Since the federal government now treats a registered domestic partner’s income in CA as community property income (each partner has a right to half of the other partner’s income), it’s a great time for CA couples to revisit how their investment accounts are titled, and where contributions should be directed going forward.
If you are over the age of 35, you probably have assets in a few different types of accounts (IRA, Roth, 401k, living trust, etc). So what happens when you register as domestic partners in CA? Imagine you had a SEP IRA worth $300,000 just prior to registering your partnership. If you contribute another $200,000 over the next 10 years, only $400,000 of your contributions ($300k + 50% of $200k) belongs to you.
If, after registering, you contribute more funds to the same investment accounts, you will end up commingling separate property and community property assets. In the event of a divorce, that means more accounting and estate planning fees will be incurred to figure out who gets what. In short, a couple should consider creating new accounts following the registration date of the relationship. If, for example, John and Mike each have IRA accounts, and then register, they can each create new IRA accounts and direct all future contributions to the newly created IRA accounts – same thing goes for any joint / trust accounts where the partners contributed unequally to the account. Now you have a clear paper trail for all of your accounts. “At a minimum, know what you had in the accounts prior to your registration or marriage. This will make preparation of federal tax returns much easier as well, now that the IRS requires splitting of community property income,” says Deb Kinney, an estate attorney in San Francisco. The appreciation in your separate property accounts (that you stop contributing to once you register) will also remain separate property.
Planning for divorce isn’t romantic, but it’s well known that divorce rates typically come in around 50% in America. “Ironically, the divorce rate for couples with prenuptial agreements is less than for those without the agreements,” says Maurice Ross, an estate attorney in New York. Perhaps this means that planning for the worst brings out the best in couples. As the saying goes, failing to plan is planning to fail. So please open up these dialogues with your partner, just maybe not on Valentines Day.