by Jay Gleason
You have been with your partner for a number of years now. You have both lived in your residence for almost that same time. It is your home—both of yours, as far as you both are concerned. So, why not contact your local real estate attorney and request that he or she add your partner onto your deed? There could be several pitfalls to taking this simple step, and there is a better way of protecting both of your futures.
First, if you execute a new deed from yourself to you and your partner as joint tenants with rights of survivorship, you have made a gift. The value of the gift is one-half of the fair market value of the residence. Under Federal Law this requires you to fill out U.S. Tax Form 709 in order to file a gift tax return. You only use up part of your lifetime gift exemption ( maximum: $1,000,000 ) , which would be applied against your estate tax exemption at your death ( maximum: $2,000,000 ) . However, if you have already used up your lifetime gift exemption, you would incur a gift tax, payable by April 15 of the following year.
Additionally, when you sell the property, you both will need to sign the deed to transfer the residence. If your partner was involved in an accident or has a serious illness and is disabled, you may need to open a guardianship case in the circuit court due to your partner's inability to competently sign the deed—which can be a very time-consuming and costly endeavor. This emphasizes the need to have an effective durable power of attorney for property, which will allow a designated agent to serve on behalf of the disabled party.
Liability may also be a concern. Suppose your partner is an obstetrician. He or she could be subject to a medical malpractice suit. Your partner's creditors, who are suing your partner for malpractice, or alleged malpractice, may obtain a judgment and execute a lien against your property. Moreover, those creditors could force a sale of your residence to satisfy the judgment. Further, although you may not want to consider it, what if you separate? If you hold the residence as joint tenants, your partner could petition the circuit court to obtain a partition order separating the property. Being an equal tenant in common, he or she would be able to walk away with half of the proceeds from a forced sale.
Finally, if you were to pass away first, your entire interest would pass to your partner. What if you do not have a relationship with your partner's family? Or what if your partner meets someone new after you are gone and executes a new deed to his or her partner as a joint tenant? After your partner's death, where will your home end up? Will it end up with a stranger? You want your partner to remain living in your home if you are gone, but you want to control who benefits from the home after your partner's death.
You could satisfy most of these concerns by creating your own revocable living trust and executing a deed transferring title to yourself as trustee of your trust. You would be the original trustee of your trust and would maintain control over your assets. However, you could provide a provision that your residence is maintained in trust for the benefit of your partner's occupancy. You could provide that your partner can stay in the residence without paying rent. Additionally, your partner could sell the property and use the proceeds to purchase a new residence which could also be held in the name of the trust.
The trust would allow you to choose a successor trustee upon your disability or death; this person could be your partner. By having your successor trustee take over after your disability or death, you could avoid both a court guardianship and a probate proceeding. This would reduce court costs, attorney's fees and time at your death and/or disability.
If you have children, using a revocable living trust could also help you avoid estate taxes. The value of the residence could be used to fund a family or bypass trust. The family trust would hold title to the residence, letting your partner live in the residence. Upon your partner's death, however, the house could pass to your children without being part of your partner's estate for federal estate tax purposes. If your partner had an estate of his or her own valued at $2,000,000 at death, keeping the value of the residence out of his or her estate could avoid some major federal and Illinois estate taxes. The current federal rate is 46%, while Illinois' highest rate is 14%.
The revocable living trust could also be drafted to provide asset protection for your surviving partner. You could add 'spendthrift' provisions to the trust, preventing any of your partner's creditors from attaching any assets in your trust. Therefore, your obstetrician partner would not be kicked out of your home if a malpractice judgment were executed against him or her.
You should make sure that you consult an attorney with expertise in the estate planning field before proceeding with the creation of a revocable living trust.
John M. ( Jay ) Gleason, J.D., LL.M, practices at the Law Offices of Bruce Kiselstein Ltd, 930 E. Northwest Hwy, Mt. Prospect. You can contact him at 847-670-8200 or firstname.lastname@example.org .