's property, then the partner-owner is treated as having made a sale to the other partner. Any gain as a result of the sale must be reported and the income tax must be paid on that amount. If on the other hand, an owner decides to add his or her partner's name to the deed without requiring payment, this constitutes a 'gift' equal to value of the property interest transferred and such gift must be reported by the partner-owner for gift tax purposes in the next tax filing year.

Further, the passing via death of jointly owned assets to a Life Partner can also result in serious tax problems. The IRS treats the deceased Life Partner as owning 100% of the assets in the estate. At the second Life Partner's death, the IRS also includes 100% of the value of the property in the decedent's estate. As a result, the same property will be taxed twice.

It is very important for Life Partners to detail the amounts that each party has contributed to the purchase and upkeep of the property. This will allow each party to establish a tax basis at the time of death rather than having the joint ownership implied by virtue of that holding title as joint ownership with rights of survivorship.

ESTATE PLANNING

The New Jersey Intestacy Law does not provide for non-spousal relationships. Without a Will, assets will pass, at death, to spouses and blood relatives (i.e. children, parents, grandchildren, siblings, nieces and nephews, etc.). Thus, if a person does not have a will, his or her Life Partner would receive nothing under the Intestacy laws.

Further, a Life Partner is not granted an automatic right to act as a personal representative such as a Trustee, Executor or Guardian. Again, without a Will specifically designating the surviving Life Partner as a personal representative, the surviving Life Partner may not only not be able to handle their deceased partners estate but also they may not be able to participate in the funeral or even be notified as to where the funeral is being held.

LONG TERM CARE PLANNING

Long Term Care planning involves both financial and life planning. It assures protection of assets and allows you to take an active role in the type of care that you or loved one may need in the future. Such planning also relieves family members of the economic and personal burdens of caring both you and your assets. New Jersey Laws do not currently take into consideration the relationship between non-married individuals.

A Power of Attorney in these relationships has a great significance. Generally, one's Life Partner would be the preferred decision maker in time of crisis, but this choice must be documented and planned in advance. Without a Power of Attorney, a family member who may not have supported the alternative life style might make these decisions.

Further, a Health Care Directive should be executed which would designate one's Life Partner to make medical decisions on behalf of the other, including the termination of life support. If there is no written Health Care Directive, hospitals and physicians might turn to the biological family to make these important life decisions, thereby completely closing out the Life Partner. Further, Life Partners should consider including in the Power of Attorney and Health Care Directive, a priority of visitation rights which would allow a Life Partner priority to visit them before anybody else, including biological family members.

Finally, the purchase of a pre-paid funeral should also be considered to avoid a burial decision being made by default by the biological family rather than the Life Partner.

PROPERTY OWNERSHIP

Under New Jersey law, property, whether real or personal, which is owned between spouses is 'presumed' to be owned as joint tenants with rights of survivorship. At the death of the first spouse, the second spouse is automatically deemed to own 100% of the property regardless of what a will might state. Such presumption is not afforded to Life Partners. Life Partners who own property jointly are considered tenants in common with each partner owning 50% of the property. At death, a tenant in common interest will pass through a Life Partner's estate rather than to the surviving Life Partner. Thus, it is crucial that the ownership of property by Life Partners be specific and detailed in nature so that the future interests of the surviving Life Partner is protected.

TERMINATION OF LIFE RELATIONSHIPS

Generally, New Jersey only recognizes spousal relationships and thus, upon a break up of Life Partners, the divorce laws do not apply and the concepts of alimony and equitable distribution are not available to Life Partners. It is generally recommended that Life Partners consider entering into a co-habitation agreement, which addresses some of these issues if the parties decide to terminate their relationship.

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If you have any questions regarding these materials, please contact:

Joanne M. Sarubbi, Esq.
159 Millburn Avenue, Millburn, New Jersey 07041
973-218-0063
email at jms.law@verizon.net