UNMARRIED COUPLES WHO BUY PROPERTY NEED EXTRA PROTECTIONS

Marriage comes with financial benefits -- a fact sometimes best recognized by couples who don't or can't get married.

Marriage allows couples tax-free transfers of property and gifts, as well as some inheritance rights without a will. Same-sex couples who can't officially wed, or heterosexual couples who are unwilling to, need to put extra protections into place when buying or sharing property.

Several states are now offering rights for unmarried couples, while others are taking them away. So local laws need to be carefully considered when choosing a home-ownership structure.

Colorado is one of the latest states to propose that same-sex partners receive the same state rights as married couples -- a vote is scheduled for November -- while in Massachusetts, gay and lesbian couples can marry and are afforded all of the same state rights. California, Vermont, Connecticut, New Jersey, Maine and Hawaii provide all state spousal rights to same-sex couples, such as the right to inherit when a partner dies without a will, according to Human Rights Campaign, a gay rights advocacy group in Washington. On the other hand, Virginia law prohibits same-sex unions and says a "civil union, partnership contract or other arrangement between persons of the same sex" created in other states is void and unenforceable.

What people really need to realize is that "real estate is governed by state law, not federal law," says Brian Chase, an attorney with the western regional office of Lambda Legal, a gay rights advocacy group. "So what's best will vary dramatically based on what state you are in."

But even if you're permitted to form a domestic partnership or other union recognized by your state, remember that many of these laws are new, nor are they recognized by the federal government, which makes joint ownership and financial planning more complicated. That's why it's best to work through these issues with an attorney and a financial professional.

Unmarried couples need to decide how to title their home, or how to structure ownership, because different structures have different consequences.

Many unmarried couples choose the "joint tenants with rights of survivorship" structure, which allows for an automatic and probate-free transfer to a surviving partner. Still, for couples with taxable estates, it can trigger an additional tax bill. Since married couples can transfer assets to each other tax-free, estate taxes aren't owed until the second spouse dies.

But unmarried people risk being taxed on a property twice: A surviving partner may pay estate taxes on the portion of a property he or she already owned since the Internal Revenue Service may consider the first partner to die the sole owner, and the full value of the property would be taxed again upon the second partner's death.

Both partners "need to have records to prove their contribution to the purchase and upkeep of the property, or else the IRS will presume the first person [to die] owned everything," says Rick Kraft, an estate-planning attorney in Boston who focuses on same-sex couples.

Tenancy-in-common -- when coupled with a revocable living trust -- is a more flexible way to title one's home, attorneys say. This structure allows partners to own unequal interests in the property, but there's no automatic transfer after one dies unless it's designated by the living trust.

A properly funded trust, in which assets are titled to the trust, is a hassle-free way to leave property to a partner because you avoid probate. And, if you're afraid a family member will contest a will, a revocable trust can be more difficult to challenge, some lawyers say. The trust also can be structured so that after one partner dies, the survivor can live in the home until he or she dies. The first partner's share can ultimately go to someone else -- perhaps a niece or nephew, Mr. Kraft adds.

Feeling generous? Be careful. If you already own property and want to transfer a portion to a partner, it's considered a gift, explains Kathleen Sherby, a partner with Bryan Cave LLP in St. Louis. And "you'd have to file a gift tax return," she adds. (Gifts worth less than $12,000 can go unreported; anything above that amount will begin to eat into your $1 million lifetime gift-tax exemption.)

Although many view prenuptial agreements as unromantic, similar agreements are critical for unmarried, property-owning couples. The agreements -- often called living-together, property, or domestic-partner agreements -- set out in detail how assets should be divided in the event of a break-up or death. In states with laws posing restrictions on same-sex couples, extra care must be taken; these agreements should be clearly structured as an investment or business arrangement.

You will also need to keep track of how much each party contributes to the mortgage. Since unmarried couples can't file joint federal tax returns, they'll have to divvy up deductions on mortgage interest and property taxes. A partner who pays 60% of the mortgage is entitled to 60% of the deductions, says Debra Neiman, a financial planner in Arlington, Mass., who co-founded PridePlanners, a national association of planners who service the gay, lesbian and nontraditional community. In states that do recognize same-sex unions, such as Massachusetts, you might file a joint return on the state level.

-- September 06, 2006

By Tara Siegel Bernard

From The Wall Street Journal Online