Estate Planning for Same-Sex Couples

 

By Alma Soongi Beck, J.D., LL.M. (Taxation), California State Bar Certified Specialist in Estate Planning, Trust & Probate Law

After the historic rulings in United States v. Windsor and Rev. Ruling 2013-17, the playing field for same-sex couples has equalized dramatically.  When married, same-sex couples are finally eligible for the same kinds of planning benefits that practitioners have leveraged with opposite sex married couples for years:  Bypass trust planning, gift splitting, leveraging of the double step-up in basis for community property, joint tax return filings, among others.  Moreover, under Rev. Ruling 2013-17, federal tax recognition now applies regardless of where the couple resides in the U.S., so long as they were married in a state that permitted same-sex marriage at the time.

For these reasons, it can be tempting for practitioners just to start treating same-sex couples the same as opposite-sex couples in our approach to planning.  Indeed, there are many cases where a plan for a same-sex couple may in fact look almost identical to how we might plan for an opposite-sex couple.  However, doing so uniformly and without thinking can be unwise and can lead to bad consequences for our clients, and for us as practitioners.

This article highlights some potential pitfalls, in the hopes that practitioners will be more likely to avoid them.  While some may seem fairly obvious on the face, they all point to underlying issues that are often still overlooked.

Many same sex couples are not married. 
Compared to the number of opposite sex couples who seek planning, same-sex couples tend to be married at a far lesser rate.  Some have no wish to get married.  Some would gladly get married, but really should not for tax, financial, or other personal, family, or work reasons.  Most are used to functioning in a world that does not recognize same-sex relationships, and when they are recognized, the results have not been so positive.

What this means for practitioners is, first, that we should be thinking about how to plan for same sex *couples* rather than just same-sex *married couples.*

Secondly, it means we will need to discuss with clients who are not married the pros and cons of marriage, and help them analyze whether it makes sense for them.  This analysis could involve a discussion about income tax filing, social security, state property taxes, capital gains, Medicare, and a host of other issues.  NOTE:  Lambda Legal (www.lambdalegal.org) has excellent resources on its website designed for laypeople to understand the impact of marriage from a legal perspective.

Thirdly, we need to patient in addressing when a couple might decide to start their estate planning. If a couple is not sure about whether to get married after the Windsor decision, they should really be doing a full tax and financial analysis with their other advisors, and if they have not considered it, we really should be suggesting that they do.

Many same sex couples have multiple statuses, or statuses that are in-between marriage and non-marriage. 
One of the huge benefits of opposite-sex marriage is that it is recognized regardless of jurisdiction.  Same-sex marriage, however, is still in flux, and in most places, relatively new.  Even those who are married might not have a marriage that is recognized in the state they reside for state law purposes.  Some have chosen to stay unmarried, but to register for one of the marriage alternatives, such as state domestic partnership or civil unions.

Moreover, same-sex couples may not fully understand the tax and legal implications of what they have done, or not done.  For instance, some couples think they are married, domestic partnered, or civil unioned, and after more investigation, actually figure out that they are not.

For these reasons, we practitioners really do need to be experts, even where our clients are not.  We should be asking for documents – e.g., marriage certificates, file-stamped domestic partner registrations forms, and be prepared to help our clients figure out the significance of their various legal statuses.  For instance, what does it means to be married and not domestic partnered?  Or civil unioned and not married?  Or domestic partnered in a state that turned the partnership into a marriage after a certain period of time?  Or married in a state that repealed the marriage, or in some cases, brought it back again?  Does the couple need to do a separate joint tax return on the state level?  Is the couple planning to move to another state, and if so, what will happen to their marriage or domestic partnership or civil union when they do?   CAUTION:  Be prepared for defensiveness from clients as to why we may not be asking the same from our opposite-sex married couples.  For instance, “If you were being treated equally under the law everywhere, we would not need to request documents, but we are finding that because of all the multiple statuses available in different states, some clients believe they are married when they are not, or domestic partnered when they are not.”)

Each situation needs to be thought through freshly, and if you are not sure, get help from others.

Marriage has only been available to same-sex couples for a short time.
In this way, planning for even the most long-term same-sex couples can be more like planning for an opposite sex couple in a blended family.  Not everything will be marital property or even jointly owed, even property that was acquired together as a couple from long ago.  Not everything will be shared.  Couples with no children often have different beneficiaries to receive assets after the death of both spouses.  Also, some couples may have done planning already to minimize gift tax implications between them, with separate trusts, or gifting trusts, or becoming co-Trustee of each other’s trusts.  Some of it may need to be unraveled, redefined, or reconsidered.

On the other hand, the recent availability of federal recognition (particularly tax recognition) provides opportunities that some couples have been waiting for a long time, such as opportunities to equalize the estate, joint trust planning with marital provisions, and in community property states, transmutation of assets to community to leverage the double step-up in basis.  Practitioners may even want to slow down some couples to make sure they truly understand the implications of commingling assets (beyond just the gift tax implications), as potentially the marriage itself (if the couple is asking whether to marry), especially if one in the couple is giving up more financial rights, and including sending that person to separate counsel when appropriate.

Discrimination against same-sex couples still exists.
Most people know this.  Not as clear is the effect on advisors seeking to serve same-sex couples.  In some cases, concern about discrimination is itself enough for couples not to marry, such as for people who work for an employer with an environment that targets gay people, whether such targeting is legal or not.  Remember that an employer is required to keep information where employees have to declare their marital status, such as the W-4 forms and company-managed retirement accounts such as 401(k) accounts.  In other cases, it might just mean that couples might be more wary of the idea of marriage, even if the tax and financial planning all points to only advantages.

In order to counsel same-sex couples properly, practitioners cannot be naïve about the impact of discrimination on the lives of our clients in same-sex relationships.  Our job is to incorporate all factors into the estate and tax planning.  In some cases, it means suggesting not to marry.  In other cases, it means adding stronger disinheritance language to estate planning documents to minimize problems from estranged family members, as well as language to prohibit those same people from serving as Trustee or Agent.  In more extreme cases, it might mean suggesting the clients come back in 6-12 months to execute basically the same documents again as revisions, in order to reduce the impact of a contest later.

Many same sex couples will not trust you.
If you are not regularly in the practice of planning for same sex couples, or for lesbian, gay, bisexual, transgender (LGBT) people generally, it can be difficult for LGBT people to trust you with their planning.

People who are targeted for discrimination have a keen eye for sincerity, and will be looking for it with their practitioners.  While practitioners who are serious about serving the LGBT community and same-sex couples can, in fact, become more trustworthy to potential clients, it takes proactive learning about the lives of LGBT people, about the LGBT communities in your area, and about how the law affecting LGBT people in the U.S. and in your state have been evolving.  The more you approach this project with genuine, personal commitment to serving and helping LGBT couples, the more you will be motivated to learn what it takes to become a trustworthy practitioner in this area.  And conversely, if you think that you will have a difficult time approaching this project with that level of genuine, personal commitment, it might just be better to keep a list of practitioners who do specialize in the area, and refer your same-sex couples to them.

The repeal of DOMA Section 3 is not the only important legal development for same-sex couples. 
Practitioners serving same-sex couples will need to continue thinking about all legal developments from the perspective of how they might affect same-sex couples, not just marriage.  For instance, in California, we have property tax rules that protect spouses and state domestic partners from “reassessment” which is often a significant increase in the property taxes after the death of an owner (or co-owner).  While we also have some rules that protect some *unmarried* co-owners who are *not* state domestic partners, the applicable of those rules are much more limited, and typically requires very specific types of ownership in order to apply.  What this means for California practitioners representing same-sex couples is that we have a much higher burden to know these rules in order to properly advise our clients on even their most basic estate planning.,  (For my article on the property tax rules affecting same sex couples owning property in California, please visit http://bit.ly/PropertyTaxChangesAlmaBeck )  In other states, the same questions need to be asked as it relates to both state and federal laws.

With the repeal of DOMA Section 3, now is an exciting time to be advising and planning for clients in same-sex relationships.  Practitioners who avoid these pitfalls should find this work not only tremendously satisfying, but also intellectually stimulating as well.

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ABOUT THE AUTHOR
Alma Soongi Beck, Esq. is a Certified Specialist, Estate Planning, Trust and Probate Law, State Bar of California Board of Legal Specialization. She helps individuals, couples and families navigate issues relating to estates and trusts, probate and trust administration, domestic partnership and property co-ownership, particularly as they affect unmarried and same sex couples.  Ms. Beck earned her J.D. from Georgetown University Law Center in 1998, and an LL.M. degree in Taxation (graduate law degree) from Golden Gate Law School in August 2004. For high school, she graduated from Phillips Academy in Andover, Massachusetts and for college, earned a B.A. in American and Ethnic Studies from Yale University.  Ms. Beck also leads diversity awareness and cross-cultural communication workshops for law firms, legal organizations, Fortune 500 companies and non-profit organizations.  She can be reached at (415) 584-9930 or by e-mail at [email protected].

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