Estate Planning for Same-Sex Couples
Estate planning can be complicated; here Natasha simplifies the steps same-sex couples must take to ensure their wishes are carried out after death.
Last year the Supreme Court announced that state-level bans on same-sex marriage were unconstitutional. In other words, no matter where in the United States that you live, you now have the same rights as any other couple.
The only hiccup is that some counties are denying licenses to same-sex couples (13 counties total). This means that same-sex couples wishing to marry in those states would need to travel to a different part of the state to obtain a license. As a result, estate planning for same-sex couples in certain states may be tricky.
Marriage equality means it’s time for you to start financial planning with the both of you in mind.
Key benefits that are now available to same-sex couples include social security, federal income taxes, employee health care benefits, retirement and pension plans, and federal estate and gift taxes. With these benefits comes the responsibility of estate planning.
When planning an estate, most people focus on:
- Organizing your personal affairs
- Accumulating an estate
- Planning for orderly distribution of your estate (providing for your surviving spouse or other beneficiaries)
- Strategizing to pass estate efficiently by planning for estate costs and taxes.
With proper planning and a good team of professionals working for you, this doesn’t have to be overwhelming.
Estate planning for same-sex couples can be complex. It depends on what you own, what you owe, what state you live in, and your wishes for after you’re no longer living.
Taking advantage of industry professionals will help immensely. Your estate planning team should include:
- You and your partner
- Financial professional
- Your accountant
- Estate planning attorney.
A financial professional works in unison with both the accountant and the estate planning attorney to offer appropriate strategies. An accountant is a professional whose business is to be on top of current tax laws, which are ever-changing. He or she can also help you calculate the value of your estate. The estate planning attorney can help you implement certain estate planning tools, such as a will or a trust.
What do you include in your estate?
People can assume estate planning is only for the wealthy. However, the word “estate” simply refers to whatever you own, whether that’s a mansion worth millions or just your grandmother’s antique tea set. You include everything you own in your taxable estate. This includes:
- Property in your name
- Your interest in joint property
- Life insurance you own
- IRAs and retirement plans
It’s also important to consider your final expenses when planning with your advisors. They can help reduce the size of your estate before assets pass to your beneficiaries (the people you will leave your money to). These can include:
- Funeral bills
- Medical bills
- Probate expenses.
How do you distribute property after death?
There are three ways that property can pass at your death:
Will – Property that you own in your own name does not automatically “know where to go” when you die. A proper will controls how and to whom this property passes at your death. If you do not have a will, certain state laws will dictate how this type of property passes at your death. Your interest in property that you own with someone as a “tenants in common” also passes under your will.
Contract – A contract means that the property involves some sort of contract where you have a beneficiary to receive your wealth, such as a life insurance policy, an annuity or a retirement plan. Your will has no control over the distribution of this type of property.
Operation of Law – means that the piece of property will automatically pass to a survivor, such as a house or a joint bank account. Do keep in mind that some laws vary by state.
It’s important to not only know what you have, but to also know how you own it so that you can understand how it will pass at your death.
You should periodically review any ownership documents you may have, because your wishes change after you create these forms.
What about health and financial decision-making?
There are two important legal documents to familiarize yourself with: a health care directive and power of attorney.
A Health Care Directive is a written statement that provides direction on how certain medical decisions are to be made. It allows you to state your choices for certain health care measures or to name someone to make those choices, if you become unable to make decisions about your medical care. Health care directives are a combination of a living will and a power of attorney for health care. In many states a living will and a power of attorney for health care are combined into a single document.
Without valid health care directives wherein you and your partner name each other as your respective agents, you may not have control over medical decisions made concerning your partner if he or she were to have health problems and could not make those decisions for him or herself.
A power of attorney for health care is a document in which a person (principal) appoints someone to be their authorized agent for purposes of health care decisions. A power of attorney for health care is a more comprehensive and flexible document than a living will. It can cover any health care decision, not just terminal illness or end of life situations.
A power of attorney for property and finances is a document in which you can appoint someone to be your authorized decisions. It allows the agent or attorney-in-fact to manage business and personal affairs of the principal. These powers of attorney can include specific powers and/or general powers. For example, if you were to become incapacitated and your POA was durable, your partner could manage your personal affairs including paying your bills, making gifts, and transferring assets.
You may need to draft these documents using specific statutory language. Some states may require a specific format or specific wording in the document. Be sure to work closely with your attorney.
What about real estate?
Married same-sex couples should not encounter any issues around real estate. However, non-married partners might. Consider the following ideas if you are unmarried, but want to own a home with your partner.
How you title your home is very important. If you and your partner title your home as “Joint Tenancy with Rights of Survivorship,” should one of you die, the survivor becomes 100% owner of the home. If a home, or other asset, isn’t titled correctly, the effects can be devastating and unintended. Your partner may not end up as the legal owner of the home. It’s important to speak with an attorney about how you should title your assets and how a trust can help in order to keep your decisions your own – even after you’re gone.
Couples without a marriage license need to also be aware of potential gift tax issues if they “add” a partner to the title of a home.
If both you and your partner own your home and you both contribute to the carrying costs (including mortgage) always pay the mortgage with two checks. For estate tax planning purposes, such an action can be most valuable as it will allow a surviving partner to prove his or her portion of ownership in the home, making the estate valuation of the first partner to die more equitable, and may also save costly estate tax dollars. Another reason to pay the mortgage with two checks is in the event partners separate. Again, careful record keeping can provide valuable documentation.
Here is another idea for those of you who are the sole owners of a home that you share with your partner. Let’s say that, in the event of your death, you’d like your partner to continue living in the home but you want your child or other heir to eventually own the home. One way to do this is with a life estate in favor of your partner. Another way is through a trust that will stipulate that your surviving partner can stay in the home for X number of years or until his or her death. At the time you stipulate, your heirs will be given ownership of the home.
What about retirement benefits?
Married same sex couples are now privy to the same retirement plan benefits that heterosexual couples are entitled to. However, if you are not legally married, then many benefits are not available. For example, while you can name your non-spouse partner as the beneficiary of your IRA or 401(k), your partner will not be eligible for favorable tax treatment in terms of distributions upon your death.
Would a trust be useful?
Another reason to consider a trust is it gives you control over how and when your beneficiaries receive your assets. Some people think of a trust as a document. I would like you to think of it as a container that holds money and other assets for your beneficiaries. You decide what you are going to put into the trust, you decide who gets what is in the trust and you decide how you will distribute the trust.
You should draft a trust with an attorney who has experience dealing with estate planning and trusts. There can be gift and estate tax consequences to the various types of trusts used in estate planning. Additionally, not all trusts provide estate tax benefits. For example, a revocable trust does not provide any estate tax benefit. However, a revocable trust does avoid probate. An estate planning attorney can work with you to decide if a trust is an appropriate tool for your situation.
(This article originally appears on Quotacy.com)
(Natasha Cornelius is the content-writer and social media manager for Quotacy.com, an online life insurance agency. Their aim is to make life insurance easy to understand and to help you get life insurance coverage to protect your loved ones. Get a term life insurance quote from Quotacy.com. No personal information required.)