Planning for Non-Traditional Couples

Non-traditional couples (NT) are defined as opposite sex couples that are not married and same sex couples (married or not). If you fall into either of these categories, you have advantages and (mostly) disadvantages as compared to traditional couples when dealing with tax and financial issues. We’ll highlight a few examples of each:

1. Federal tax code does not recognize NTcouples as a family and therefor does not allow assets to pass  tax-free to the surviving partner upon death of the other…estate taxes will apply.

2. Asset transfers from one partner to the other are subject to gift tax and lifetime gift exclusion rules.

3. Since partners are not related in the eyes of the tax code, one partner can sell assets to the other at a loss and use the loss for tax purposes (one of the few benefits you have over traditional couples).

4. Exclusion on Sale of Residence of $250,000 for an individual and $500,000 for a couple is restricted to just one exclusion ($250,000).

5. Passive Loss Limitation rules apply separately to each partner (one of the few bonuses for NT couples).

6. COBRA premium subsidy. If both partners are insured under a group policy at a company only one of the partners work at, the other partner is not a “qualified beneficiary” under the definition of the act and therefor not eligible.

7. Social Security. Don’t even ask.

8. Qualified Domestic Relations Order. If the NT couple split up and retirement plan benefits are included in the QDRO, an employer is under no obligation to follow the order since The Defense Of Marriage Act prohibits the recognition of same-sex marriage.

9. Property transfers between spouses/domestic partners. If a traditional marriage ends, any gains in value of property transferred between spouses to settle the divorce are not taxed. NT couples will pay tax on any gain over the cost basis of transferred property.

These are just a few of the financial and tax issues a NT couple faces which traditional couples don’t. Luckily there is a way to solve many of these problems using insurance or trusts. The most common trusts to use are:
-Grantor Retained Income Trusts
-Charitable Remainder Trusts
-Wealth Replacement Trusts
-Charitable Lead Trusts

The problem with trusts are that they cost money to create and maintain and the rules regarding trusts seem to change constantly. Life insurance is one of the best ways to transfer assets at death of one of the partners of a  NT couple and keep those assets from being taxed. Life insurance (with a Long-Term-Care rider) can also  make sure each partner has funding for nursing home or home health care available without worrying about bankrupting the other partner.

These are complex issues that every NT couple should deal with…earlier rather than later!