Monday, February 18, 2013

Using Written Contracts in States that do not Recognize Same-Sex Marriage

I spent this morning in a stimulating discussion with Dean Suzanne Reynolds' Family Law class at Wake Forest University School of Law. The students' questions were tough and insightful, and I enjoyed my experience immensely. The topic of the discussion was written contracts for same sex couples.

Such written contracts are useful, but parties' contracts can not totally substitute for marriage rights. For example, agreements can not provide for alimony. Likewise, courts are not bound by agreements regarding child custody and support.

Further, agreements do not bind the government. So, tax consequences are out of the parties' hands. Also, parties may still be ineligible for government benefits such as Social Security. Finally, parties may still have no standing for claims such as wrongful death or loss of consortium.

Parties can agree about the ownership of property. So, essentially, agreements substitute for equitable distribution. Agreements will provide for the acquisition, ownership, and dissolution of joint property.

The preface to the agreement should do three things. First, the preface should show how the property was acquired. Second, the preface should show what property will continue to be separate property. Third, the preface also should list the property that will be held jointly.

If one partner already owns the property, there may be negative tax consequences for the other partner. There may be a presumption that the joint property was a taxable gift from one partner to the other.

To avoid the presumption of a taxable gift, the agreement should show the initial contribution that each party made to the purchase of the property. The initial contribution may be an amount paid for the down payment, or sales proceeds from the party's other property.

Agreements should set out how the property will be held and managed. The parties may establish a joint account solely for joint expenses. They may agree to contribute a certain amount or a certain percentage to the joint account. The agreement may provide for sharing the cost of upkeep, maintenance, repairs, and improvements.

Agreements should set out how the property will be dissolved. Many events may trigger dissolution of the joint ownership. The parties might sell the property while remaining a couple. Due to aging, illness, or some other factor, one party may become incompetent. One party may predecease the other. The agreement should provide for each of these contingencies.

One party may be forced into bankruptcy. Since property owned by unmarried parties is held jointly or in common, instead of by the entireties, the property is vulnerable to a party's separate creditors. The agreement should provide a way for the other party to buy out the bankrupt party's share of the property.

Most contentiously, the parties may break up. The agreement should set out who gets to choose to stay, and who has to go. The one who has to go may have to continue to pay the property's joint expenses until the property is sold. The one who gets to stay may have to give the other party some credit for the fair rental value of the residence. Or, the one who stays may have to buy the other one out. The agreement may provide that the leaving partner has no financial obligation if the staying partner brings in a new girlfriend/boyfriend.

Generally, agreements give one party the right of first refusal to buy the other out. The agreement will have to set out how the property will be appraised. If the right of first refusal is not exercised, the agreement should set out how a Realtor will be selected, how the listing price will be set, and when an offer will be accepted.

To keep the parties' private affairs out of the public record, agreements should include recourse to mediation or arbitration, or both.

Agreements are not the last step. Parties may decide to be married, civilly united, or domestically partnered. While not recognized here and now, when recognition comes, these events may establish an early beginning date for tax purposes or government benefits. However, parties must be careful not to become "wed-locked:" unable to dissolve their marriage, union, or partnership.

Parties may decide to establish an inter vivos trust to substitute for alimony. Such trusts are sometimes appropriate when one partner earns substantially more than the other. However, unlike alimony, trusts are not as easily modifiable.

Parties must ensure that they actually title joint property jointly. Joint property may include real estate, time shares, vehicles, bank accounts, financial instruments, retirement accounts, life insurance, and closely-held businesses.

Parties may wish to execute reciprocal wills, living wills, powers of attorney, and health care powers of attorney.

Parties may have to do something to protect their children. They may consider adoption, second-parent adoption in another state, artificial insemination agreements, sperm donor agreements, parenting agreements, or "friendly" lawsuits.

Clearly, these agreements can become quite complicated. This general outline is not intended as legal advice, nor should it be relied upon as such. If you are considering whether an agreement might be right for your situation, I would be happy to discuss your particular situation with you in a private consultation; just call me to set up an appointment. Also, I welcome general comments and questions in the public comments section below.