10 Tax Facts to Know About Marriage and Blended Families – ThinkAdvisor

1. What are the requirements for drafting a valid separation agreement?

A separation agreement (sometimes referred to as a property settlement agreement) is an agreement between two married spouses who have decided to separate and may be especially appropriate in cases where the spouses share custody of a child. Most state statutes require that a separation agreement be in writing, although this requirement is not as strictly construed as in the case of prenuptial or postnuptial agreements (for example, some New York courts permit oral separation agreements to be made while the parties are in court).

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2. How are alimony payments taxed?

Alimony and separate maintenance payments generally are taxable to the recipient and deductible from gross income by the payor (even if the payor does not itemize). Alimony payments are deductible regardless of whether the payment is made from taxable income (i.e., the deduction is still allowed even if the payor used savings in order to make the payment).

The individuals may agree in the written divorce instrument or separation agreement that the alimony payments will be excludable by the recipient and nondeductible by the payor, and a state court may also order this treatment.

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3. What are domestic partner employment benefits and how are they taxed?

Domestic partner benefits are benefits that an employer voluntarily offers to an employee’s unmarried partner. An employee’s domestic partner may be of the same sex or the opposite sex. An employer determines the scope of its plan’s definition of domestic partner.

Employers may offer a range of domestic partnership benefits, such as health insurance or family, bereavement, sick leave, and relocation benefits.

An employee is taxed on the value of employer-provided health benefits for his or her domestic partner unless the domestic partner qualifies as the employee’s dependent under IRC Section 151. The tax is determined by assessing the fair market value of the coverage provided to the domestic partner.

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4. What are the estate tax implications when a couple marries?

Federal estate tax rules have evolved in recent years to make it easier for legally married couples to avoid transfer taxes when passing wealth from one spouse to another spouse after death. Both same-sex and opposite-sex couples are now able to take advantage of these special rules.

For example, the $11.7 million (in 2021) exemption is portable between spouses if an election is made on a properly filed estate tax return, meaning that legally married couples can now rely on shielding a combined $23.4 million from estate taxes without having to engage in complex and expensive estate planning in order to determine which spouse should technically own marital assets.

Because same-sex married couples are now entitled to this federal tax treatment, these couples should be advised to review their estate planning documents to take into account the fact that these taxpayers are now entitled to both the portability election and the marital deduction.

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5. What are the gift tax implications when a couple marries?

Legally married couples are permitted to pool their $15,000 (in 2019-2021) annual gift tax exclusion so that each couple is able to make annual tax-free gifts of up to $30,000. If a gift is treated as a split gift for gift tax purposes, it will also be treated as a split gift for generation skipping transfer (GST) tax purposes.

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6. What are the potential gift and estate tax consequences when unmarried partners own property jointly?

Two unmarried partners may own property as a joint tenancy with a right of survivorship, meaning generally that each individual is a co-owner of the property and that upon the first partner’s death, the survivor retains his or her right to the property.

While this can be a beneficial estate planning strategy, gift tax liability can arise when one party contributes more of the purchase price than the other.

Further, the property may be included entirely in the deceased partner’s estate upon his or her death unless the surviving partner is able to show that he or she contributed to the purchase price of the asset. On the other hand, a legally married couple is able to take advantage of both the marital deduction and portability options when jointly owned property is involved.

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7. What is a blended family?

Most commonly, the term refers to individuals who have remarried after prior marriages have ended in divorce. These couples may have children from prior marriages, and may have children together, potentially resulting in a situation where individuals may wish to provide for children from both current and prior marriages, and also stepchildren. Each client may wish to ensure that his or her own children (rather than stepchildren) are provided for in the event that they are the first-to-die spouse, but may concurrently wish to provide for their surviving spouse even if their own children are the ultimate beneficiaries.

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8. What basic planning considerations must be accounted for in blended family situations?

When an individual enters into a second or subsequent marriage, it is entirely possible that he or she has entered into agreements with a prior spouse that must be taken into account when entering into estate planning strategies in contemplation of providing for a spouse from a subsequent marriage. These existing agreements could provide for continuing support obligations, required funding of life insurance policies for the benefit of a former spouse or previously agreed upon beneficiary designations on retirement accounts or other financial products.

Importantly, many individuals who enter into second or subsequent marriages already have children from a prior marriage and may wish to ensure that those children are provided for before leaving any assets to stepchildren. Both accurate, updated beneficiary designations and trust arrangements can be useful in this context.

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9. What is the impact of divorce and remarriage on Social Security planning?

Typically, a surviving spouse may be entitled to receive Social Security survivor benefits based upon the earnings record of the deceased spouse. In the case of divorce, however, if one spouse remarries before age 60, he or she may no longer be entitled to claim survivor benefits based on the prior marriage unless the subsequent marriage ends. This is the case unless the prior marriage lasted for at least 10 years.

Social Security survivor benefits are not affected if the surviving spouse remarried after he or she reached age 60. In certain cases where the surviving spouse remarries after age 50, but before age 60, that spouse may remain entitled to a prior spouse’s Social Security benefits if he or she was disabled at the time of the remarriage.

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10. What considerations should be accounted for in choosing a trustee when a blended family is involved?

Many individuals who are engaged in estate planning for a blended family choose to establish trusts to ensure that their wishes in providing for various heirs are carried out. In these cases, it is important to carefully consider who will serve as trustee in carrying out those wishes.

Many remarried individuals may be tempted to appoint their surviving spouse as trustee, but the relationship between the surviving spouse and any children from prior marriages should be considered before making this choice. A corporate or institutional trustee may provide the best option in order to minimize conflict in blended family situations in that an impartial third party will be making decisions regarding trust distributions and general administration.

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