Dear Quentin,
I have been in a committed, long-term relationship for over 14 years. My partner does not want to get married and he believes he will take care of me legally and financially if he precedes me in death. He is a loving and generous partner and I trust him, but I know that his arrangements are designed to protect himself while he tries to take care of me at the same time.
We are both retired. We both have our own annuities and IRAs (traditional and Roth) and serve as partial beneficiaries of these investments. He has brothers, no children, while I have children and grandchildren. His personal assets (including a valuable home) are placed in a revocable trust with me as the sole beneficiary. They are not on the deed to our house.
My questions were about the trust: What happens after he dies, and what tax consequences will I face once ownership of the home passes to me? Is it still an inherited property? How will long-term capital gains work? I already know that property taxes will be adjusted based on the value of the home at the time of transfer.
What other financial or legal matters should I be prepared for, assuming, of course, that I survive them?
Grateful in Florida
“The clue is in the title: Revocable trusts give the grantor, your partner, the freedom to make a change if and when he wants, unless he becomes incapacitated.”
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Dear Grato,
You’re right, for the most part.
He will take care of you legally and financially if he dies before you, as long as he doesn’t change his mind in the meantime. The clue is in the title: Revocable trusts give the grantor, your partner, the freedom to make a change if and when he wishes, unless he becomes incapacitated. In that case, a durable attorney or court-appointed trustee may be legally authorized to make changes. Trust assets also avoid probate. In the meantime, speaking together with an attorney should help.
If your partner died before you and you inherited the house, you would receive a step-up in basis, meaning you would pay capital gains on the value of the property when you inherited it rather than the price 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 an individual on the initial appreciation in the value of the inherited property upon sale.
According to the U.S. Census Bureau, the number of unmarried couples in the United States has risen to more than 17 million from 6 million over the past two decades. “In 1996, only 2% of partners in cohabiting families were 65 or older; by 2017, this figure had tripled to 6%,” the bureau says. The research has also noted a “significant increase in cohabitation among older adults,” it adds, while divorced people 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 to ensure that you both have the legal power to make financial and medical decisions in the event that one of you becomes incapacitated. Otherwise, the responsibility is likely to fall on next of kin. Likewise, the trust should have some sort of mechanism to allow withdrawals in the event that your partner becomes incapacitated and you need money for his or her care.
“Florida statutes clearly do not provide creditor protection for certain assets held under a revocable trust that are otherwise protected whether held individually or in other trust vehicles,” according to the Florida Bar Association. “Such assets include annuity contracts, life insurance policies and perhaps even real estate. These creditor-exempt assets will generally be owned by the individual and may be made payable to the trust upon death.
Common law marriage does not exist in Florida, and as such, you will not receive spousal benefits from Social Security or Medicare. You also cannot file a joint tax return and take advantage of any tax benefits that may be available. It’s great that you both saved money in your IRAs and listed each other as partial beneficiaries, as many defined benefit pension plans will not automatically provide benefits for an unmarried partner.
Revocable trusts are increasingly becoming standard inheritance vehicles for unmarried couples, and, yes, they protect the grantor in case he wants to change his mind (in the event you separate). You’ve been together for 14 years, but if you had money to spend, it wouldn’t hurt to have your own investment property if you live in your partner’s house. This would help strengthen your 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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