Ask MAX: We Aren't Married, Will She Owe Taxes When I Die?

April 13, 2006

Dear MAX,

I'm 62 years old and am not married but I have lived with my girlfriend for over 17 years. She is the main benefactor in my will (which includes a house and a decent-sized mutual fund portfolio), and I plan on leaving her my IRA assets. Will she be required to pay taxes on those assets?

Thanks.

Ron
Atlanta, GA

Dear Ron,

Stuffy old Uncle Sam still doesn't give his full blessing to unmarried couples.

When married people die, they may leave their spouse an unlimited amount of assets free of federal estate taxes. That's called the marital deduction.

Unmarried couples do not receive an unlimited marital deduction, and therefore your girlfriend could be due a nasty tax bill after you leave this mortal coil.

Your estate is the total value of all of your assets, less any debts, at the time of your death.

If you died tomorrow and your assets total less than $2 million (the current federal estate exemption, increasing to $3.5 million in 2009), your girlfriend won't have to pay anything by way of taxes.

If you want to leave an IRA or property in excess of the exemption, it will trigger the dreaded estate tax - currently as much a 46% of the estate's value.

Under the laws in effect for the tax year 2006, if you die with an estate greater than $2,000,000, the amount of your estate that is over that amount will be subject to a graduated estate tax that climbs to as high as 47 percent. That $2,000,000 is an exclusion, meaning that the first $2,000,000 of your estate does not get taxed. (Note: the estate tax is going to be nullified on January 1st, 2010, but will return the next year; so if you can arrange it, you'd be very considerate to kick the bucket between those dates.)

If your estate exceeds (or if you think it will exceed) the estate tax exemption, consider gifting some assets to your partner before you die. In 2006 you can give as much as $12,000 a year to whomever you like without either you or they having to pay taxes on it. Do enough gifting and you might be able to lower your estate’s value to below the estate tax exclusion amount.

Even if your estate is small, there will be expenses at your death. There are administrative costs, court costs, legal fees, probate expenses, and sometimes state inheritance or estate taxes (in Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Ohio, Oklahoma, Pennsylvania, Tennessee, but not in Georgia) even if your estate is worth only $50,000 .

These pesky costs mean that your girlfriend will have to come up with the cash to pay them. That can be a problem if the bulk of an estate is tied up in a home. Your girlfriend might be forced to sell your house in order to raise the money.

If you're going to stick your girlfriend with a bill when you pass on, think about leaving her enough cash to pay the taxes. Life insurance is a solution, since it provides cash to your partner upon death, which can be used tax-free by your partner either to pay estate taxes and other post-death expenses, or to pay living expenses.

Better yet, if you start to feel a bit under the weather, head to Vegas and get hitched.

Thanks for the question,

MAX

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