Estate Planning for Singles and Same-Sex Couples

Wednesday, October 25, 2017

6:00 pm – 7:30 pm 

Location: SF LGBT Community Center
1800 Market Street
San Francisco

FREE SEMINAR

To register, please call (415) 526-5580 or please click here.

The law provides a default estate plan for every person, but it may not reflect your wishes. Create a plan tailored to your own life and priorities. For same-sex couples, changing laws may also impact your estate plan. Know the options for your financial and health care decisions, and ensure that your wishes will be followed after your death.

What’s In A Name: Titling Real Estate for Same-Sex Couples

For most opposite sex couples, the question of their legal status in California or elsewhere is generally a simple one – they are either married or single*. Under the current legal framework in California, the answer is not as clear for same sex couples because there are four distinct legal statuses that a same sex couple may hold. Furthermore, if an opposite sex couple who is married and residing in California purchases real property, it is generally understood among titling professionals that the couple can hold title to the subject property as community property with right of survivorship, community or separate property, in joint tenancy, or as tenants in common. The four different statuses available to same sex couples inherently cause confusion, even among the most well-intentioned titling experts, which can be problematic because incorrectly titled real property can create adverse tax liabilities. However,  federally recognized spouses can usually change the nature of property from community property to separate property, or vice versa, without income tax consequences although there may be other significant implications.

Registered Domestic Partners

One of the most common statuses for California same sex couples is Registered Domestic Partners (RDPs). This applies to any couple who registered with the State of California on or after January 1, 2000 and who did not “opt out” of the RDP status before January 1, 2005 when AB 205, the California Domestic Partners Rights and Responsibilities Act of 2003, became effective, or who have not subsequently dissolved their relationship.

Pursuant to California Family Code Section 299.2, this title also applies to those same sex couples who entered into a legally recognized relationship in a foreign jurisdiction, whether elsewhere in the United States or in another country, that is “substantially equivalent” to a California domestic partnership. Such “substantially equivalent” relationships include the Civil Unions or Comprehensive Domestic Partnerships provided by state law in Connecticut, the District of Columbia, Oregon, Nevada, New Jersey, and Washington. The limited rights granted to same sex couples in states like Colorado, Hawaii, Maine, Maryland, and Wisconsin are not characterized as “substantially equivalent” and, as a result, a couple who has registered in one of those states but has not subsequently registered with the State of California would not be deemed RDPs under California law.

Married

Married includes all couples either married in California between June 16 and November 4, 2008 or since June 26, 2013. This title is also applicable to couples who were legally and validly married in a foreign jurisdiction, whether in the United States or in another country at any time.

Registered Domestic Partner and Married

Because California law allowed RDPs to marry without first dissolving the registered domestic partnership, many couples who had previously registered with the State as domestic partners subsequently married and, as a result, now hold both statuses. For purposes of property ownership and accumulation of community property, the earlier of the two dates controls.

Property Characterization

Once the actual legal status is determined, the second, and most significant, issue is to insure that the subject property is characterized properly as community property with right of survivorship, community property, separate property, joint tenancy, or tenancy in common, in the title documents. Because RDPs and married same sex couples are entitled to all of the same rights and subject to all of the same responsibilities as opposite sex married couples under California law, all couples with any of these legal statuses are subject to California’s community property regime. This means that there is a presumption that if such a couple acquires property during the tenure of their legally recognized relationship, the property is community property. However, the source of the down payment and the source of mortgage payments must also be taken into account. Only income acquired after the date of registration or marriage is community property (IRS Chief Council Advisory 2010210, May 28, 2010), and, as such, only real property acquired with community property funds is truly community property. Even real property acquired after the date of registration or marriage with previously owned assets, no matter the intent of the couple, will have a separate property interest that must be accounted for, unless there is a transmutation by the parties.

It is especially important that the intended ownership is properly identified on the original title because, although under California law, a transfer of real property between RDPs or same sex spouses does not constitute a change of ownership that would trigger a reassessment, RDPs and legally unrelated couples do not have use of the unlimited marital deduction, a federal right, and, as a result, they do not have the option of making unlimited transfers between themselves without the potential of those transfers being characterized as taxable transfers by the IRS. This means that if title is taken incorrectly in the original title and must later be corrected to reflect the intended ownership of the property, there is a chance that this latter change in ownership will have negative tax consequences for the affected couple if it is treated as a gift or a taxable event. Community property has a different tax treatment at death which can significantly benefit the survivor, however not all property should necessarily be title as community property. We recommend that you consult an attorney before changing title to property.

If property is incorrectly titled, it is also possible that the incorrect titling could lead to a situation where upon the death of one partner or spouse, the survivor could lose control over the decedent’s one-half of the property, which, when there are other family members involved, can ultimately result in the survivor’s being unable to retain ownership of the property.

Because so many families own real estate prior to marriage or domestic partnership, an analysis of title is necessary to insure that real property assets are titled correctly. The existing legal framework requires that the professionals involved with the transfer and titling of assets understand the issues, talk freely with their clients to insure that they have all of the necessary information to properly title an asset, and know what resources are available for both the professionals and their clients in the event that questions arise that cannot be answered by the titling professional or the client. Titling companies often refuse to give titling advice so it is up to the client to access the proper information.

In light of the current legal framework and the significant issues associated with titling, we recommend the following language for use in titling documents: For RDPs: “Jane Smith and Sally Jones, Registered Domestic Partners, as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For married same sex couples: “Jane Smith and Sally Jones, spouses (or wife and wife), as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For RDPs and married same sex couples: “Jane Smith and Sally Jones, spouses and Registered Domestic Partners, as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For unrelated same sex couples: “Jane Smith and Sally Jones, as [separate property/joint tenants/tenants in common]”

*California Family Code Section 297(b)(5)(B) permits opposite sex couples to register as domestic partners if at least one of the parties is at least 62 years old and eligible for Social Security benefits.

Important Tax Considerations in Foreclosures, Short Sales, and Deeds-in-Lieu of Foreclosure

By Yulissa Zulaica

How do you determine capital gains?

Capital Gains or losses = Amount Realized (AR) – Adjusted Basis (AB)

How do you determine whether there is income from cancellation of debt from a foreclosure, deed in lieu of foreclosure or short sale?

Cancellation of debt (COD) income is defined as the amount by which the canceled debt is more than the fair market value of the property which was used to secure the loan. COD income can occur when a bank forgives part of a debt to which a person was personally liable.

Exceptions to Cancellation of Debt Income: Insolvency Bankruptcy Mortgage Debt Forgiveness Act of 2007 Certain farm debts Non-Recourse Loans

Primary Residence versus Investment property: Capital losses resulting from the sale of a primary residence are not deductible. However, a person may still incur capital gains on the sale of her/his primary residence if the amount realized was greater than the person’s adjusted basis. It is important to note, however, that there is a $250,000 capital gain exclusion which a person may elect to apply. In order to qualify for this exclusion they must have lived in the home for 2 years over the last 5 years, which does not have to be consecutive, and the home must be the person’s primary residence.

Capital losses resulting from the sale of an investment property on the other hand, are deductible against capital gains, if they are available. Generally, capital losses may be applied towards ordinary income, but only up to a maximum of $3,000 per year ($1,500 if married filing separately) and the remaining capital losses may be carried forward. However, when dealing with rental property, by definition, all rental activities are considered passive and passive activity gain and loss are treated differently. Generally, passive activity gains and losses are netted against each other. If the passive activity income exceeds the available passive activity loss then it is income to the taxpayer. If the passive activity loss exceeds the income then the losses that exceed the available income will be suspended and carried forward until there is passive activity income to offset said loss. Additional limitations to this rule exists which depend on the taxpayer’s adjusted gross income and/or level of participation.

In sum, a person seriously considering a foreclosure, deed in lieu of foreclosure and/or short sale should discuss the potential tax consequences of a specific transaction with a tax attorney and/or accountant.

Recourse Loans versus Non-Recourse Loans: A recourse loan is a loan in which the borrower may be personally liable. A non-recourse loan is a loan which is usually secured by collateral and in which a borrower may not be held personally liable if the collateral does not satisfy the full value of the amount owed.

In a recourse loan, the Amount Realized (AR) is the canceled debt up to the fair market value of the property. In a non-recourse loan, the AR is the full amount of the debt. The gain or loss in either type of loan is calculated by subtracting the adjusted basis from the amount realized. To see why it is important to determine the type of loan and the type of property, see examples below.

Example 1:

Non-Recourse Loan

Facts: A buys a condo for $200,000. A puts $15,000 down and obtains a loan of $185,000.

The bank foreclosed on the loan and at that time the vale of loan was $180,000. Fair market value of the property was $170,000. A’s adjusted basis in the property was $175,000 (due to casualty loss she had deducted).

Results: A has a $5,000 gain, the amount by which A’s adjusted basis in the condo exceeds its fair market value. Whether or not it is a taxable gain will depend on whether A qualifies for and elects to use part of the capital gains exclusion amount.

There is no income from cancellation of debt for non-recourse debt.

Example 2: Recourse Loan

Facts: Same as above.

Results: A has a $5,000 capital loss, the amount by which A’s amount realized, which is equal to the property’s fair market value, exceeds A’s adjusted basis in the condo, and a $10,000 or ordinary income derived from the debt cancellation. The income is derived from subtracting the amount realized ($170,000) from the total amount of the debt ($180,000).

A cannot deduct the capital losses if the condo is her or his primary residence. If it is an investment property, however, A can use capital gains to offset capital losses subject to the loss limitations discussed above.