Proper estate planning is vital for anyone who wishes to protect his or her assets and loved ones, but experts say it’s potentially more vital for same-sex couples and families, due in part to the passage of marriage equality laws.
Indeed, the 2015 U.S. Supreme Court ruling that legalized same-sex marriage created new opportunities for gay and lesbian couples who wed to benefit from estate planning strategies that were once out of reach. The landmark legislation also made it possible to better protect their interests in the event of an accident or illness.
“I have friends who say that because of the 2015 ruling all these things have been resolved, but that’s not true,” said Joan Burda, an attorney in Lakewood, Ohio, who advocates for the LGBT community. “Same-sex couples need to plan for them. With a good estate plan, you can control what happens after you are gone.”
Estate planning challenges remain for many LGBT individuals who entered into legal unions before marriage was even an option, added John McManus, a founding principal with the estate planning firm McManus & Associates in New York City, which specializes in working with LGBT clients.
A careful review of their existing estate planning documents, especially those drafted before 2015, is not only wise, but essential.
“Even though same-sex spouses are protected by law, we still need to consider that there may be a lot of dynamics going on with family members who may not accept them, or adoptions by non-biological parents,” said McManus, in an interview. “That can distract from the important estate planning opportunities and tax-savings vehicles that now exist.”
Essential estate planning documents
While there is no need to draft estate planning documents differently from heterosexual spouses, he said, same-sex married couples should make a pointed effort to review their existing strategy to maximize federal and state estate, gift, and income tax planning.
For starters, he said, gay and lesbian spouses should check the estate planning documents they already have to be sure they include language (wife/husband/spouse) consistent with current laws. All couples, regardless of sexual orientation, said McManus, should have at minimum a:
- Living will – a written statement that details your wishes regarding end-of-life care, in case an injury or illness renders you unable to communicate on your own. (Learn more: Will basics)
- Health care power of attorney (also called a health care proxy) — a legal document that designates a person to make medical decisions on your behalf if you are too ill or incapacitated.
- Durable financial power of attorney — a legal document that designates a person to handle your financial affairs if you become too ill or incapacitated.
- HIPAA privacy authorization form — an often-overlooked, but critical, form that allows doctors and others health care professionals to disclose pertinent health information and records to your designated health care power of attorney or trustee. A trustee, for example, may need your medical records to establish your medical condition or mental capacity for the purposes of managing your estate.
Review your beneficiary forms
Similarly, LGBT individuals should ensure that their beneficiary forms for any insurance plans or retirement accounts they may own still reflect their financial intent. Indeed, your 401(k), IRA, and life insurance beneficiary forms are legally binding documents that supersede whatever is written in your will, Burda pointed out.
As such, if you previously named an ex-partner or spouse as beneficiary on an IRA and forgot to change it, he or she will collect that asset when you die, regardless of who you name as a beneficiary in your will. For many individuals, their retirement account is one of their largest assets. (Will that account be enough? Check our Retirement Calculator)
Thanks to the landmark 2015 ruling, same-sex couples who tie the knot can now claim the unlimited marital exemption for federal estate and gift taxes. Therefore, gay and lesbian spouses can now generally leave an unlimited amount of assets to their surviving spouse without triggering a federal estate tax, as long as both are U.S. citizens.
Before the ruling, as McManus notes in his online guide “Top 10 Tax and Estate Planning Considerations for Same-Sex Couples,” gay and lesbian couples had to rely on their applicable exclusion amount with regard to providing for the surviving spouse.
Additionally, he noted, portability provisions allow a surviving spouse, regardless of gender, to preserve and later use any portion of their deceased spouse’s unused estate and gift exclusion amount, an amount that gets adjusted each year for inflation. For 2017, that amount is $5.49 million.1
A same-sex spouse can also now roll over assets from his or her retirement account to the surviving spouse’s account without a mandatory minimum distribution or lump-sum distribution. That previously wasn't an option, said McManus.
“Now you can roll it over to your surviving LGBT spouse and then, on his or her death, he or she can then stretch the IRA out over the lives of their kids if they have any,” he said.
When they marry, same-sex spouses can also now take full advantage of “gift splitting” to reduce the size of their taxable estate. According to McManus, each individual has the right to make financial gifts on a tax-free basis for federal gift and generation-skipping transfer tax purposes up to the annual exclusion limit. For 2017, that limit is $14,000 per person, or $28,000 for a married couple.
By gift splitting, however, one spouse (with his or her spouse’s consent) can instead gift the entire $28,000 from their own assets to a family member or friend and treat it as if each partner contributed half of the amount, allowing that couple to better use their total gift tax exemption amount by combining individual allowances.
As always, LGBT couples considering such a strategy, however, should consult a financial advisor or tax professional to determine whether gift splitting makes sense for them.
LGBT parents have a unique set of estate planning concerns. Indeed, establishing parentage can still be tricky, especially when only one partner is the biological parent.
In such cases, Burda said the non-biological parent should strongly consider adopting that child to establish a legal relationship to avoid having to battle for custody with long-lost relatives if the biological parent should die. “The children of same-sex couples can almost never establish a biological connection with both of their parents,” she said. “If the child was born before the couple got married, not every state has marital presumption laws.”
From a tax planning perspective, McManus also notes that a nonmarried same-sex partner who plans to adopt his or her partner’s child after they tie the knot may wish to consider the timing. The partner who plans to adopt would only be eligible for an adoption tax credit before they marry.
“If a couple is planning to marry and an adoption is part of the big picture, it may be more advantageous for the adoption to take place before the couple marries,” he wrote in the “Top 10” guide.
To Marry or not to marry?
LGBT couples who are contemplating marriage face a few other estate planning challenges as well.
Before marriage was an option, life partners could leave each other whatever portion of their estate they deemed fit. They could bequeath, say, 10 percent of their assets, and leave the rest to their kids or other family members. Or they could leave their partner nothing at all.
Under federal marriage laws, however, surviving spouses, regardless of sexual orientation, are entitled to roughly one-third, or more, of their deceased spouse’s estate, depending on their state of residence.
“This is very important in the LGBT community because previously they could just leave a fraction to their partner, or just leave them an insurance policy,” said McManus. “Not anymore.”
Thus, LGBT couples who are looking to legally wed, especially those in which one partner has significantly more wealth than the other, may want to consider a prenuptial agreement to preserve their premarital assets, said McManus.
“Everybody has got to be completely color, gender, and sexual orientation blind when they walk into this and recognize that LGBT spouses are now subject to all the same rules and rights as heterosexual spouses,” he said. “LGBT couples should get up to speed with what protections exist, and what disadvantages they may now face since passage of marriage equality laws.”
The tangled web
Finally, to protect their estate and their interests, Burda said that LGBT spouses must also resolve the tangled web of domestic partnerships, civil unions and other legal arrangements they may have created with prior partners from before marriage was made legal.
“There were many couples who went to Seattle, for example, to get a domestic partnership agreement because their home state didn’t recognize it, but they have since broken up and gone their separate ways,” she said. “Washington state later did an automatic upgrade to make all domestic partnerships the same as a marriage, so these people are now married and don’t even know it.”
That opens the door to future claims against their estate.
Before she even begins to discuss estate planning strategy with new LGBT clients, Burda said she begins with a simple question: “What about before? I tell them they have to undo all previously recognized relationships and that can be difficult because some states have residency requirements.”
Proper estate planning is vital to ensuring that your wishes are carried out during your lifetime, and your assets pass along to your loved ones in the manner you desire after your death, issues that can potentially be more complex for the LGBT community.
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1 IRS, “What’s New — Estate and Gift Taxes,” 2017.