Two things in life are unavoidable: death and taxes. While you can’t do anything about death, you can engage in proper planning to mitigate your tax obligations. While there are mechanisms in place to protect a married couple, others are left wondering, “What happens if we live together as boyfriend/girlfriend and one of us dies?”
First, expect an estate tax of up to 60% to be due right away. As many of you know, actor Phillip Seymour Hoffman had exactly the same issue when he died. His estate was valued at 35 million dollars and was left to the mother of his children, to whom he was not legally married at the time. Right away, his girlfriend was slammed with over 15 million dollars in taxes. Had he done proper planning ahead of time (by creating a trust), he would have left all of his money to his girlfriend and kids.
In Mr. Hoffman’s case, his partner was at least somehow protected as he had a will in place. Thus, she ended up getting something. But for many others without even a will in place, the surviving partner does not end up so comfortable. The remaining property ends up going to the deceased’s parents, siblings and other distant relatives. And in New York, even having a religious ceremony does not make you a married couple. Thus, you cannot get any protection under law.
What is a common law marriage?
A common law relationship is when unmarried couple live together in a “marriage-like” relationship. This means that they share a home, publicly refer to themselves as spouses or partners, and share their bills and finances. However, not every state recognizes common law relationships. The states that currently recognize common law marriage are Colorado, District of Columbia, Iowa, Kansas, Montana, Rhode Island, South Carolina, Texas, and Utah. In addition, only Iowa and District of Columbia recognize common law marriages of the same sex.
In many of the mentioned states, the validation of common law marriages has four common requirements. First, the couple must live together for at least a year (the exact duration varies by state). Second, the couple must intend to get married. Third, the couple must refer to themselves as a married couple to their friends and family with proof by sharing last names, homes, bank accounts, and credit cards. Lastly, they must have the capacity to marry, meaning that they must be at least 18 years old (specifics vary by state), be of sound mind, and must not be married to someone else.
Should you co-sign a cohabitation agreement?
A common law couple can sign a cohabitation agreement at any time to register their domestic partnership. This agreement will allow them to share last names and financial arrangements, determine the division of property and debts if they were to split, and establish who will take responsibility for the children if they were to have any. Co-signing this agreement is a significant decision that requires legal assistance. If you co-sign loans and debts, then you will become responsible for repaying expenses that do not include just food, oil, and other necessities. Thus, both individuals in the common law relationship should consult with separate lawyers to discuss the agreement implications before signing it.
How does a common law relationship end?
A common law relationship does not end when the partners split up. In order to end the relationship, it has to go through the same process as getting a regular marriage divorce. The common law couple must legally file for divorce and be granted the divorce by court. When the common law couple separates, the property, debts, and assets are not divided equally as with a married couple. If only one of the common law spouse is the sole owner of a shared residence, then he or she can keep the property without splitting, and may freely sell or mortgage the property without consent. Thus, if you plan to buy a home or own other valuable property, consider signing a co-ownership agreement so that both of you will be named as purchasers and both of you will benefit from any increased home value.
What if my partner dies?
A common law relationship can also end if one partner dies. If a common law spouse dies or becomes disabled, the survival spouse must prove the marriage validity in order to inherit insurance benefits, social security benefits, and all other assets. However, if the partner dies without leaving a will or enough in their will, your spouse’s family may exclude you from medical decision-making or inheriting property. The surviving partner would not be able to certainly inherit anything unless they co-own the property or if there is a will. In addition, unlike married couples, an unmarried couple is not exempt from inheritance taxes on money and property if a partner dies. Therefore, it is imperative to write a will naming your partner as the beneficiary if you want your partner to inherit your property and retirement accounts, and limit the amount of taxes on your assets.
James Redmond’s $1million Will
James Redmond died at age 74 from prostate cancer in 2014. He left a will leaving his entire estate to his two daughters. On November 9th 2017, his girlfriend Carole Anne Taylor sued for $325,000 from his estate. She claimed that she lived with Redmond in a marriage-like relationship for seven years prior to his death. Taylor’s lawyer said that Redmond promised himself that he would provide for Taylor for her efforts in caring for him and contributing to the renovation of their home.
Despite evidence that they loved each other dearly, Redmond’s will had not been updated in over two decades. In addition, Redmond’s daughters claimed that Taylor was only one of his many girlfriends. William Richmond-Coggan, the lawyer representing the daughters, argued that before Redmond became ill, he had asked Taylor to move out of his home because he had plans to move to France with his daughter. All Taylor could do now was prove that she and Redmond continued to live together for at least two years prior to his death. If she was unable to prove it, then the court could have been led to believe that Redmond had spent those two years with another girlfriend. Taylor also had to prove that Redmond was actually supporting her needs during that time.
Since Redmond and Taylor were not married, and Taylor was not mentioned in the will, she did not have the right to automatically take his assets. Also, the only award that she could receive was for maintenance, which would be much less than how much she would receive if she were his spouse. If only Redmond had updated his will to include Taylor, then this situation would not have been as complicated.
Another form of co-ownership is a business partnership. However, business co-ownership is not exactly the same as a business partnership. While there could be an unlimited amount of co-owners, there can only be a limited amount of partners in a business. In business co-ownership, an individual shares ownership with another group or individual. The co-owners own a percentage of the asset and can manage and control their business entities. In the contract or agreement, co-owners are entitled to treatment of revenue and tax obligations, and certain rights such as the right to transfer their interests whenever they like without asking other co-owners for permission. When ending a co-ownership, co-owners can demand that the jointed property or business be divided equally, or based on the percentage they own.
On the other hand, in business partnership, partners come together and agree to contribute money, property, personal labor, or skill to the business in order to gain and share the profits. In a partnership agreement, the business may provide details on the goals of the company and the expectations of each partner. Partners cannot sell or transfer their shares and interests without seeking approval from all of the other partners. Partners can also act as mediators of business with their indirect power to bind the firm by their acts. There are many factors involved in order to be considered a partner, rather than just an investor. These factors include whether you contribute to the services of the business, whether you are liable for business debts or only your investments, whether you share the business profits, whether you are employed by the partnership, and the extent of your control and decision making in the business. If a partner spends money on the business and suffers a loss, he can ask ask for reimbursement. A partnership can end if the partner dies or retires. Rather than requesting for a percentage of the property, they can only ask for their share in the profit, which depends on the amount invested.
How can you prevent these inheritance issues
Marriage is one solution to preventing such complications. Marriage can save you from taxes and ensure that your spouse is taken care of. In addition, always update your trusts and wills after significant events such as birth, marriage, divorce, and the purchase of new property. This allows you to include everyone in your will and trust.
If marriage is not for you, but you want your significant other to be taken care of financially after your passing, finding a reputable estate planning attorney to draft your will and trust is a must. If you have more detailed questions, feel free to come into our office today.