Estate Planning and Some Issues for Same-Sex Couples

Last week, the State of Washington joined seven other jurisdictions in the United States to allow same-sex marriages. As more jurisdictions move towards legalizing such relationships, the estate planning and the related income tax issues for such couples become increasingly complex. The Estate Planning Lawyer – Oren Ross & Associates can help here.

Although same-sex couples are considered as married in jurisdictions recognizing same-sex marriages (for example, Connecticut, Iowa, Massachusetts, New York, and Vermont have all legalized these relationships), they are not considered married for the purposes of federal law.

Under the Defense of Marriage Act (DOMA) of 1996, marriage is defined as the legal union of one man and one woman. More importantly for estate and  other tax planning purposes, DOMA removes the constitutional protection of comity (U.S. Constitution, Article IV, Section 2, Clauses 1 & 2). Comity provides for legal reciprocity: the principle that a jurisdictional authority will recognize and respect the laws of another jurisdiction and will give effect to these laws. Opposite-sex couples who are married in Connecticut, for instance, are considered married in every other jurisdiction. The same is not true for same-sex marriages. The marriage of same-sex couples who are wed in Connecticut may not be recognized (and, in some cases, is specifically outlawed) in other jurisdictions. The federal government is one of those outlawing jurisdictions.

The challenges of tax planning for same-sex married couples is no more evident than by the divergent filing statuses at the state and federal levels for individual income tax returns. In Connecticut, same-sex married couples file their tax returns as married filing joint. However, since the federal government does not recognize same-sex marriages, these couples must use a different filing status, usually either single or head of household. This conflict between state and federal law is ripe with confusion and with inequality as shown by the following scenario.

Jane and Janet Doe are a married same-sex couple residing in Connecticut. Jane has a biological minor child, Janice, by a previous relationship. Janet is the legally adoptive mother of this child. Both women have income (comparable wages) and both contribute equally to the household and to the support of the minor. They have lived as a family unit for more than one year. On their Connecticut tax return, Jane and Janet would file married filing joint – as with opposite-sex married couples – and take Janice as a dependent. In contrast, the filing statuses for the federal tax returns for these women are unclear. Does one or both of them file as single? If so, which one? Who is entitled to the more favorable filing status of head of household? Who (if anyone) can be claimed as an exemption? And, who can claim Janice as a dependent? Suppose further that Jane and Janet work in different states or move to another state which does not recognize same-sex marriages. The answers to these questions render their federal return(s) as well as their state return(s) legal minefields, potentially explosive on audit by the three taxing jurisdictions. In case of any unfortunate event or an accident the firm in Phoenix probate attorneys can help get legal aid.

Although Jane and Janet’s and their daughter’s familial and financial situation is not unique, their estate and tax issues  issued by business succession plans and hiring lawyer, require unique planning. They should start by meeting with an attorney or a representative of a law firm that specializes in estate and tax planning or with a diversified financial services company such as Ameriprise Financial, Charles Schwab, or Morgan Stanley. While no short article can address, comprehensively, the complex issues of estate and tax planning for same-sex couples – married or otherwise – here is a list of starting point issues.

•Keep current and detailed financial records concerning ownership, control, and major improvements of all property and maintain these records for at least three years. Original documents over which there may be a future controversy should never be destroyed and should be stored in a secure location away from the home such as in a joint safe deposit box at a banking facility. To avoid the inconvenience of traveling to the facility every time the documents need to be reviewed, copies (clearly marked as such) can be kept at home. For added safety and security, a family member, a family friend, or a financial advisor may also be entrusted with copies.

•Same-sex relationships as with opposite-sex relationships end, sometimes bitterly. Consider entering into a prenuptial or postnuptial agreement (if permitted by state law) or a domestic partnership or cohabitation agreement to ensure the rights and the responsibilities of each partner and to define the parameters of property division in the event that the relationship terminates.

•Engage in strategic gift-giving to equalize partners with unequal wages or assets. Since DOMA prohibits same-sex marriages, same-sex couples are not afforded tax-free unlimited transfers between spouses under federal law. That is, opposite-sex married couples may transfer property between themselves pre-death and post-death without any financial limitations and without incurring tax liabilities. This privilege is not afforded to same-sex couples who are considered to be legal strangers in the eyes of the federal government. However, same-sex partners can make $13,000 gifts to each other without incurring any tax liability. Over several years, this annual gift-giving amount – which is indexed for inflation – can help to equalize an unequal financial status between partners, especially as Social Security survivor benefits, of-right and tax-deferred inheritance, federal death benefits, and the tax advantages of qualified retirement plans, marital deduction and QTIP trusts as well as the myriad of other federal benefits, rights, and privileges granted by law, custom, and statute to opposite-sex married couples are not available to them.

•Implement health powers such as advance medical directives, powers of attorney for health care, and HIPAA waivers. Documents governing burial arrangements (especially where one spouse serves in combat) can also be prepared. These documents should be taken when traveling.

•Implement planning documents such as powers of attorney, revocable trusts, and wills. It is important that same-sex couples plan for the possible conflict of disapproving family members who may challenge their arrangements by claiming fraud, duress, undue influence, moral turpitude, and the like. Videotaping the signing of such documents can be an added protection.

•Avoid adding the name of one spouse to the real property (such as the family home or the vacation cottage) of the other spouse. Doing so constitutes a transfer of property, resulting in a federal (and possibly a state) taxable event and creating gift and estate tax issues. Such substantial real property transfers (like the transfer of cash, payable-on-death accounts, or monetary assets at a banking institution) must be part of an overall, long-term financial plan.

•Lastly, education about estate and tax planning is a must-do. Estate Planning for Dummies by Caverly and Simon and Estate and Trust Administration for Dummies by Munro and Murphy are both dated, but they both remain two excellent primers and are highly recommended.

Lynn Jenkins, Esq. is a practicing attorney, a UNH graduate student, and is enrolled in the University’s Masters of Taxation program. She is designated as a registered tax return preparer (RTRP) by the Internal Revenue Service, and is a Master Tax Advisor at the H&R Block office in Orange. She would be happy to review your state and federal income tax returns for past and present years. She can be reached at (203) 799-2966. Call her to use this FREE SERVICE to students, faculty, and the UNH community.