Estate Planning: Why gay couples should get married … the sooner the better

Jim Gianelli
By Jim Gianelli September 15, 2013 18:10

jim-gianelliWe all have gay friends or relatives, whether we know it or not, and many share life with a partner.

After a historic U.S. Supreme Court decision opened the matrimonial door for California same-sex partners – and prohibits the federal government from discriminating against them – I have just two words of advice for those couples: Get married!

The U.S. Supreme Court on June 26 struck down the “Defense of Marriage Act” (DOMA), a 1996 law that denied federal benefits to same-sex couples. At the same time, the justices upheld a lower court’s dismissal of California’s Proposition 8, a 2008 voter-approved ban on gay marriage.

As a result, it is now legal – and in many cases, advisable – for same-sex couples to tie the knot in California, one of 13 states in which gay marriage is now legal.

What changed with the Supreme Court’s action? For those with sons, daughters, friends or other loved ones affected by this, and of course for those directly affected, here are some guidelines.

Living trusts and federal tax returns

For legally married/domestic partner same-sex couples, just as for traditional married couples, a joint revocable trust can help avoid probate and allow a loved one to efficiently manage assets if the partner is incapacitated by illness or injury. Before the DOMA ruling, I typically advised legally married/domestic partner same-sex couples with such trusts to complete separate federal income tax returns (rather than partnership returns).

Aside from inconvenience, the inequality had implications for other tax-related matters. It prevented same-sex couples from jointly qualifying for certain mortgages and obtaining some types of college financial aid for their children.

As a result of the Supreme Court ruling, same-sex couples can now, among other things, file joint federal tax returns, qualify for federally regulated mortgages and obtain education-related federal financial aid for their children.

Eligibility for the estate tax marital deduction

Before the Supreme Court struck down DOMA, only traditional married couples could avoid federal estate taxes when a spouse died by having what was called an “unlimited marital deduction.”  This allowed a traditional spouse to leave an unlimited sum of money to his or her spouse upon his or her death, estate-tax free.

Because this deduction did not apply to same-sex couples, assets in excess of $5 million that were inherited by a same-sex spouse were subject to a 35 percent tax rate. Current estate tax exclusion is $5.25 million, with assets over this amount now taxed at 45 percent.

The unlimited marital deduction now applies to same-sex couples.

In addition, a surviving same-sex spouse now can, like a traditional spouse, use the deceased’s remaining lifetime exemption upon his or her own death. This means that a same-sex couple can now transfer at death, from one spouse to the other, the first-to-die’s estate tax exclusion of $5.25 million, resulting in a total spousal estate tax exclusion of $10.5 million. The real beneficiaries of this change are, of course, the couple’s heirs and beneficiaries.

Changes in federal gift tax rules

Same-sex spouses can now transfer an unlimited amount of property between each other without being subject to the federal gift tax. Prior to the court rulings, actions such as buying a car for a spouse or adding the same-sex spouse’s name to a property deed required the recipient to file a gift tax return and possibly pay taxes if the amount exceeded $14,000 in one year. The change is potentially a huge financial gain for same-sex couples, since gift tax rates are the same as estate tax rates.

No more tax penalty on an inherited IRA

With the DOMA repeal, a partner who inherits an individual retirement account from a spouse can postpone required minimum distributions by rolling it into a spousal rollover IRA.

The assets will continue to grow tax-deferred until he or she reaches age 70½, at which time the spouse must begin taking a required minimum distribution.

Since spousal IRA rollovers were not previously allowed for same-sex spouses upon the death of the first, they were fully taxed.

Entitlement to spousal and survivor federal benefits

Previously, Social Security benefits were not available to surviving partners in same-sex marriages. Now, a surviving same-sex spouse is entitled to the same Social Security and veteran benefits as traditional married couples in the past.

Marriage pros and cons and unsolved mysteries

Of course, there may remain many good reasons for not getting married. Among them: community property laws, shared long-term care costs, shared debts, and the obvious one – not liking the other person.

Absent those concerns, why wait? I advise any California same-sex couple to get married sooner rather than later, and to revise any existing estate planning documents with the help of a knowledgeable attorney.

Though the repudiation of DOMA helps to level the financial playing field for same-sex married couples, other issues must be resolved. One key question: Does the application of federal benefits apply to unmarried domestic partners?

Another issue: What if same-sex couples become legally married, then move to a state that doesn’t recognize their marriage? That is the million dollar question, as some of the consequences of moving between states remain a mystery, at least for now.

Attorney Jim Gianelli is a founding partner in Gianelli & Polley, a Sonora law firm. gianellilaw.com

Copyright © 2013 Friends and Neighbors Magazine

Jim Gianelli
By Jim Gianelli September 15, 2013 18:10
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