LEGISLATIVE HIGHLIGHTS OF CALIFORNIA’S DOMESTIC PARTNERSHIP LAWS
AB 26 (1/1/2000. Migden)
Established the CA Domestic Partnership Registry, allowed for hospital visitation and provided for health benefit coverage for the registered domestic partners of state employees,
AB 25 (1/1/2002. Migden)
Provided additional rights to Registered Domestic Partners (RDPs): right to make medical decisions, use stepparent adoptions, sue for wrongful death, file for state disability benefits for disabled partner, use sick leave to care for partner or partner’s child, use statutory will forms, be appointed as conservator for an incapacitated domestic partner and to act as administrator of a deceased partner’s estate.
AB 2216 (7/1/2002. Keeley)
RDPs may inherit an interest in partner’s separate property if the partner dies without a Will.
AB 2208 (2004. Kehoe)
It requires all insurance policies and plans that include coverage for spouses -- including health, life, auto, and homeowners insurance, among others -- to include the same coverage for domestic partners.
AB 205 (1/1/2005. Goldberg)
Provided RDPs with nearly all the rights, benefits and responsibilities of spouses.
AB 2580 (1/1/2005. Goldberg)
Made the date of state registration the effective date of community property requirement; provided for summary termination of registered domestic partnership for relationship of less than 5 years, with no children and minimal property.
SB 565 (1/1/2006. Migden)
Determined that the transfer of property between RDPs is not a “change of ownership.”
SB 1827 (1/1/2007. Migden)
RDPs must file California income tax returns as married or married filing separately for tax years beggining on and after January 1, 2007.
SB 105 (10/07. Migden): Clean-up bill, which among other things will clarify the procedure for preparers to utilize in preparing a joint California for RDPs.
SB 559 (10/07. Kehoe): Will allow RDPs whose paid higher property taxes due to transfer of property to a RDP, on or after 1/1/2000, will be allowed to seek a reassessment of property as well as reimbursement of excess taxes paid.
AB 102 (10/07. Ma) Equitable name change available for partners and spouses.
Pending Legislation
SB 11: (Migden): would allow any two unmarried, unrelated adults who share a common residence to establish a domestic partnership
STATUTORY REQUIREMENTS
A. Qualifications
1. Must be at least 18 years of age.
2. Must share a common residence.
a. Either or both RDPs may have an additional residence
b. Residence need not be in the name of both partners
3. Must be members of the same sex (any age over 18), or over 62 for opposite sex couples who also meet the requirements of the Social Security Act.
4. Cannot be married or a member of another domestic partnership.
5. Cannot be related by blood in manner that would prohibit marriage.
6. Must have the mental capacity to consent.
7. Both partners must agree to be jointly responsible for basic living expenses of the partnership.
B. Registration
1. Complete the statutory state application.
2. Sign the application before a Notary.
3. Pay the filing fee and file the application with the Office of the Secretary of State.
a. Couples should verify receipt by the Secretary of State because there is at least one case pending in which both partners completed the application, but the responsible partner never actually filed it with the Secretary of State. These couples have subsequently terminated their relationship and property ownership issues are now at stake.
4. If a couple previously registered with City, they must still complete the statutory state application or they will not be considered RDPs under California law.
C. Termination
1. California Superior Court has jurisdiction over all proceedings governing dissolution regardless of whether the RDP is still a California resident.
a. Assigned to Family Law departments
b. Equivalent to Filing Divorce
2. Non-Court Termination Requirements
a. Domestic Partnership lasted less than 5 years
b. No children born during the term of the registration
c. Neither of the parties is pregnant
d. Minimum assets and debts
e. Neither partner may own an interest in real property nor be leasing real property except where one or both reside
f. Both parties mutually agree
g. The parties must have signed a property settlement agreement
h. Both parties must sign and file a Notice of Termination of Domestic Partnership with the Office of the Secretary of State
3. Several cases currently pending regarding terminations of Domestic Partnerships prior to 12/31/2004. If the DP was not terminated by the appropriate notice, issues exist in current cases regarding spousal support, child support, and obligations regarding the debts of the partners.
D. Recognition By Other Jurisdictions
1. Does not grant any rights under federal law (i.e. Social Security, Medicare, ERISA)
2. Recognition in other states on a state by state basis
3. California law does recognize out of state domestic partnerships and civil unions that provide substantially the same legal rights and obligations.
RIGHTS, RESPONSIBILITIES AND LIMITATIONS
A. Rights and Responsibilities
1. Family Code Section 297.5 provides that registered domestic partners have the same rights, protections and benefits, and are subject to the same responsibilities, obligations and duties under law, whether they derive from statutes, administrative regulations, court rules, government policies, common law or any other provisions or sources of law, as are granted to and imposed upon spouses.
a. Former RDPs have the same rights and responsibilities as former spouses.
b. A surviving RDP, following the death of the other partner, has the same rights and responsibilities as a widow or widower.
c. RDPs have the same rights and responsibilities as spouses with respect to a child or partner.
d. To the extent California law adopts, refers to, or relies upon federal law, RDPs shall be treated as if federal law recognizes California registered domestic partnerships, although registered domestic partners must use the same filing status for state income tax purposes used for federal tax purposes.
e. RDPs have the same nondiscrimination rights as spouses
B. Limitations
1. Subdivision (m) of Section 297.5 qualifies the general provisions by providing that the section does not amend or modify any provision of the California Constitution or any provision of any statute that was adopted by initiative.
TO REGISTER OR NOT TO REGISTER
A. Considerations
1. Financial position of each partner
a. Inequality vs equality: Is there a significant disparity in income and ownership of assets by the two partners?
b. The transfer of property between RDPs may give rise to federal gift tax or income tax consequences.
c. Management and control of community property, as well as separate property of each partner.
d. Financial liability for the debts of a partner provided the debts are incurred after the date of registration
e. Does one of the partners receive public assistance - Eligibility for some public assistance benefits, such as Medi-Cal or food stamps, will take the income of both RDPs into account when calculating eligibility
f. Is one/both of the partners a veteran? Although federal benefits that are provided to heterosexual spouses will not apply, the non-veteran partner will be entitled to the benefits that the state of California provides to heterosexual spouses, i.e. state-conferred hiring preference for surviving partners and partners of totally disabled veterans and other survivor state tax benefits.
2. Family Issues
a. Does one of the partner’s have children? Second parent vs domestic partner adoption
b. Spousal support considerations
3. Estate Planning Considerations
a. Estate planning wishes of each partner.
ESTATE PLANNING ISSUES AND TECHNIQUES
A. Potential Conflict of Interest and Lack of Attorney Client Privilege
Practitioners should recognize that while the interests of the two partners may not be adverse, the RDPs may have issues as to whether property is separate property or community property and may choose to make different beneficial designations, before and after the death of the surviving RDP. Therefore, practitioners must advise their clients of potential conflicts and should recommend individual representation of each partner. If the partner’s choose to retain one practitioner, the practitioner should obtain written acknowledgement from the RDPs that they have been advised of the potential conflict issues and that they consent to joint representation.
In the event of a break-up of the partners, where an attorney has previously represented both partners, the attorney should consider not representing either partner in the dissolution and recommend each seeks independent counsel.
B. Domestic Partnership Property Agreement
AB 2580 made the date of state registration, the effective date for determination that all property acquired by partners is to be considered Community Property of the registered domestic partnership. The parties had until June 30, 2005 to enter into an agreement stating their own ownership scheme, if their intent was not to consider all property community.
Couples that did not enter into a written agreement prior to June 30, 2006 may still enter into an agreement, similar to a post-nuptial agreement establishing their intent as to title and ownership to property, payment of living expenses, division of property on termination, right to support during relationship and upon termination, and child support and visitation by the non-parent partner.
C. Dying Intestate (without Will or Living Trust)
1. The surviving domestic partner inherits from the deceased partner by intestate succession.
a. If the decedent is not survived by issue, parent, brother, sister, or issue of deceased brother or sister, the surviving domestic partner receives the entire separate property of the decedent.
b. The surviving partner receives only half of the separate property intestate estate if the decedent is survived by 1) only one child or 2) issue of one deceased child or 3) no issue of the decedent, but one or more parents or 4) no issue of the decedent and no parent.
c. The surviving partner receives only one-third of the separate property if the decedent leaves 1) more than one chilled or 2) one chilled and the issue of one or more deceased children or 3) issue of tow or more children.
2. The domestic partner has priority for nomination of, or appointment as, administrator of the deceased partner’s estate.
D. Guardianship/Conservator
1. A partner has priority for nomination as guardian of a child of the relationship, as well as appointment of a conservator.
E. Basic Estate Planning Tools
1. Revocable Living Trust: Sets forth the dispositive wishes of the partners.
The decision whether to use one or two trusts should be driven by the specific facts and circumstances of the RDPs. Among other things, consideration should be given to the net worth of each partner, whether or not there are children, what the ultimate disposition will be and ease of administering two trusts. Avoids probate, but not estate taxes.
2. Wills- RDPs have the same intestacy rights as spouses (P.C. Section 6401)
When there are children, guardianship provisions must be addressed in the Wills.
3. Durable Powers of Attorney - which designates the RDP, or any other party, to act on behalf of the incapacitated partner.
a. Probate Code Section 4401 – Uniform Statutory Form Power of Attorney.
4. Advance Health Care Directive and HIPAA Designation- allows the designated agent (RDP or other party) to make medical decisions on behalf of the incapacitated partner.
F. Holding Title to Property
1. Community Property: without agreement to the contrary, property owned or acquired as of the date of registration is currently considered community property. Title to real property can be taken as Community Property or as Community Property with Right of Survivorship.
a. Holding title as community property or as community property with right of survivorship provide important tax benefits including double stepped-up basis for capital gains when the survivor sells the property.
i. The IRS has not yet ruled on the tax consequence (if any) on the double stepped-up basis where the parties are RDPs not spouses.
b. Civil Code Section 682.1 provides that “[c]ommunity property of a husband and wife, when expressly declared in the transfer document to be community property with right of survivorship,…,shall upon the death of one of the spouses, pass to the survivor, without administration…, subject to the same procedures, as property held in joint tenancy.”, i.e. passes the property to the surviving partner without having to go through probate.
2. Joint Tenancy: potential gift issues if both partners did not equally contribute to the property. On death of first partner, 100% of property will be included in the estate of deceased partner unless there is proof that both partners owned the property or surviving partner acquired their interest for full and adequate consideration. Surviving partner takes title free of creditors.
3. Pay on Death Accounts and Totten Trusts: to pass title to bank accounts, stock, automobiles and other assets without probate
G. Advanced Estate Planning Techniques
1. Irrevocable Trusts
a. Charitable Remainder Trusts (CRT), can provide income for the surviving partner and give the decedent partner a charitable gift and estate tax savings. The charitable remainder beneficiary can be the settlor’s private foundation, created to fund specific charitable activities.
b. Grantor Retained Income Trust (GRIT), grantor retains the income interest for a specified term then the property passes to the remainder beneficiary. There are limitations for the benefit of Grantor’s family, however, Treasury Regulation Section 25.2702-2(a)(1) does not recognize a RDP as a family member, and therefore can be a qualified remainder beneficiary. Gift will be valued based upon actuarial tables and the term of the grantor retained interest.
c. Qualified Personal Residence Trusts (QPRT), for transferring title of the grantor’s residence to the other partner, by gifting the residence to the QPRT, with the grantor retaining an interest for a specified term of years.
d. Life Insurance Trusts can be used to replace lost income of decedent partner as well as to provide liquidity for the payment of estate taxes, debts and expenses of administration.
e. Creation of LLC or other formal entities to hold title to real property or for the management and operation of a business. Specific facts and circumstances must be considered before creating any entity to hold property.
f. Other advanced planning techniques should be explored as well. These include the use of family entities so that liability protection, gifting, and discounts may be available. Fractional interest gifts of real property may be utilized to obtain fractional interest discounts.
TAXATION ISSUES FOR REGISTERED DOMESTIC PARTNERS
A. Income Tax Issues
SB 1827, signed by the Governor on September 30, 2006, removed two of the continuing inequities in state tax law. Family Code Section 297.5(g) was repealed. California law now permits domestic partners to file joint returns and requires them to file as married filing separately if they do not file jointly. It also removed the provision of prior law that earned income would not be treated as community income. The conflicts with federal tax law remain.
Under prior law, domestic partners had to use the same status used in filing federal income tax returns. Federal law does not does not consider domestic partners to be married. Defense of Marriage Act, 1 U.S.C. 7, provides:
In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word `marriage' means only a legal union between one man and one woman as husband and wife, and the word `spouse' refers only to a person of the opposite sex who is a husband or a wife.
Thus, for 2005 and 2006 domestic partners had to file individual federal and state income tax returns. For 2007 and later years they will continue to file individual federal returns even though they may file joint state returns. The Franchise Tax Board is currently establishing guidelines and procedures for the implementation of SB 1827.
Filing Status for California RDPs must be Married Filing Joint Return or married Filing Separate Return. Head of Household will only be available under limited circumstances, most specifically if the partners have separated, filed for dissolution and not living in the same residence.
There are a multitude of other tax issues that can arise. Some as simple as the sale of a personal residence. Obviously, the federal government will not recognize the $500,000 exclusion between domestic partners since a joint return is not permitted under federal law. Will they allow each domestic partner to exclude $250,000 from gain if they are not co-owners. In addition, will there be a federal and/or California tax consequence to the receipt of distributions from a qualified retirement plan.
B. Estate and Generation Skipping Transfer Tax Consequences
On death, partners are ineligible for the unlimited marital deduction for transfers to a surviving partner. They are also ineligible for the step-up in basis for the survivor’s share of community property (IRC § 1041). They may transfer up to the unified credit amount to their partner upon death which is currently $2,000,000. As federal law does not recognize community property between partners, any transfers between partners either during life or upon death will be deemed gifts of separate property.
When making transfers on death to the surviving domestic partner, it is important to utilize bypass trusts so that any property passing to the domestic partner is taxed at the first death but then excluded from the surviving domestic partner’s estate on his or her death. These trusts are obviously irrevocable and can contain the ascertainable standard, allowing the survivor to access principal for health, education, support or maintenance or unlimited access if an independent trustee is appointed. The survivor can be given a limited power of appointment if the deceased domestic partner wants to allow the surviving domestic partner to change the beneficiaries.
Generation-skipping transfer (“gst”) tax laws may also come into play. If the surviving partner is less than 37-1/2 years younger than the deceased partner, generation-skipping transfer tax will arise on any such property transferred over the exclusion amount, which currently is equal to the unified credit amount of $2,000,000. Gifts to a niece or nephew or to a partner’s children or grandchildren may trigger gst tax as well. Thus, practitioners need to be aware of the interplay of these rules.
C. Gift Taxes
Under Internal Revenue code Section 2523, gifts between spouses are not subject to gift tax. This does not apply to domestic partners. When domestic partners transmute separate property to community property, gift tax is triggered on the amount of transfer, less the annual $12,000 gift exclusion and lifetime gift exclusion of $1,000,000 allowed per individual.
Because of complications, with the gift and estate tax laws it is as important for domestic partners to structure their estates as it is for a married couple. Partners can utilize a $12,000 per year annual gift tax exclusion under IRC § 2503(b)(1). Additionally, medical and educational expenses of a partner are exempt if they are paid directly to the provider such as directly to a university or hospital under IRC § 2503(b). Transfers on death up to $2,000,000 in 2007, increasing to $3,500,000 in 2009, unlimited in 2010 and back down to $1,000,000 in 2011 can be utilized. Bear in mind that the lifetime exclusion for gifts is only $1,000,000.
CONSIDERATIONS ON DISSOLUTION OF DOMESTIC PARTNERSHIP
A. Jurisdiction: California Family Court
1. Question of jurisdiction regarding pre-registration oral and written agreements between the partners.
2. Substantive law applicable to pre-registration assets.
B. Federal Preemption over State Law for federally regulated assets (i.e. Treasury bonds, federal pensions, ERISA regulated pensions, social security benefits)
C. Tax Issues due to Federal Non-Recognition of Domestic Partnerships:
Internal Revenue Code Section 1041 prohibits recognizing any gain on property transfers between spouses either during or after marriage if the transfer was incident to divorce. Since that provision only applies to a “spouse” or “former spouse,” it currently does not apply to domestic partners. This could result in a taxable transaction if the community property is not divided equally or when separate property is used in dividing community property. This is particularly problematic when living in a non-community property state or when dealing with non-community property or quasi-community property in equalizing a division.
1. No statutory exemptions for distribution of assets between spouses (RDPs are not spouses under federal law).
2. Uncertainty of tax treatment of Community Property transfers: possible considerations:
a. possibly no tax consequence
b. possibly taxed as income to recipient
c. possibly taxable as capital gains to recipient
d. possibly transfer exempt as required by state law
3. Spousal Support Issues:
a. Will support be based on length of relationship or just on registration period?
b. Taxation
i. No federal preemption, so not recognized as spouses
ii. No deduction for paying spouse: Sections 71 and 215, which provide for the deduction, are applicable only to spouses and former spouses.
iii. Possibly taxable to receiving spouse as income or gift
(i). Rev. Rul. 68-379: potentially taxable gift to the extent value of transferred property exceeds the value of support rights surrendered.
iv. At the present time, the Franchise tax Board does not intend to tax nondeductible support received, however the IRS may look upon this as a taxable gift.
D. Earned Income:
Practitioners are still uncertain as to the appropriate recognition of earned income. Here again, the IRS may look upon the disproportionate contribution of earned income by the two partners to the DP as creating a taxable gift to one of the partners, especially upon dissolution where the earnings of both parties will be scrutinized. If one partner contributed more to the “community,” did that partner make a gift or income to the other.
PROPERTY TAX ISSUES : to be completed at a later date