Estate Planning for Same Sex Couples
Before marriage equality, estate planning for same sex couples was far more complicated than it is today. With the U.S. Supreme Court’s 2015 ruling in Obergefell v. Hodges, which guaranteed the right of same sex couples to marry in all 50 states, same sex couples now take advantage of all of the estate planning tools that have long been available to heterosexual couples.
The estate planning benefits of marriage are well known. All married couples may make unlimited gifts to a U.S. citizen spouse during life and at death, free of gift and estate tax. All assets passing to a U.S. citizen spouse, whether through a probated Will, through a trust, as a beneficiary on a life insurance policy or retirement account, or as a surviving joint owner are exempt from estate taxes (tax deferral for non-U.S. citizen spouses can be accomplished using a Qualified Domestic Trust.). Assets passing to a non-spouse in excess of the federal and state estate tax exemptions are subject to estate tax, at the federal rate of 40% of all assets over $11.2 million and 16% in Maryland for all assets exceeding $4 million. A married couple may defer, or entirely avoid, estate tax for their family by combining their estate tax exemptions provided that the surviving spouse makes a portability election on a timely filed federal estate tax return for their deceased spouse’s estate. Under current law, the portability election allows a married couple to give up to $22.4 million of their assets free of gift and estate tax. The portability election is made by the personal representative (i.e., “executor”) appointed in the Will of the first spouse to die. This is one, among many other reasons, to have a Will so that proper consideration can be given to who should be given the authority to make the election.
Married couples with large estates, particularly in which much of the wealth is attributed to accumulated family wealth of only one spouse, may want to take advantage of a marital trust, which provides a financial safety net for the surviving spouse, but assures that the legacy remains within the family’s line of descent at the death of that surviving spouse. Marital trusts are also commonly used in today’s modern blended families where each spouse has children from a prior marriage.
Transferring highly appreciating assets during life is also a common estate planning tool. Married couples can take advantage of gift splitting, meaning that together they can combine their gifts treating them as made one-half by each of them even if the source of the gifts came from the separate assets of one of them.
Other financial benefits that extend to married couples include the ability of a surviving spouse to roll over an IRA into his or her own IRA (thus allowing the surviving spouse to defer the taxable withdrawal of the benefit until that spouse reaches age 70 ½), receiving a higher social security benefit and avoiding the payoff or refinance of a mortgage on a residence owned solely by the decedent. Also, in all states with the exception of Georgia, a spouse cannot be disinherited from a Will.
There are no protections in place for an unmarried partner. Laws of intestacy do not provide for a partner. In the event of a disability, a partner can be excluded from control of financial and medical decisions. In Maryland, the surviving individual in an unmarried couple is subject to a 10% inheritance tax on both probate and non-probate assets received as a result of their partner’s death. There is an exception for a primary residence that is owned jointly provided there is evidence of the domestic partnership. This is available for both same sex and opposite sex unmarried couples. In Maryland domestic partnership is defined as a relationship between two individuals who are at least 18 years of age, not related to each other by blood or marriage, not married or in a civil union or domestic relationship with another individual and agree to be in a relationship of mutual interdependence in which each in which each contributes to the maintenance and support of the other individual and the relationship, even if not equally. The partners must sign an affidavit stating that they have established a domestic partnership and provide two forms of proof of the partnership.
The solution for all couples, married or not, same sex or opposite sex, is to each have in place the three fundamental estate planning documents: Wills, Financial Powers of Attorney and Health Care Directives. Incorporating a testamentary trust in the Will can provide for the proper management and disbursement of the assets to a spouse, children or other dependents. These trusts, which get established only upon one’s death, can be used to minimize estate taxes and to provide asset protection for the beneficiaries.
Couples with children will want to nominate a guardian for any minor children and select a trustee, who may or may not be the same person as the guardian, to manage the assets of the child until the child reaches maturity according to terms spelled out by the couple. In same sex couples with children it is very likely that only one of the parents is a biological birth parent to the child. Therefore, it is important for these couples to determine whether a “Second Parent “ or “Step-Parent” adoption is needed to secure the inheritance rights between the non biological parent and children.
In addition to the three fundamental documents described above, a couple may want to incorporate the use of one or more revocable trusts in lieu of relying upon joint ownership and transfer on death designations. Using a revocable trust avoids probate on the assets in the trust. A revocable trust can be named as a beneficiary of life insurance and retirement assets, giving greater control over who ultimately benefits from their estate.
Couples who choose not to marry, but who live together, may want to enter into a contract to address the use and occupancy of real property, whether co-owned or owned solely by one of the individuals in the relationship, during joint lifetime and at the death of one them. This agreement can cover the ownership, use and furnishing of the residential property, payment of real estate taxes and insurance, payment of utilities and related property expenses, occupancy by other family members, the right to have the property sold and the extension of the agreement to any replacement residential property. This agreement may also address the payment of separate or joint debts and the financial obligations of the parties at the termination of the relationship, whether during life or at death.
Although estate planning for same sex couples has become far easier, it is still important for same sex couples who are looking to take care of one another in both sickness and at death to meet with an estate planning attorney who is experienced in drafting the documents described above and who is familiar with the estate and inheritance tax laws of the jurisdiction in which they reside. Contact Danielle Cruttenden or any of our other experienced attorneys and discuss your estate planning options today.