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Tax and Estate Planning Considerations for the Unmarried Couple Monday, October 8, 2018

The State of California does not have “common law marriage” statutes, and federal law does not extend spousal rights or tax incentives to unmarried couples, as it does to their legally married counterparts. Because unmarried couples do not have the benefit of the federal unlimited marital deduction and other tax advantages, in addition to estate planning, such as Wills and Trusts, unmarried couples may wish to consider gifting strategies aimed to limit the amount of estate tax that may be due at the death of a partner. Such strategies can include the traditional lifetime gifting options, as well as setting up limited liability companies to minimize tax liability on transfer of assets to the other partner.

Limited Liability Companies (“LLCs”) Unmarried couples who plan to own real property together for investment purposes may form an LLC and title investment property they purchase together in the name of the LLC, while each partner takes a membership interest in the LLC. In this case, the terms of the LLC’s Operating Agreement will govern how the property will be managed, invested, and distributed, and will provide additional security to both partners in the event that one partner dies, or the couple separates. An LLC is a pass-through entity and provides beneficial tax treatment, while at the same time a two-member LLC adds the insulation from personal liability that might arise from such ownership.

Cohabitation Agreements are Essential for Couples who Don’t Plan to Marry: What Happens Financially on Separation or Death

Even if unmarried couples prudently set up wills, trusts, and other estate planning documents to ensure that their property is distributed according to their wishes, family conflicts may still arise to derail those carefully laid plans. Family members who refuse to accept an unmarried couples’ relationship may challenge their estate plans, alleging fraud, duress, undue influence or a lack of capacity.  It is often advisable for unmarried couples to plan ahead for these family conflicts by executing cohabitation agreements, including robust “no contest” clauses in their wills and trusts, documenting their capacity via video or doctor’s letters of capacity, and confirming their intent as expressed in their Wills/Trusts by way of a Certificate of Independent Review. If a couple anticipates family conflict, they should take advantage of additional tools to ensure their intent is clarified beyond a shadow of a doubt.

  • Cohabitation Agreements. Cohabitation agreements, which are similar to prenuptial agreements, may help resolve factual disputes by clarifying the unmarried partners’ intentions regarding distribution of their property upon the couple’s separation. This document generally details the nature and value of the couple’s property, how the property will be divided in the event of separation, how debts and liabilities would be divided, how expenses will be paid, and by whom, whether any support obligations will arise at the termination of the relationship, and how property will be distributed at death.
  • Prenuptial and Postnuptial Agreements. A cohabitation agreement can be followed by a Prenuptial Agreement (PMA) in the event the couple intends to eventually marry. A PMA is a very technical document entered into before marriage in order to establish each party’s property rights and support obligations in the event of divorce. And, couples who are already married and who did not enter into a prenuptial agreement, may still “determine their own fate” at divorce by entering into a Postnuptial Agreement to accomplish the same results.

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