Thursday, September 16, 2004
A story published today by
Forbes.com reports that unmarried homeowners often pay much higher estate
taxes when they die than do their married counterparts. Here is what
the story says:
widowed father just died, leaving an estate valued at well over $1.5
million, including the house where you grew up and spent every holiday. He
never remarried but as one of his heirs you may soon be wishing he had.
As a single person, your father's estate could be taxed as high as 48%,
leaving you and his other heirs with a whopping tax bill. And that house?
Most likely, soon it will be just another memory.
taxes aren't a pressing concern for most Americans. In fact, only a little
over 2% of all estates are large enough to be taxed, according to the U.S.
Internal Revenue Service. (The 2% only includes estates woth $1.5million
Still, of the thousands of people that do pay estates taxes--a total of
51,159, or 2.18%, out of 2.3 million estates left in 2000 were taxable,
according to the IRS--estates owned by single or unmarried individuals
take a much bigger tax hit than married owners.
While these numbers seem comparatively small and skewed toward the
wealthy, it could be a growing concern as the number of unmarried
households is on the rise, particularly as housing prices remain strong.
According to the U.S. Census Bureau, there are about 5.5 million
unmarried-partner households, up from 3.2 million unmarried-partner
households in 1990. Often, the majority of the deceased's net worth is in
husband or wife can leave their spouse an estate of an unlimited size and
not pay a cent in federal estate taxes as a result of the unlimited
marital deduction. In contrast, an unmarried person's estate that was not
left to a charity or placed in a charitable trust, an estate left from a
single person to a non-spouse--even a child or a parent--could be taxed
between 25% to 48%.
"It's a huge disadvantage for singles," says Mary Randolph, legal editor
at Berkeley, Calif.-based Nolo, a self-help legal publisher and legal
software provider. "You could have a billion-dollar estate and leave it to
your spouse, and there's no tax on the transfer. Of course, it really only
delays the tax payment, because when the second spouse dies he or she will
have to pay it. But that does give that spouse time to plan."
While the current laws seem to be stacked up against singles, tax
attorneys say that there are some options for single people, and with some
planning, anyone concerned with estate taxes can take steps now to lessen
the blow for their heirs later.
"While single people may not have the same options as married people, they
can still make gifts the same way that married people can," says Paul
Karan, a trusts and estates lawyer with New York-based law firm Todtman,
Nachamie, Spizz & Johns, P.C. "There are also techniques single people can
employ involving trusts."
Depending upon the circumstances, Karan says a home can be placed into a
Qualified Personal Trust Residence--available
to married couples as well--which allows the property owner to live in and
enjoy the home while he or she is still alive, and at the end of a
specified period of time, the home transfers to the designated recipient
in the trust, and the home is no longer part of the owner's estate. If the
original owner chooses to live in the house after the property has been
transferred to the trust, he or she must pay fair market rent.
"The trick is not to die before the property is transferred," says Karan.
"Otherwise, for tax purposes, the house is taxed as if it's part of the
The primary tax advantage to a QPRT is that the value of the property
diminishes over the course of time it is used by the owner. For example,
if a parent owns a house that's worth $1 million, and continues to use it
for ten years before it is transferred into a trust, the value of the
property is a fraction of what it would be if it were transferred at the
time of one's death, because the value of the person's right to live in
the residence for the specified period of time is subtracted from the
value of the house. A house worth $1 million on the open market might be
taxed as a $500,000 gift if it were placed in a QPRT because the value is
discounted based on the time it is used by the owner. If however, the
person dies before the fixed term has expired, the house would be taxed
according to the fair market value.
Karan also suggests that unmarried couples who are living together draw up
a legally-binding cohabitation agreement to avoid any confusion if one of
them dies. The cohabitation agreement could specify matters such as how
property is distributed in the event of a death or a breakup; who will pay
"Two single people who are living together and make provisions for each
other can enter into a cohabitation agreement, which is perfectly legal.
The purpose of the agreement is to spell out who is contributing what, and
what happens when they split up or one of them dies."
Clearly, single people aren't completely helpless when it comes to estate
planning. Still, that doesn't stop civil rights groups from arguing for
some tax reform. Thomas Coleman, executive director of Glendale,
Calif.-based Unmarried America, a non-profit civil rights group that
represents single Americans, says the estate tax doesn't affect many of
its members, but it's a source of contention.
"As a matter of policy, we don't think it's fair to award people in the
area of taxation because of marital status," Coleman says. "We may suggest
that the marital exemption is eliminated. It's from a different era when
women didn't work and they were dependent on men. It doesn't seem fair
that in some cases, a parent can't leave any wealth to their children
without the government grabbing at it."