Dear Quentin,
I have been in a committed, long-term relationship for 14-plus years. My partner does not want to marry and believes he is taking care of me legally and financially should he precede me in death. He is a loving and generous partner and I do trust him, but I know his arrangements are designed to protect himself while trying to look out for me at the same time.
We are both retired. We both have our own annuities and IRAs (traditional and Roth), and we serve as partial beneficiaries on these investments. He has siblings, no children, while I have children and grandchildren. His personal property (including a valuable home) is in a revocable trust with me as sole beneficiary. I am not on the deed of our home.
My questions related to the trust: What happens after he passes and what tax consequences will I be dealing with once ownership of the house passes to me? Is this still inherited property? How will long-term capital gains work? I already know that the property taxes will be adjusted based on the home’s value at the time of transfer.
What other financial or legal issues do I need to be prepared for, assuming, of course, that I outlive him?
Grateful in Florida
“The clue is in the title: revocable trusts give the grantor, your partner, the freedom to make an amendment if and when he chooses, unless he becomes incapacitated.”
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Dear Grateful,
You are correct — for the most part.
He is taking care of you legally and financially should he die before you, as long as he does not change his mind in the interim. The clue is in the title: Revocable trusts give the grantor, your partner, the freedom to make an amendment if and when he chooses, unless he becomes incapacitated. In that case, a durable power of attorney or a court-appointed conservator may be legally permitted to make changes. Trust assets also avoid probate. In the meantime, talking to a lawyer together should help.
If your partner did predecease you and you inherited the house, you would receive a step-up in basis, meaning that you would pay capital gains on the value of the property when you inherited it rather than the price that your partner paid for it (should you eventually decide to sell). Under Internal Revenue Service rules, you would also have a $ 250,000 capital-gains tax exclusion as a single person on the initial appreciation of that inherited-property value if you sold.
The number of unmarried couples in the U.S. has risen to more than 17 million from 6 million over the past two decades, according to the U.S. Census Bureau. “In 1996, only 2% of partners in cohabiting households were ages 65 or older; by 2017, that had tripled to 6%,” the bureau says. Research has also noted a “significant jump in cohabitation among older adults,” it adds, while divorcees also comprise a large proportion of older cohabiting couples.
But as an unmarried couple, it’s wise to have a durable power of attorney or medical directive in place to make sure you both have the legal power to make financial and medical decisions should one of you become incapacitated. Otherwise, it’s likely that the responsibility would fall upon next of kin. Similarly, the trust should have some kind of mechanism to allow withdrawals should your partner become incapacitated and you need money for his care.
“Florida statutes do not clearly provide creditor protection for certain assets held under a revocable trust that are otherwise protected when owned individually or in other trust vehicles,” according to the Florida Bar. “Such assets include annuity contracts, life-insurance policies, and possibly even homestead property. These creditor-exempt assets will typically be owned by the single individual and may be made payable to the trust in the event of death.”
Common-law marriage does not exist in Florida and, as such, you will not receive Social Security or Medicare spousal benefits. You are also unable to file a joint tax return, and avail of any tax advantages that might be available. It’s great that you have both saved money in your IRAs and have listed each other as partial beneficiaries, as many defined-benefit pension plans will not automatically provide benefits for an unmarried partner.
Revocable trusts are becoming increasingly standard vehicles of inheritance for unmarried couples and, yes, they protect the grantor should they wish to change their mind (in the event you split up). You’ve been together for 14 years, but if you did have cash to spare, it would not hurt to have your own investment property, if you are living in your partner’s home. That would help bolster your own financial independence, and perhaps give you peace of mind.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.
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