Blogs Derek's Tax Blog Hidden Tax Issues for Everything But Marriage
What are the tax implications for Washington's new Everything But Marriage Law? Plenty.
Washington's voter approved Referendum 71, the so called Everything But Marriage Law, creates some interesting Federal Estate and Gift Tax results. Under this law Registered Domestic Partners will get all of the state law protections and rights that a married couple have. This even extends to the right to community property and the right to leave your estate to your partner free from state estate tax. However, these rights are only state property rights. They do not control how the IRS views a transfer between partners. For Federal purposes every transfer between partners is potentially subject to transfer tax.
To illustrate the strange tax results lets review an example. Chris and Pat have been in a committed relationship for years. Pat is a successful surgeon and Chris owns an engineering firm. They each have a significant income and have invested their assets wisely over the years. Each has a net worth of approximately $4 million comprised of business holdings, real estate, retirement, and securities. They have no children and but for the tax law would like to leave everything to the survivor at the first death. Therefore, at the first death $4 million will be transferred from the decedent's estate to the survivor. Depending on how their relationship is defined, this will create three very different tax results. Consider:
- Single Individuals. For both Federal and State purposes this transfer is considered a taxable event. The exemptions against estate tax are $3.5 million and $2.0 million respectively. Therefore the Federal Estate Tax due is $117,000 and the State Estate Tax due is $240,000 for a total of $357,000.
- State Registered Domestic Partners. For state purposes this transfer is exempt from taxation under something akin to the Federal Unlimited Marital Deduction. However, since their status is not recognized by the Feds, this transfer will still be subject to $117,000 in Federal Estate Tax.
- Married Couple. For both Federal and State purposes this transfer is exempt from taxation.
In our example, Chris and Pat will save $240,000 in State Estate Tax if they register under the new law. Of course giving the entire estate to the survivor is not the most efficient tax planning since the survivor will only have one Federal and one State exemption to use. However, with proper Registered Domestic Partners Estate Tax Planning, they will be able to exempt at least $4 million from the State Estate Tax and $7 million from the Federal Estate Tax on their joint estate.
Anyone who has followed the estate tax over the last few years, will recognize that the exemptions are scheduled to change next year and again in 2011.
Next time I will discuss the perils of creating community property between registered domestic partners.