Tax Issues Affecting Same-Sex Couples

By Tamara E. Kolz

Tax laws are not equally applied to opposite-sex married couples and same-sex couples. Although many same-sex couples handle their financial affairs in a perfectly appropriate manner based upon the nature of their relationship, such manner may risk unfavorable tax consequences. Planning for same-sex couples involves estate, gift, and income tax issues.

The creation of joint property may cause unintended results because of the property ownership presumptions under federal law. For example, where one partner places real estate in joint tenancy with a partner, a gift of 50 percent of the property is deemed to have been made to the partner. Placing a bank account or stock account in joint tenancy, however, does not constitute a gift since the original owner may still withdraw all of the money at any time. A gift will occur when the co-tenant actually withdraws any of the original owner’s money.

Despite the potential immediate taxable gift, the IRS considers jointly owned property to be wholly owned by and taxable in the estate of the first partner to die, unless the surviving partner can prove one-half ownership. Once the property passes to the surviving partner, the entire value of the property is included in that individual’s estate. The property, therefore, is taxed twice where there is no proof of contribution to identify the actual ownership interest of each partner. A same-sex couple should consider using “payable-on-death” accounts rather than joint accounts and “transfer-on-death deeds” rather than joint tenancy.

Same-sex couples should take care when titling and retitling assets as there may be significant federal gift tax issues subject to gift tax audits. Gifts or transfers in excess of $12,000 per year may result in gift tax or the usage of a portion of one’s $1,000,000 gift tax exemption. If there is a significant age difference between the partners, federal generation-skipping tax may also be incurred.

In addition, the fact that same-sex couples may not file joint income tax returns also presents tax challenges. For example, if one partner owns 100 percent of real estate and the other partner pays the real estate taxes, it is unlikely that a federal income tax deduction will be available to the non-owner partner. Whenever possible, same-sex couples should align property ownership and deduction-producing activities with the desired income tax consequences.

Tamara E. Kolz is a partner at the Boston office of Holland & Knight, LLP. She specializes in estate planning, prenuptial agreements, and advising same-sex and unmarried couples. Contact her at tamara.kolz@hklaw.com.

Copyright 2006

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