The federal gift and estate tax laws, as well as the laws in most states, were designed with “traditional” marriages between a man and woman in mind. For those who don’t fall within that category because they and their partner aren’t married or because they’re part of a same-sex marriage, thorough planning is required to meet their estate planning goals. This article looks at the legal environment as it pertains to same-sex marriages, the importance of estate planning documentation for nontraditional couples, and gifting strategies.
Are you part of a nontraditional couple?
Unmarried and same-sex married couples face estate planning hurdles
The federal gift and estate tax laws, as well as the laws in most states, were designed with “traditional” marriages between a man and woman in mind. If you don’t fall within that category because you and your partner aren’t married or because you’re part of a same-sex marriage, thorough planning is required to meet your estate planning goals.
Impact of same-sex marriage laws
There’s a common misconception that the same-sex marriage laws enacted in several states provide same-sex married couples with the same rights and privileges as traditional married couples. But this isn’t the case — at least not yet.
Under the Defense of Marriage Act (DOMA), the term “marriage” for purposes of federal law means “a legal union between one man and one woman as husband and wife” and the term “spouse” means “a person of the opposite sex who is a husband or wife.” This means that same-sex married couples are treated the same as unmarried couples under the federal gift and estate tax regime.
What about state laws? Same-sex married couples who live in one of the states that authorize this type of union should be treated the same as traditional married couples for inheritance, financial and health care decision-making and tax purposes. But if they’re domiciled in another state, the answer depends on that state’s law. Under DOMA, a state may refuse to recognize same-sex marriages performed in other states. Some states recognize these marriages, but many do not.
Be aware that many lawmakers want to repeal DOMA. In addition, the U.S. Court of Appeals for the First Circuit recently found DOMA to be unconstitutional, and the case likely will be appealed to the U.S. Supreme Court. If either Congress repeals DOMA or the Supreme Court upholds the First Circuit’s decision, the estate planning landscape will change dramatically for same-sex married couples.
Nevertheless, because currently under federal law as well as the laws of many states same-sex married couples aren’t treated as married couples, such couples may need to plan as if they weren’t married.
Documentation is key
Everyone should document their wishes with wills, trusts or other estate planning instruments. But it’s even more critical for nontraditional couples.
When married people in traditional couples die intestate (that is, without a will), their assets are still distributed to their surviving spouses and children according to state law (though possibly not in the precise manner they would have desired). If a member of an unmarried couple dies intestate, however, his or her partner likely will be disinherited.
Planning for disability or incapacity is also important. Again, everyone should sign advance directives, powers of attorney and other documents to spell out how health care and financial decisions should be made in the event they’re unable to make such decisions themselves.
But even without such documents, a spouse in a traditional couple has the right to make certain decisions on the other spouse’s behalf. Members of an unmarried couple, on the other hand, generally have no rights to participate in such decisions for their partners without written authorization.
For traditional married couples, estate planning typically centers around the federal marital deduction, which allows one spouse to make unlimited gifts or bequests to the other spouse gift- and estate-tax-free (as long as the recipient spouse is a U.S. citizen). The marital deduction isn’t available to unmarried couples, nor is it available on the federal level to same-sex married couples. As a result, it’s critical for these couples to begin planning early to make the most of the annual gift tax exclusion and lifetime gift tax exemption.
Currently, the annual exclusion allows you to make up to $13,000 in tax-free gifts to an unlimited number of recipients each year. The lifetime exemption stands at $5.12 million, but it’s scheduled to drop to $1 million beginning in 2013. Although Congress may adjust next year’s lifetime exemption, it’s a good idea to take advantage of the $5.12 million exemption while it lasts to the extent you can afford to do so.
Consult your advisor
If you’re part of a nontraditional couple, you likely know that some traditional estate planning strategies aren’t available to you. Discuss your options with your estate planning advisor about steps you can take to ensure that your wishes are respected and your goals are achieved.