LGBTQ Estate Planning

Estate planning is critical for everyone: single, married, straight, and LGBTQ. However, for the LGBTQ community, estate planning provides protections to help guard against discrimination when people are reluctant to recognize your relationship, even if you are married.

In many states, if a member of the LGBTQ community fails to plan properly, the result can be devastating to his or her spouse or partner and family. Having no estate plan, or relying upon a Will, Joint Tenancy, or Tenancy in Common as an estate plan, is tantamount to giving up control of one’s estate and management of one’s well-being in times of incapacity. This need for an estate plan is critical in case of an accident or illness that renders a partner or spouse incapable of making decisions or managing his or her affairs. Without a proper estate plan, the other partner could be legally precluded from having any role in the decision-making of his or her partner’s care, managing his or her affairs, or even having access to the incapacitated partner.

Even if you are married, planning is critical in the event you encounter resistance to recognizing your marital rights.

History of Same-Sex Marriage

In U.S. v. Windsor, the U.S. Supreme Court made federal benefits available to spouses in same-sex marriages and cleared the way for same-sex marriage. In U.S. v. Windsor, the Supreme Court struck down a section of the Defense of Marriage Act (DOMA), a federal law defining marriage as only between a man and a woman. That section of the law denied federal recognition to same-sex couples validly married under state law. The purpose of the Court’s ruling was to ensure that all married couples within a state are treated equally under federal law.

Then in 2015, in a narrow victory, the Supreme Court ruled 5-4 in Obergefell v. Hodges that there is a fundamental constitutional right to marry, which includes same-sex couples. It also ruled that a same-sex marriage valid in one state must be recognized in all states.

While there is still a way to go with the prevention of discrimination in other areas, such as employment, the LGBTQ community achieved a remarkable milestone: Marriage Equality.

Marriage By Any Other Name . . .

Some states and local jurisdictions offer domestic partnerships, civil unions, or similar methods of legal recognition for same-sex couples. These forms of relationships are offered in addition to marriage. The rights and responsibilities of domestic partnerships or civil unions vary substantially from jurisdiction to jurisdiction. For example, in some states, such relationships other than marriage do not affect property rights between the parties, but in other states they do.

One thing is clear, these non-marriage alternatives will not result in recognition of the relationship by the federal government.  For example, the tax advantages available for same-sex married couples do not apply to registered domestic partnerships, civil unions, or other similar relationships that are not recognized as married couples. Couples currently in these types of unions may wish to weigh the benefits of getting married, as there are now serious tax benefits to doing so for high-net-worth couples who wish to leave their assets to each other.

Below are the various effects the Supreme Court rulings have had on tax and estate planning for same-sex couples.

Tax & Retirement Considerations: 

Income Tax

Married taxpayers reach the highest marginal rates of income tax at far less than double the income of a single taxpayer. For example, in 2022, single taxpayers will pay the highest marginal rate of income tax of 37% on all income earned over $539,900 in contrast to married couples who file jointly they will reach the 37% rate on all income collectively earned over $647,850. Yielding a difference of only $107,950 is not much of an incentive.  However, the analysis could yield a more favorable outcome when one spouse has little or no income.

Estate Tax & Marital Deduction

Same-sex couples can now take advantage of the gift and estate tax marital deduction. This allows spouses to give unlimited assets to each other, during life or at death, without gift tax or estate tax. At the death of the first spouse, assets can be passed to the surviving spouse, free of the estate tax, deferring estate tax until the second death. For example, in 2022, the federal estate tax exemption is $12,950,000 per individual and $25,900,000 for married couples. Therefore, married same-sex couples can shield $22,800,000– keeping in mind that the current federal exemption will sunset on January 1, 2026, and the exemption amount will be reduced to $5,000,000 per person (indexed for inflation).

Annual Gifting

The annual exclusion for 2022 is $16,000 per person to an unlimited number of persons, and they can take advantage of the federal law that allows married couples to jointly gift $32,000 to an unlimited number of persons every year without the amount counting against their lifetime exclusion. 

Gifting to Non-citizen spouse

Married same-sex couples can gift an unlimited amount of money to their spouses during their lifetime without imposing a tax liability issue if they are U.S. citizens.  However, for gits to a non-citizen spouse, the gift tax annual exclusion amount is $164,000. 

Retirement Planning

Spouses can roll over a deceased spouse’s IRA into their own IRA. For an unmarried couple, a spousal rollover is not an option. The ability of married same-sex couples to execute a spousal rollover could result in significant income and tax savings.

Surviving spouses may also be entitled to the deceased spouse’s pension. Additionally, when a spouse retires, the non-employee spouse will be eligible to continue the retiring spouse’s health plan through the Consolidated Omnibus Budget Reconciliation Act (COBRA).

The Problems Estate Planning Solves for the LGBTQ Community

An LGBTQ couple can avoid numerous problems through proper estate planning:

• For a married same-sex couple, proper estate planning will ensure they get all the state and federal benefits of their marriage, while avoiding probate, maintaining their privacy, and protecting their assets.
• For an unmarried same-sex couple, proper estate planning will ensure their partner will have legal rights to make health care decisions, protect their rights to inherit assets from each other while avoiding probate and utilize planning strategies to avoid the burdens of extra taxation when possible.
• A Trust can be used as the main estate planning document so that a  spouse or partner is the nominated Trustee, i.e., manager of their spouse or partner’s affairs if he or she becomes incapacitated through illness or accident.
• The Health Care Power of Attorney can avoid potential problems if a spouse or partner becomes incapacitated. It allows a spouse or partner to appoint their spouse, partner, or someone they care about to make health care decisions on their behalf if they are incapacitated. This prevents potential problems where a spouse or partner may not be given access to his or her incapacitated spouse or partner.
• A proper estate plan will ensure your assets are distributed to whom you want, when, and how you want.
• A Trust guarantees privacy, through avoidance of probate and its process of opening court records. This is beneficial for any same-sex couple who wishes for their relationship, assets, and disposition to remain confidential.
• An estate plan allows you to nominate the person you want to care for and raise any surviving minor children.

Our attorney at Amato Law, PLLC can assist married and non-married same-sex couples to create their estate plan to ensure optimal taxation.  Contact our office at (212) 355-5255 or fill out our online contact form.