There are now several states which have either same-sex marriages or civil unions. The federal government, however, has not only refused to follow suit but has passed the Defense of Marriage Act, also known as DOMA, which makes it legal for other states to refuse to recognize same-sex marriages and civil unions from other states.
In General, doing estate planning for same-sex couples is no different that estate planning for unmarried couples. There are a few pitfalls that need to be considered and explained to the clients when we are doing planning for same-sex couples.
Gifting
There is unlimited gifting between heterosexual married couples. Same-sex couples, however, are limited to the $12,000 per person/per year rule and $1 million lifetime gifting exclusion (under current law in 2008). This can become problematic for the same-sex couple if only one is working and paying for the household expenses, as these payments will be construed as taxable gifts to the non-working partner.
Marital Deduction
Married heterosexual couples may transfer an unlimited amount of wealth to each other when they die. Same-sex couples, however, are limited to the estate tax exemption amount (currently $2 million). Amounts transferred above that will be subject to the federal estate tax (the top rate of which is currently 45%).
Portability
Under DOMA, other states have no requirement to honor a civil union or same-sex marriage from another state. This makes the protability of these arrangements questionable at best, and probably non-existent (depending upon which state the couple moves to). The impact of this will mean that same-sex couples who can count on statutory shares in the state where they were married (or joined in a civil union) will not have this protection if they move and do not have their estate documents in place.
Planning Tips
Same-sex couples should try to do as much planning as possible to avoid the federal estate tax as well as the portability issue. Steps the couple should take include:
1. Having updated Wills so they do not have to rely on the stautory laws of intestacy;
2. Having updated Living Wills and Health Care Proxies. Without them their partner will most likely be removed from these decisions in favor of a family member;
3. Consider using Living Trusts to avoid probate; and
4. Consider using Irrevocable Life Insurance Trusts to reduce the taxable estate and avoid the exemption/marital deduction pitfall.
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Attorney Eric L. Green is Of Counsel to the law firm of Convicer & Percy, LLP in Glastonbury, Connecticut (www.convicerpercy.com), where he focuses his practice in civil and criminal taxpayer representation before the IRS and state tax authorities, business planning and estate planning. Attorney Green represents taxpayers in Western Massachusetts and all of Connecticut. Attorney Green is currently the vice chair of the Closely held Business Tax Committee of the American Bar Association, and is on the Executive Committee of the Connecticut Bar Association’s Tax Committee. He can be reached at egreen@convicerpercy.com.
