Greg and Thomas have been together for three years. They decided they were in their relationship for the long run and wanted to share their property to take care of each other. Thomas owned the house where they lived, and he deeded a one-half interest to Greg, with a one-size-fits-all deed he found on the Internet.
At the time, the house was worth $200,000. Greg owned a brokerage account, which was also worth $200,000, and he added Thomas’ name as a joint owner. Once those transactions were done, they were satisfied that they had done all that was necessary. But had they
Suppose Thomas suddenly died. What would happen to their joint property? Without a Last Will and Testament giving the house and his share of the brokerage account to Greg, Thomas’ relatives would inherit Thomas’ interest in the house – and the brokerage account. Depending on the character of Thomas’ relatives, things could get ugly. As joint owners of the house, the relatives could go to court and get an order for the house to be sold at a partition sale. Even though Greg would receive half of the profits (if any), he’d have no place to live. As joint owners of the brokerage account, the relatives could clean out the account.
What could Greg and Thomas have done – and what can you and your partner do – to avoid these problems? The best answer is to sign Wills leaving everything to each other. Even without Wills, Thomas and Greg would also have been protected if the deed for the house and the brokerage account had specified that the house and account were owned by them as “joint tenants with right of survivorship.” By using that magic language, they could be sure that Thomas’ interests would pass on to Greg.
Would this have solved all of Greg’s and Thomas’ problems? No, because of the gift tax. Both the United States and the State of Tennessee impose a tax on all gratuitous transfers between people who are not legally married to each other. In our case, Thomas made a gift of $100,000 (half of the value of the house) to Greg. Greg’s gift to Thomas would occur every time Thomas took money out of the brokerage account. There would be no federal tax on these gifts because federal law allows a $1,000,000 lifetime gift tax exemption for each person. However, the Tennessee gift tax law currently only exempts $11,000 per year from gift taxes. Then in our example, Thomas would be liable for $4,986 in Tennessee gift taxes for the year he deeded half the house to Greg. Greg would be liable for Tennessee gift taxes for any year in which Thomas took out more that $11,000 from the brokerage account. If they had not changed ownership, but left the property to each other in their Wills, there would be no gift tax.
In Tennessee , unmarried couples face significant disadvantages under the inheritance laws and the tax laws. With proper estate planning, these disadvantages can be minimized, and partners can have the peace of mind knowing that they have done their best to take care of one another.
Paul Nowak is an estate planning attorney in Franklin , Tenn. He can be reached at (615)790-9678 or pnowak@yosrob.com.