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When Same-Sex Relationships End
Same-sex couples may enter into legally recognizable relationships in various states in the country. While only Massachusetts extends the right to marry at this time, several other states have extended marriage-like rights and responsibilities to these couples by way of a domestic partnership, civil union or reciprocal beneficiary relationship. In addition, many couples cohabit, and mix their income and assets, without any formal legal agreement, recognition or protection. Of course, some relationships end. In the event a relationship with commingled assets or income ends, there may be a transfer of cash or property between members of the couple. Depending upon the manner in which the transfer is characterized, any transfer between a same sex couple may have taxable consequences. Even if a same-sex couple receives recognition of their relationship at the state level, such recognition is not available at the federal level because of the federal Defense of Marriage Act (DOMA). Accordingly, same-sex couples will need to face the complex matter of potential tax ramifications resulting from the agreements they have made upon such dissolution of their relationship relative to their assets and income.
Gift Tax Treatment of Transfers Upon Dissolution
Where the dissolution of a same-sex relationship results in a transfer of cash or property, gift tax liability will result unless the transfer is: 1) made in exchange for either valuable consideration or support rights; 2) pursuant to a court order; or 3) qualifies for another exception to the gift tax. Most practitioners are familiar with the concept of consideration in the context of a contract. That which is sufficient consideration to support a contract, however, is not necessarily sufficient consideration for gift tax purposes. Under Section 2512(b) of the Internal Revenue Code (the Code), in order to avoid the possible imposition of gift tax, the consideration must be 'adequate and full consideration in money or money's worth.' The release of support rights by a spouse constitutes consideration in money or money's worth. As such, Revenue Ruling 68-379 recognizes that a transfer of property in exchange for the release of support rights results in a taxable gift only to the extent that the value of the property transferred exceeds the value of the support rights released.
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