Domestic Partner/Cohabitation Agreements: Separation

by Maureen B. Cohon

This is final piece in a three-part overview of domestic partner/cohabitation agreements. Part one discussed financial and property matters, and part two covered family issues. The final installment below addresses how these agreements can smooth the process of separation.

Potential Separation
In the unfortunate event of a separation, a domestic partnership agreement can save the parties the time and expense of litigating their rights and obligations, particularly with respect to property. Clients who contact us after deciding to terminate their partnership most often find parting less stressful if there is a signed agreement that states the partners’ wishes.

Questions to Consider

  1. What would happen if the relationship was no longer working for you or your partner?If you have an agreement most of the issues, which could cause problems, would be covered.  Parting will still be painful, but the agreement will be determined by you before the separation. The agreement would have addressed:
    1. How the notice of termination is given to each other.
    2. The time limits for the purchase or sale of the home and the distribution of the equity if it is a joint ownership.
    3. Distribution of your joint accounts.
    4. Issues regarding children.
    5. Any other issues that you determine you want in the agreement.

 Remember: each couple is different, and the issues addressed here (and in parts one  and two) will not apply in every circumstance. Domestic partner/cohabitation agreements, like most family law matters, need to be tailored to the individuals it serves.

While agreements are not easy to talk about while you are happy with each other, it is better to talk now than at the end of a relationship. Of course, the best outcome would be to create and sign the agreement and then put in a safe place and never have to look at it again!

Domestic Partner/Cohabitation Agreements: Finances & Property

by Maureen B. Cohon

If you can’t marry in the state you live in – or if you do not want to marry – domestic partner/cohabitation agreements (the terms are interchangeable) can help you make a plan for your partnership.

In broad terms, these agreements address the sharing of assets and expenses, and can document for a court and any other interested parties (i.e. an employer from which you wish to obtain domestic partner benefits) the “family nature” of the cohabiting parties’ relationship and living arrangements. Specifically, these agreements may define the partners’ financial obligations to one another and to their children, clarify the ownership of major assets such as real or personal property, and protect the partners’ rights should they ever terminate their relationship.

In the unfortunate event of a separation, a domestic partnership agreement can save the parties the time and expense of litigating their rights and obligations, particularly with respect to property. Clients who contact us after deciding to terminate their partnership most often find parting less stressful if there already is a signed agreement that states the partners’ wishes.

In the next three posts, we’ll cover three broad categories of issues Domestic Partner/ Cohabitation Agreements can help address – finances & property, family, and potential separation.

Finances & Property

If you are living with someone, domestic partner/cohabitation agreements can outline what you and your partner will each contribute to living expenses, mortgage, utilities, entertainment, real estate taxes, homeowners or renters insurance and other items relating to your place of residence or any other shared property.

Questions to Consider

  • Do you have – or will you open – joint banking or checking accounts, joint credit cards, or investment accounts? You might want a joint account for only household purchases and separate accounts for credit card purchases or paying for personal items. If you have or want joint accounts of any kind, you may want to have both signatures for any withdrawals over a certain amount. If you and your partner decide to separate, how will you split the accounts?
  • How is your home titled?
  • If the home you live in is titled in one partner’s name:
    1. Did the non-owner partner contribute money to the purchase of the home?
    2. Does the non-owner pay any amounts to the mortgage for the property you are living in? What about for improvements on the home?
    3. Do these payments give the non-owner partner any ownership interests in the home?
  • If the home or other real property is owned jointly,
    1. Did each partner share the down payment and settlement costs equally and/or share the mortgage payments equally?
    2. If you sell the home, how will the equity be distributed? Will it be in proportion to the amount paid on the home by each, equally, or some other way? How do you determine the value of the house? How soon does it have to go on the market?
    3. If you separate, who will have the right of first refusal to purchase the home? In what amount of time?
    4. If one partner moves out, will that partner have to continue to contribute to the mortgage, utilities, etc.?
  • Is there property in the home that you brought into the household? Do you want the property to remain yours after a termination? This “separate property” could include family heirlooms or inherited property or property that just has sentimental value to you. Most couples have such property and agree that it belongs to the original owner.

Please check back for more information on Families and Potential Separations.

 

Gift Tax Consequences of Real Estate Transfers

By Lauren Sweeney

Often times, one partner in a same-sex couple owns real property and seeks to add the other partner to the title or deed for no consideration (i.e. when no money or other type of payment is received in return).  Though this may appear to be a straightforward process, it is important to keep in mind that there are tax consequences. This type of one-sided property transfer constitutes a taxable gift for federal gift tax purposes.  Under the federal tax laws, there is a gift tax reporting obligation to the extent that the fair market value of the gifted interest exceeds the available annual exemption in the year of the gift.  

This reporting obligation does not necessarily imply a tax liability.  According to The American Taxpayer Relief Act, each American taxpayer has a $5 million cumulative lifetime gift and estate tax exemption.  This means that any amounts given during life or transferred upon death that total less than $5 million will be transferred free of tax.  Additionally taxpayers are allowed to make annual gifts up to $14,000, per recipient, which gift does not count towards the $5 million lifetime maximum exemption.   Any gift amount to an individual that exceeds $14,000 is considered a taxable gift, and the taxpayer who made the gift is required to file a gift tax return.  Gifts that exceed the annual exemption amount accumulate from year to year and count toward the $5 million lifetime maximum exemption, as do any assets that are part of an inheritance.

The use of a “tenancy in common” may be a beneficial means for gifting the other partner into ownership with minimal gift tax consequences. Because the shares of ownership do not have to be equal in a tenancy in common, the partner may choose to gift a share of the property to the other partner each year (up to the annual exclusion amount) until the desired property apportionment is received.   Best-practices compliance involves not only a gift tax return filling, but also a real estate valuation of the fractional interest being gifted.

Due to the complexity of both real estate and tax law, it is advisable that individuals consult with an attorney prior to adding his or her same-sex partner to a title or deed to ensure proper reporting of both the real estate transfer and gift tax reporting.

Real Property Series – Part 3 & 4 of 4: Dissolution & Conclusion

By B. Lafe Metz, Esq. & Tyler S. Dischinger, Esq.

This four part series addresses several broad issues encountered by nontraditional couples regarding the acquisition, ownership and transfer of real property. If you have not yet read part 1 or two, click here.  (See NOTE.)

  • In jurisdictions where nontraditional couples do not have the benefit of marriage statutes, they likewise do not have access to the corresponding divorce procedures. This makes for a more complicated and less predictable scenario should the two partners choose to part ways.
    Without a legal default to guide the way, it is important for the parties to be proactive by documenting their agreement about owning and maintaining the property, and keeping records of who has paid which expenses so each partner has evidence of his/her contribution to the jointly-owned property.
  • A formal joint tenancy or tenant in common agreement is often beneficial to establish a record of contributions, allocate responsibilities and benefits, and provide an agreed form of dispute resolution. While it is sometimes difficult for a couple to sit down and discuss business issues, especially early in a relationship, both partners and the relationship itself will ultimately benefit from clear communication and mutual understanding.
  • Ideally, each partner should be represented by independent counsel in the negotiation and execution of a joint tenancy or tenant in common agreement.

Conclusion

Nontraditional couples often own real property either as joint tenants with right of survivorship or as tenants in common. A discussion with counsel may help determine which approach is right for your family. Under either type of ownership, it is usually beneficial for the partners to enter into a written agreement addressing their respective ownership rights and obligations and providing mechanisms for future sales, leases, or mortgages of the property as well as dispute resolution procedures. If we may be helpful to your family in any way, please call Lafe Metz at 412-562-1044 or Tyler Dischinger at 412-562-1387.

Real Property Series – Part 2 of 4: Issues & Complications When One Partner Already Owns Property

By B. Lafe Metz, Esq. & Tyler S. Dischinger, Esq.

This four part series addresses several broad issues encountered by nontraditional couples regarding the acquisition, ownership and transfer of real property. If you have not yet read part 1, click here.  (See NOTE.)

Where one partner already owns real property, and would like to create a joint tenancy or a tenancy in common with his/her partner, here are a few issues for consideration:

  • Adding the other partner to the title/deed of the real property for no consideration is not as simple an answer as it may seem, because it may trigger federal and state gift taxes. [1] 
  • Adding the other partner’s name to the title by transferring one-half of the ownership interest for arm’s length consideration should avoid estate and gift tax consequences, but may be difficult to accomplish if the property is mortgaged.  Most mortgages include “due-on-sale” clauses in which the mortgage is due to be repaid in full upon the sale of all or part of the property.  The practical effect is that a mortgage lender’s consent must be obtained before adding your partner to the title or transferring any interest in the property.  This may be challenging if the partner to be added has less than perfect credit and may give the lender leverage to renegotiate the terms of the mortgage.
  • Transferring an interest in the property to your partner for consideration may trigger real estate transfer taxes and other transaction costs.  While most states exclude from transfer tax a transfer between family members, in jurisdictions where nontraditional couples may not legally marry and the state does not provide a parallel exclusion for transfers between members of a nontraditional couple, there may be a significant transfer tax if your partner is added to the deed, whether they pay for the interest or it is given as a gift.  Consult counsel for advice on the best approach for your individual circumstances.
  • The use of a tenancy in common may be a beneficial means for gifting the other partner into ownership under certain circumstances.  Because the shares of ownership do not have to be equal in a tenancy in common, the partner that owns the property may choose to gift a share of property to the other partner each year (up to the annual gift tax exclusion amount) until the desired property apportionment is reached.  Realty transfer tax may still apply even where gift tax does not.

Please check back next week to read the third part of this four part series that will address dissolution.

[1] Nontraditional couples may face significant gift-tax burdens outside of the real property realm, due to the unavailability of marital status.  Consult counsel to determine the best strategy to minimize gift tax exposure.

NOTE: This outline provides a quick review of key issues and is intended for reference only.  Additional understanding of a couple’s circumstances and goals would be needed to provide specific advice about any real property transaction.  The practical details also may vary by jurisdiction.

Real Property Series – Part 1 of 4: Alternative Ways to Hold Real Property

By B. Lafe Metz, Esq. & Tyler S. Dischinger, Esq.

This four part series addresses several broad issues encountered by nontraditional couples regarding the acquisition, ownership and transfer of real property. (See NOTE.)

While most married couples own real estate in a form of ownership called “tenants by the entirety,” this form of ownership is not available for nontraditional couples in jurisdictions where they cannot legally marry. As a result, nontraditional couples frequently seek other forms of property ownership that can replicate the benefits of a tenancy by the entirety or achieve other goals of the couple.

Alternative Ways to Hold Real Property
There are two primary alternative ways to title real property for nontraditional couples: (1) joint tenancy with right of survivorship and (2) tenancy in common. It is helpful to understand the unique attributes of each type of ownership to make the best decision for your family about how to own property. A discussion with counsel about your unique circumstances will help determine the best form of property ownership for your family.

Joint Tenancy with Right of Survivorship
The first type of ownership often used by nontraditional couples is a joint tenancy with right of survivorship. Here are some key attributes of this type of ownership:

  • Both parties have equal ownership of the property. This is often described as an “undivided 50% interest in the whole,” as there is no dividing line or portion of the property owned by each tenant, but rather the entire property is jointly owned by both tenants equally.
  • Unless the parties agree otherwise in a joint tenancy agreement, both joint tenants share in any income or gains, as well as in the duties and obligations of owning the property. For instance, if the property is leased, or sold at a gain, the joint tenants would share the lease income or sales proceeds 50-50. Similarly, obligations like maintenance, taxes, insurance, utilities and other costs are shared 50-50.
  • When the first joint tenant dies, full title to the property vests automatically in the surviving joint tenant outside of a will or probate.
  • While the vesting of full title in the second tenant to die provides some simplicity and replicates benefits available to traditional couples, it may also complicate estate planning for nontraditional couples. For example, since title to the property vests automatically in the surviving tenant, the first joint tenant to die has no ability to leave a share of the property to an heir. Where the couple has children or other joint heirs, this may not be an issue. But if there are no children or joint heirs, 100% of the property would pass to the heirs of the second member of the couple. The person who dies first would lose the power to direct who would inherit an interest in the property. Nontraditional couples can address this issue by identifying joint heirs when they purchase the property (with the ability to change the designations later) or by agreeing that on the death of the second member of the couple, the property will be sold, with the proceeds split equally between each party’s designated beneficiaries.
  • Absent a contractual prohibition, a joint tenancy may be terminated at will by either member of the couple, which converts it to a tenancy in common (discussed below). To alter this result, the parties can enter into a joint tenancy agreement that provides alternative methods for the dissolution of the joint tenancy or transfer of interests in the property.
  • A joint tenancy can be challenging in an unpredictable relationship, because either joint tenant can “hold out” and effectively prohibit the sale or encumbrance of the entire property absent their consent. A joint tenancy agreement can also help to address this issue with a buy-sell provision often referred to as “I cut you choose.” This allows one party to name a price for the buyout, and then the other party must choose either to buy the remaining share or sell his/her share at that price.
  • Property owned in a joint tenancy may be subject to the claims of both tenants’ creditors.
  • Many jurisdictions require that if the property is owned in a joint tenancy it must be noted on the deed.

Tenancy in Common
The second type of property ownership frequently used by nontraditional couples is a tenancy in common.

  • In a tenancy in common, each partner owns a specified portion of the property. Unlike a joint tenancy, in which each party owns an undivided 50% interest in the whole, tenants in common may hold property in any proportion (e.g. 80-20 or 65-35).
  • Either party may dispose of, convey, or encumber his/her share of the property as he/she wishes, absent a contrary contractual agreement. Tenants in common frequently enter into contracts governing the sales process and restricting the parties’ rights to encumber the property. For example, a tenancy in common agreement often provides each party a right of first offer and/or right of first refusal to purchase the other party’s share before it may be sold to a third party.
  • Because there is no right of survivorship, when a tenant in common dies, his/her interest in the property does not automatically pass to the other tenant in common. Rather, it passes under their will (or under the intestacy statutes of the state, should the decedent not have a will at death).
  • If there is any ambiguity about the form of ownership in which a property is held, most jurisdictions presume a tenancy in common as the default rule.

Please check back tomorrow to read the second part of this four part series that will address issues and complications that may arise when one partner already owns property.

NOTE: This outline provides a quick review of key issues and is intended for reference only.  Additional understanding of a couple’s circumstances and goals would be needed to provide specific advice about any real property transaction.  The practical details also may vary by jurisdiction.