Mosshead

Washington domestic partner law and financial planning

April 23rd, 2008

A and I have talked about becoming registered domestic partners off and on the past year. We have this sense that it would be a “Good Thing” ™ to get our financial and estate planning together before registering.

Mosshead is definitely not a money blog, but it’s tax season, so naturally I wonder what the financial implications of registering will be. Below are some notes from my research.

UPDATE: the ACLU in Seattle sponsored a great informational session with a financial planner and estate planner so I’ve added answers to my questions below.

Financial Planning

We have some common short term goals as well as the usual long term goals.

• build up emergency savings and place it into a higher yield account (other than our shared savings account)
  • must we track who contributes what?
    • yes! … gift tax, which might as well be called “gay tax” when you consider IRS’ arguments against lifting it for domestic partnerships … if either of us were audited, we’d need to prove that no gift tax as owed. So we do need to ensure that we’re contributing somewhat equal amounts to any shared accounts. The annual exclusion is $12,000.
    • Essentially, on a shared account, we both own 50% of the account regardless of how much $ each contributed. That means if A deposits $1000, she’s gifted me with $500. If I deposit $1000 2 weeks later, I’ve gifted her with $500. That’s how I understand it anyway.
    • Gift tax is especially insidious from a taxes perspective … it’s taxed at about 45% … the government figures if you’ve got enough money to give away they should get a good cut.
  • on shared interest-bearing accounts can we decide who claims interest on taxes?
    • I believe so
  • Actually, we need some advice in general about how we manage our money - at the moment, we get paid at different times and we shift money back and forth as needed. I suppose you could call the “shifting” interest-free loans.
    • gift tax again is an issue
• pay off our unsecured credit card debt
  • will domestic partnership make us liable for each other’s debt?
    • As of June 12, registered domestic partners in WA will join the wonderful world of community property that married couples enjoy … but since the federal government (esp. IRS) does not recognize domestic partnerships …. we are once again vulnerable to that 45% gift tax. From the Second Substitute House Bill sec VI it appears the debt preceding the registration does not become community property (the wording kind of beats around the bush, so that should be verified by a bona fide lawyer).
    • Since we don’t own a house, our situation is easier to manage - but community property means we each own 50% of assets. If one of us were to get pregnant and only work part-time … we’d need to work closely with a financial planner to avoid getting screwed at tax time.
  • if one partner pays over $12,000 of the other’s debt, will it incur the gift tax penalty?
    • yep
  • What if we just put all our money into a common pot and pay what needs to be paid out of it? (yep, that’s what we do now and so do a lot of unmarried couples.)
    • bad idea until the IRS starts treating gay households fairly.
• fully fund our IRAs each year and make matching contributions to a retirement fund
  • again, we run into risking that $12,000 gift tax penalty if not careful.
  • the retirement fund … we do own a business together and the business will provide a retirement fund with a matching plan. This is probably the safest way for us to build retirement
• we’ll need a new car in the next 5 years
  • it will cost about $24,000 for the truck we want.
  • I don’t think that tracking amount of money contributed to this purchase is really important unless we plan to divorce, or only 1 person’s name is on the loan.
• we want to buy a house in 2-3 years.
  • We have a lot of saving to do. Again, we’ll have to watch the gift tax penalty closely and be smart about shifting income between us.
  • We have to meet with a financial planner before embarking on the house journey.
• we especially need retirement security - if one of us dies before the other, we don’t qualify for social security benefits as long as the federal government will not recognize gay households.
  • we’ll need a long term investment plan and profile designed by a CFP who understands financial bias against gay/lesbian households in the tax code.
  • Again, we want tax efficiency in our investment profile as well

So, the thing that pisses me off the most about the whole gift tax/gay tax thing? Every bill that’s been introduced to make an exception for unmarried households has been shot down because of the terrible loss of income it would represent to the federal government.

So … you tax the shit out of queer households, most of which are low to middle income, to fund services that we don’t have access to (social security, military service and benefits). Hm.

Estate Planning

it’s hard to separate this out from financial planning since it’s so closely related.

house: we don’t own one yet, but it doesn’t hurt to be informed beforehand so we can focus on the house when we buy it. According to this account of California domestic partner , even though domestic partnerships got inheritance rights, the law is fuzzy on whether the property undergoes a change of ownership (when a married survivor receives the house they own, it is not considered a change of ownership). The problem is whether the property value must be re-evaluated … which will greatly increase inheritance tax if they didn’t do any estate planning to avoid inheritance tax.

How should we manage our short term and long term financial plans?
Does anything change with the estate planning we need to do? (my suspicion is “no”)
Will we become responsible for each other’s debt? (yes)
How can we make our investments and cash more tax efficient without incurring gift tax penalties? (work with a financial planner to design a tax strategy)

I’m a strong proponent of doing things myself. But my NOLO books and forms apply to straight married households not to me. Tax and estate laws so strongly disadvantage gay households that I believe it’s absolutely necessary to work with a planner who is familiar with queer issues.

maybe I’ll write more about this later …

This was a good article over at GFN

Entry Filed under: ./live shiny