The Cohabitation Penalty

The U. S. Supreme Court recently made same-sex marriages on par equal with heterosexual marriages in all states, thus legalizing same sex marriages in all states (Obergefell etal v Hodges, Director, Ohio Department of Health, etal, No. 14-556, Slip Opinion decided June 26, 2015).  Some states allowed such marriages prior to Obergefell.  Others, like Kansas, did not.  Nor did we recognize same sex marriages as legal if performed in a state that legalized the practice.  If our views as a state are reflected in our current legislation and constitution, Kansans adhered to the more traditional approach of the one man one woman marriage.  Obergefell has changed that for Kansas, however.  Our personal "views" are unlikely to change just because the Supreme Court has spoken.  But the law will change.  The legislature will have to respond. 

However, what about changing the "cohabitation penalty" for the heterosexual man and woman who have lived together for two decades?

The cohabitation penalty involves the estate tax.  Larger estates pay a 40% estate tax above certain "exemption" limits.  As for the current exemption limits, most of us will never have to pay Uncle Sam an estate tax because the tax doesn't bite us unless the estate exceeds the exemption of $5.43 million.  ((This amount is subject to annual inflationary adjustments.))

In 2015 the Obama Administration recommended doing away with the stepped up basis, which will tax the heck out of a lot of ordinary middle class folks' inheritance.  See our discussion "DON'T TAX ME ..."

An unmarried heterosexual couple do not get benefit of the marital exemption for estate tax purposes.  It also means they don't have benefit of "portability" (allowing your $5.43 million exemption to become an amount that tops out at between $5.43 million and $10.8 million).  See our Topic heading for Portability.

Revenue Rulings 2013-17 indicate that if persons (whether same sex or heterosexual) are spouses for income tax purposes depends on the law of the state where they reside as to whether they allow such "marriages," or whether they recognize valid marriages in other states between same sex couples.  A heterosexual couple who obtain a common law marriage designation somewhere in the country would be "spouses" in Kansas and thus entitled to the marital exemption.  But what about two people who live together long-term who are not common law spouses? 

The marital exemption is striking.  Regardless of the size of the estate, a surviving spouse gets the entire estate of the first-to-die spouse without any tax.  The estate could be billions, but it is untaxed to the first spouse to die.  That's the marital exemption -- meaning it is available to spouses (now it is available to heterosexual and gay/lesbian spouses).  Unmarried persons can give land and property to an unmarried partner by Will or by Trust document, but there is no marital exemption to an unmarried partner.  The property can come to the unmarried heterosexual partner, but the exemption is the decedent's -- and it is limited to $5.43 million.  And there would have to be significant estate planning done using revocable trusts and jointly owned property in order to avoid some estate taxes if the estate is more than $5.4 million and the couples are unmarried. 

  • One way around the limit, to obtain the marital deduction and portability would be if the unmarried heterosexual partner could a prove common law marriage.  The children of the deceased's first marriage may, or may not, have a good relationship with the current spouse.  If the relationship isn't so good, the kids may fight the common law marriage claim.  The IRS prefers large estates and small exemptions in order to kick in the 40% estate tax.


There are reasons many long-term live-in couples do not marry nor hold themselves out as married for "common law" purposes.  But with gay and lesbian couples now able to take advantage of marital property laws and resulting tax benefits, the cohabitation penalty may be something to think about -- and avoid if possible -- through estate planning.  As it is now, Americans with wealth are penalized for cohabitation instead of marrying.  Given that the Old Order is ending, is the penalty any longer wise policy?


Smith, Burnett & Hagerman, LLC
Attorneys at Law
111 E 8th St.
PO Box 360
Larned KS 67550

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