Apr 04, 2008  |  By: STEVEN M. SUSHNE  | COMMENTS     

Despite recent declines in home values, most Americans still have the majority of their wealth tied up in their homes, and gay and lesbian couples are no exception. As a gay real estate attorney, I have handled thousands of refinance and purchase transactions, many for gay and transgender clients.  Because federal, and many times state, laws do not protect our relationships, I see some common errors in dealing with gay and lesbian property ownership. The following are the four most common mistakes gay and lesbian couples make and how to fix them.

It’s all in the title. By far the biggest mistake a gay person can make with property is thinking that your house will pass to the person you want.

Gay and lesbian couples can title properties two different ways. The first option is “tenants in common,” in which, upon the death of the first partner, the first partner’s share of the property passes pursuant to the will of deceased partner, or if there is no will, pursuant to a pre-determined state formula (which likely does not include your partner).

The second option, the one nearly every gay couple should use is called “joint tenants” or more formally “joint tenants with right of survivorship.” If you own your property as joint tenants, upon the death of the first partner, the property automatically and instantly becomes the property of the other partner.

Be careful, however. If you own the home as joint tenants, the IRS assumes that the value of the entire home falls in the estate of the first person to die unless the surviving partner can prove their contribution.

Take Action: Confirm how you hold title. If you are uncertain, it’s important that you do not delay and find the original deed or a copy (your local title company can obtain one for a nominal fee) and read it. If you do not see the words “joint tenants,” then you own the property as tenants in common.  Consult a local real estate attorney or title company and have a new deed drafted and recorded in the local recorder of deeds office. If you own more than one house, make sure that you do this for each property. But be advised that many jurisdictions charge transfer taxes. 

Don’t take it for granted. Most couples purchasing houses require the income of both partners to afford the monthly payments. In the event that one partner dies, the other is often forced to sell the property. The best way to prevent the surviving partner from having to sell the property is for each partner to purchase life insurance. 

Take Action: Purchase a life insurance policy to cover the balance of the mortgage. However, because we cannot marry, it may make sense for estate tax reasons to own the policy on each other.  Consult a financial adviser for details. In addition, every time you refinance or purchase a new property, make sure that you revisit life insurance needs to ensure that you have enough coverage and for a sufficient period of time.

MANAGING UNCLE SAM. For married couples, determining which partner’s account the mortgage payment comes from simply doesn’t matter. For gay and lesbian couples, however, the decision can be worth thousands of dollars. The partner who actually makes the mortgage payments and property taxes is the one who may take the deduction.

Take Action: Have the partner with higher income (and higher tax bracket) pay the mortgage payment and property taxes. For estate tax reasons, it’s important that the partner paying the mortgage payment and property taxes do so from an account that is solely in the higher income-earning partner’s name. The other partner can contribute by paying for non-tax deductible expenses. (As an aside, this same strategy works for charitable deductions as well.)

Reviewing your safety net. Do not presume that because you both own the house your insurance automatically covers you both in the event of fire or other claim. Insurance companies do not discriminate in adding additional owners to property insurance, but you won’t be covered if you don’t ask.

Take Action: Dig out your homeowner’s insurance policy and make certain that both partners’ names are listed as insureds. This is particularly important if one partner has come into the relationship after the house was purchased or if the mortgage is only in one partner’s name. If you cannot find your policy or are uncertain, call your insurance agent for a copy. Ask the agent to identify where you can find both partners’ names in the policy. Make sure to check every time your policy renews and every time the insurance company sends a rider.