Oregon common law has recognized domestic partnerships for about the past 30 years. However, the Oregon Legislature had never enacted a statute until recently when Governor Kulongoski signed the Oregon Family Fairness Act (“the Act”) into law on May 9, 2007. The Act will become effective on January 1, 2008. Generally, the Act provides that the same responsibilities, privileges, immunity, rights and benefits granted by Oregon law to married couples, surviving spouses and their children will be provided to registered same sex domestic partners and their children. It is estimated that 500 such rights exist; including those under intestate succession, electing Oregon special marital property in wills and trusts, giving priority to a domestic partner to make decisions regarding health care and disposition of remains.

This article will discuss the most significant rights and benefits that will become available beginning on January 1, 2008.

A. GENERAL PROVISIONS OF THE FAMILY FAIRNESS ACT

1. The Act does not alter the definition of marriage as between one man and one woman under Oregon law or federal law. Unlike marriage, the Act does not require that domestic partnerships be solemnized. If domestic partners wish to have a commitment ceremony or have their domestic partnership solemnized, they are free to do so. However, it is important to note that the Act allows religious institutions to decide whether to perform such ceremonies and couples are encouraged to do their research.

2. Furthermore, the Act only grants these rights and responsibilities under Oregon law. If the provisions in the Act differ from federal laws (such as Oregon’s tax laws and the Internal Revenue Code), then federal law will prevail. Thus, federal laws applying to married couples in Oregon will not extend to Oregon domestic partnerships. The interplay between the Act and federal law will be discussed in more detail below.

3. While the Act applies only to same sex couples, it does not provide same sex couples with special rights. Rather, the Act equalizes the playing field between registered same sex domestic partners with opposite sex couples who marry. Similarly, both opposite and same sex couples are still permitted to enter into private domestic partnership contracts, but neither group will be afforded the statutory rights and benefits provided to married couples and registered domestic partners under Oregon law. Therefore, all Oregonians are afforded the same rights and responsibilities depending upon whether they register or marry, or enter into private contracts.

4. How to register as a domestic partnership

4.1. Beginning on January 1, 2008, same sex couples wishing to establish their domestic partnerships will need to complete a Declaration of Domestic Partnership with the clerk in the county in which they reside and pay a filing fee. In order to qualify as a domestic partnership, each person must be at least 18 years old, capable to enter into a civil contract in person and at least one partner must be a resident of Oregon. The clerk will register the Declaration in a domestic partnership registry and return a Certificate of Registered Domestic Partnership to the couple. Once the couple registers as a domestic partnership, they will be afforded all of the rights granted to spouses, surviving spouses and their children as married people under Oregon law. Registered domestic partners will not be permitted to file a new declaration or marry without dissolving or annulling the registered domestic partnership. This will require court action and obtaining a General Judgment of Dissolution or Annulment.

B. THE EFFECT OF THE ACT ON ESTATE PLANNING

This section will discuss the effect of estate planning on registered domestic partnerships. Note, property located in any other state (i.e. real property in Washington or the condo in Arizona) is not subject to Oregon’s jurisdiction for inheritance tax purposes and the Act does not apply to those assets.

1. Inheritance Rights.

1.1. Intestate Succession. If you have no will, or an invalid will, the state of Oregon provides you with a will – the law of intestate succession. Prior to the enactment of the Act, domestic partners had no inheritance rights under Oregon state law. Now, the surviving domestic partner will have the same inheritance rights as a surviving spouse. However, neither domestic partners nor married couples should rely on intestate succession for their estate plan. It is very important to put a plan in place that meets your goals and objectives. Seldom does the intestate succession meet a family’s goals. It will not meet domestic partners’ goals if they move to another state or have real estate outside Oregon.

1.2. The law of intestate succession is as follows:

1.2.1. If a decedent has a domestic partner and no children, a domestic partner inherits the net intestate estate.

1.2.2. If the decedent had children, then, a domestic partner inherits all of the net intestate estate, so long as all of the children are also the surviving domestic partners’ legal children.

1.2.2.1. Absent an adoption, if the surviving domestic partner is not the biological parent of the children, then the surviving domestic partner is not the legal parent for inheritance tax purposes.

1.2.3. If the decedent’s children are not legally the surviving domestic partner’s children, then the domestic partner only receives 50% of the net intestate estate.

1.2.3.1. All of the decedent’s children receive the other 50% of the net intestate estate.

1.2.4. If there is no surviving domestic partner or issue, then the net intestate estate is distributed to the decedent’s parents and then to the parents’ descendants.

1.3. Spousal Support during Probate. During the probate administration, a surviving spouse is entitled to petition the court for support. Normally, distributions are not allowed from the estate until end of the administration period. The Act now provides a domestic partner with the right to request support during the probate administration. Additionally, a domestic partner now has the right to live in the residence for one year after the decedent’s date of death.

1.4. Elective Share of Surviving Spouse. Oregon adopted the elective share which allows a surviving spouse to elect to receive one-fourth of the decedent’s net gross estate. The purpose of this was to prevent the surviving spouse from being disinherited. Prior to the Act, a domestic partner had no statutory right to receive any portion of the estate of the deceased domestic partner. Now, a domestic partner is also entitled to the elective share.

2. Taxes. The Act only applies to Oregon state income and inheritance taxes.

2.1. Income Tax. Under the Oregon Act, a registered domestic partnership may file an Oregon joint income tax or married filing separately income tax return instead of two individual returns. This does not apply to federal income tax. So, you will have to file a single person federal income tax return and prepare a dummy federal joint return to attach to the Oregon income tax return. [This may not be widely known among tax preparers, so be proactive with your tax preparer.]

2.2. Inheritance Tax. The inheritance, or estate tax, is a transfer tax on all of the assets you own on the date of death, including life insurance, retirement plans, art collections, jewelry, etc. In 2003, Oregon disconnected from the current federal estate tax law. In doing so, Oregon now has its own inheritance tax which applies on estates over $1 million. A surviving spouse may elect to treat the excess over $1 million as Oregon special marital property. The effect of this is to defer any tax on the excess until the death of the surviving spouse. Prior to the Act, this deferral was not available to the surviving domestic partner. Now it is under the Act.

2.2.1. This special treatment does not apply at the federal level which does not recognize domestic partnerships. Under the federal law, married couples can defer all federal estate taxes until the death of the surviving spouse by a combination of using the federal exemption amount (currently $2 million) and the marital deduction planning. The federal marital deduction is only available to married couples.

2.2.2. Example: Alice and Joan are registered domestic partners. Alice has a gross estate of $2.5 million and Joan has an estate of $1.5 million. Alice passes away in 2007 and her estate planning includes tax planning provisions. For Oregon inheritance tax purposes, Alice’s estate claims the $1 million exemption and the Oregon special marital property election for the remaining $1.5 million for the gift to Joan. There is no Oregon inheritance taxes owing on Alice’s death. However, Alice’s estate exceeds the federal exemption, so federal estate taxes will be due upon her death on the $500,000, which is estimated at $225,000 in federal estate taxes. On Joan’s death in 2008, for federal estate tax purposes, her estate has the $500,000 gift from Alice, plus Joan’s estate of $1.5 million. This is below the federal exemption, so there will not be any federal estate taxes. However, for Oregon inheritance taxes, Joan’s estate includes the Oregon special marital property election of $1.5 million, plus Joan’s estate of $1.5 million. This is in excess of the $1 million exemption, so Oregon inheritance taxes will be owing of approximately $200,000.

3. Priority

3.1. Fiduciaries. Prior to the Act, a domestic partner fell within the category of “any other person” who was qualified to serve as the personal representative of the decedent’s estate in the absence of designation in a will, or as the guardian or conservator for a protected person. This category was the last category in the priority list of who could serve. Now, under the Act, domestic partners have the same rights as spouses and are listed at the top of the priority list in the absence of a named executor or nominated guardian or conservator.

3.2. Medical Care. Prior to the Act, only the spouse was in priority to make decisions regarding the medical condition of the principal spouse when that spouse was terminally ill, permanently unconscious, or when life-sustaining measures would not be of benefit. A domestic partner had no right unless the right was given to a domestic partner through a power of attorney or advance directive. Under the Act, domestic partners have the rights of a spouse.

3.3. Funeral and Burial Instructions. The first priority for the right to control the disposition of remains is the surviving spouse. There is no listing in the current law for a domestic partner or any category under which a domestic partner would be included. Now, domestic partners will have first priority.

4. Miscellaneous.

4.1. Revocation Upon Marriage. Under current law, if a single person marries, their current will is revoked upon the marriage. However, the will can indicate that it was being made in contemplation of the marriage and therefore survive the marriage. For those domestic partners who have estate planning documents and intend to register, they will need to republish their wills after registration. Those couples may also want to update their estate plan to include the Oregon tax planning.

C. THE EFFECT OF THE ACT ON INCOME TAXES

So far, this article has provided the ‘clearer’ aspects of the Act. Now, let’s look at the gray area. The Act affects Oregon income taxes beginning with the 2008 tax year. Let’s start with what we know:

1. Registered domestic partners are now ‘spouses’ for Oregon income tax purposes. Thus, domestic partners can file either a joint Oregon return, or Oregon ‘married filing separately’ returns.

2. If a joint Oregon return is filed, the consensus seems to be that the CPA must prepare a ‘pro forma’ or ‘dummy’ federal joint income tax return as if the registered domestic partners were married, and file that return with the Oregon joint income tax return. Obviously, that return must not be filed as the federal return. That is the general ‘theory.’

Observation: To file jointly for Oregon, the CPA will have to prepare four tax returns: a joint Oregon income tax return, a “dummy” joint federal return for the Oregon Department of Revenue — because the state return is based on the joint federal return, and then two individual federal tax returns, prepared as single individuals, to actually send to the IRS.

Observation: It is more than likely that the additional returns will be more expensive than simply preparing two individual returns.

3. Once registered, registered domestic partners cannot file individual Oregon income tax returns but must continue to file single federal income tax returns.

4. For federal income tax purposes, the CPA must prepare each individual return as if the Act did not exist. Thus, a CPA should make no changes to an individual federal income tax return that the CPA would have otherwise have prepared for a registered domestic partner. Federal income tax compliance and planning, in theory, should be performed as if the registered domestic partners were not married.

5. “In theory.” Points 2 and 4 are where the gray areas begin. The Act does not actually address Oregon [1] income tax law and rules (substantive or procedural) and the Act clearly cannot change federal law. At this point, we simply do not know if a CPA can simply ‘pick up’ adjusted gross income from the ‘dummy’ federal return in preparing the joint Oregon return.[2] Perhaps the state will require Oregon ‘adjustments’ to arrive at ‘adjusted gross income.’ Clearly, the state will need to address many issues like the following:

5.1 How do you equitably divide the costs, and deductions, attributed to the partnership’s child(ren)? What happens if a child is the child of the ‘stay-at-home’ partner who is not producing income? This issue will affect dependent care plan deductions, earned income credits, child care credits, dependency exemptions, student loan deductions to name a few.

5.2 What if one partner has a capital loss of $50,000 and the other partner has a capital gain or $50,000? Will Oregon allow them to net the losses? If the answer is yes, then the partner with the loss generated a tax benefit for the partner with the gain, yet for federal purposes one partner owes tax and the other shelters (possibly) other income or gain? To preserve harmony, how should these differing tax effects be equalized between the partners?

5.3 How will the Act affect eligibility for saving in an IRA?

5.4 Will income from joint assets, security sales and businesses need to be separated? If so, will the separation be equally or based upon each partner’s contributions?

5.5 How are federal estimated tax payments to be allocated if there are joint assets?

5.6 If one domestic partner has owned a residence for three years, and then the residence is sold after the partners register, will Oregon grant them a $500,000 exclusion, or just the $250,000 exclusion to the partner that actually owned the residence? What is the nature of funds contributed to capital improvements for the residence by the non-owner partner upon a sale of the residence? Do they increase the basis of the owner-partner?

5.7 If one domestic partner is required to file a tax return in another state, does the partner file an individual income tax return, or does the partnership file a joint income tax return? Does it matter if both partners have income from the same source? What if they have different sources of income from the same state? Can they file a married tax return in that state?

5.8 Combined adjusted gross income for federal income tax purposes serves to limited itemized deductions for many joint filers, including at the state level. Thus, a “dummy” joint federal income tax return could have a similar negative affect on the ability to deduct itemized expenses.

6. Relief Provisions

6.1 Beyond these issues, how do the ‘innocent spouse’ relief provisions work?

So, what is a CPA to do now? Given that the Act is so new, is different from domestic partnership acts in California[3] and Washington, and that we can expect the Oregon Department of Revenue to issue its own forms and instructions before the 2009 filing season, we recommend the following:

6.2 The CPA ought to question whether it makes more sense, given the issues raised above, and the potential cost of an Oregon ‘dummy’ return, to simply elect married filing separately for Oregon purposes.

6.3 The CPA ought to begin planning early for such couples by exploring whether any business interests, or jointly held interests, should be accounted for in such a way that it will be easier to account for differing ‘contributions by the partners during 2008. For example, assume one partner has a coffee cart and is paying some of the funds to their partner. For Oregon income tax purposes, those funds should have no income tax affect. For federal purposes, how are those funds treated? As a gift from one partner to the other? As compensation? Should the partners form an LLC and distribute the units between them? Rather than waiting until January 1, 2008, the CPA might want to explore such arrangements with their domestic partner clients now.

6.4 Stay informed about this issue so you are not caught off guard when the 2009 filing season hits.

6.5 Expect tax preparation software companies to be scrambling to comply not only with Oregon’s law, but California’s and Washington’s as well. You may be receiving multiple software updates through out the filing season.

The good news is that the Act gives basic rights to Oregonians. The bad news: as frequently happens, actually implementing the law will create complications that even most people who have studied the Act cannot foresee. Moreover, the Act may be in jeopardy due to a referendum. All CPAs are encouraged to track the status of this Act and study its impact on their same-sex clients.

[1] The Act merely states, in Section 9, that a registered domestic partnership is entitled to the same rights, privileges, etc. as a married couple.

[2]For an interesting article on how California is addressing the AGI issue, see http://ftb.ca.gov/forms/RegDomPrtnr/RegisteredDomesticPartnerAGILimitationDiscussion.pdf

[3]California’s domestic partnership law went into effect January 1, 2007. Recognizing that domestic partnership income tax filing is going to be complicated, the state’s Franchise Tax Board held a ‘town hall’ meeting in late 2006 to review the filing problems.