The constitutionality of the Defense of Marriage Act, which defines marriage as the legal union of a man and a woman, is under attack on several fronts. Regardless of the outcomes of these legal battles, estate planners should recognize the uncertain landscape and develop estate plans that not only meet the client’s basic planning needs, but also have the flexibility to ensure same-sex couples can take advantage of future planning opportunities.
In advising same-sex married couples, one of the first steps is determining where and when they married. Because of the changing requirements for same-sex marriage among the states, it may be preferable, in some cases, to have a client remarry in New Hampshire, where the laws are now well-settled.
Next, review any existing documents. Many commentators advise that wills and trusts should include expansive definitions of "spouse," "marriage," "children," and "descendant," and avoid relying on state law definitions. It’s good practice to use a definition that specifically identifies the same-sex spouse, including the date and place of marriage, and be sure to include references to the spouse when identifying the individual as a beneficiary, to avoid ambiguity.
It’s important that clients have updated financial and health care powers of attorney, clearly nominating the spouse as the primary person to make financial and healthcare decisions in the event of incapacity. It is also advisable to prepare a HIPAA release, which generally names the healthcare and financial agents.
Both partners in the same-sex couple will need a will and, depending on the assets and complexity of the estate plan, perhaps trusts as well. Each of the wills should nominate the spouse as the personal representative and primary guardian over minor children. The wills should also provide burial instructions and control over remains. Additionally, if there is not a separate trust, the wills should contain all the dispositive provisions of the client’s plan.
It also is important to confirm that the designated beneficiary of life insurance policies and retirement accounts is correct. If the couple is not using revocable trusts, it may be useful to title assets in joint tenancy, to avoid probate and ensure the property ends up in the hands of the intended beneficiary.
One of the primary federal benefits of marriage, which is unavailable to same-sex couples, is the unlimited marital deduction that allows the lifetime tax-free transfers and delayed payment of estate taxes at death. Wealthier clients may need to develop a plan that has flexibility, in the event DOMA does not survive. For instance, consider drafting a plan that provides alternative dispositive provisions, providing a marital bequest or marital qualified terminable interest in property (QTIP) in the event the federal Defense of Marriage Act is overturned (see sidebar) and the IRS recognizes same-sex spouses.
Under current law, if an attorney is counseling a couple whose assets exceed the available estate tax exemption amount, the practitioner should structure the estate in such a manner as to avoid double estate tax, by leaving assets in trust for the benefit of the surviving spouse, but not outright. In this manner, the couple can take full advantage of whatever estate tax exemption is available and only incur a tax on any assets that exceed the exemption amount.
Commentators on this topic note that some surviving same-sex spouses are filing estate tax returns (Form 706) to claim a "protective" marital deduction and paying the estate tax under protest, as well as electing their deceased spouse’s unused exemption amount (portability).
During life, the wealthier spouse can transfer $14,000 tax-free in annual exclusion gifts to the other spouse. The use of various types of inter-vivos trusts for the surviving spouse can efficiently transfer or equalize wealth.
Irrevocable Life Insurance Trusts are a popular alternative to the marital deduction, allowing the tax-efficient transfer of wealth to the surviving same-sex spouse (or domestic partner). In addition, the use of more exotic wealth transfer techniques, such as Qualified Personal Residence Trusts and Grantor Retained Income Trusts, might be appropriate.
DOMA and the patchwork of state laws affecting marriage will continue to evolve. Estate planning attorneys need to be prepared to help same-sex couples develop plans that satisfy their basic wishes and have built-in flexibility, enabling them to take full advantage of all of the current and future opportunities available under both state and federal law.