Domestic Partnerships: How to Avoid Costly Inheritance Taxes on the Family Home
In this modern era, families come in all shapes in sizes. It has become fairly common for same sex couples to buy a home and raise children. Then there are opposite sex couples who share their lives, including buying a house together, but forego the formalities of marriage. In 2009 the Maryland legislature enacted legislation providing some measure of protection to these more nontraditional families. Specifically, the legislature created “domestic partnerships” and imbued them with one of the legal advantages of marriage.
At death Maryland imposes an inheritance tax of 10% on all assets that pass to people who are unrelated to the decedent or who are further removed in relationship than a brother or sister. Importantly, there is no inheritance tax imposed on assets passing to a spouse. Thus when the family house, often times the most valuable asset in the estate, passes to the surviving spouse, it is subject to no inheritance tax.
People who are neither married or closely related, but who jointly own their own house have a problem. When the first dies, the second becomes the legal owner of the property but is now subject to a 10% inheritance tax on the amount inherited. Thus, for a house worth $300,000 the survivor owes the state of Maryland $15,000 (10% of the half inherited by the surviving spouse).
The 2009 legislation creates a class of people called “domestic partners.” Domestic partners are exempt from inheritance tax on a jointly owned primary residence. Second houses (or any other types of assets, for that matter) don’t get the exemption, only the primary residence. In addition, if only one of the domestic partners names is on the deed to the house, the exemption does not apply.
So how do people become “domestic partners?” They must be at least 18 years old and not related to one another. Their sex does not matter, they can be same sex or opposite sex couples. They must sign an affidavit indicating their agreement to be in a relationship of mutual interdependence. Attached to the affidavit must be two documents as proof of the interdependence. The types of documents that satisfy the statute are:
- joint lease, mortgage or loan,
- designation of one of the individuals as the primary beneficiary on the other’s life insurance or retirement plan,
- designation of one of the individuals as the primary beneficiary of the will of the other,
- health care or financial power of attorney granted by one of the individuals to the other,
- joint ownership or lease of a motor vehicle,
- joint checking account, investment or credit card,
- joint renter’s or homeowner’s insurance,
- coverage on a health insurance policy,
- joint responsibility for child care, such as a guardianship or school document, and
- relationship or cohabitation agreement.
The surviving domestic partner must present the affidavit and accompanying documents to the Register of Wills to be exempt from inheritance tax on the primary residence. Thus the affidavit and documents should be kept in a safe place – theoretically along with the Will and other important legal papers.