This article addresses the legal and social considerations of representing same-sex couples and then discusses strategies for dealing with gaps in the legal protections for these couples.
State and federal laws create special challenges when advising same-sex couples. Advising and representing lesbian, gay, bisexual, and transgender (LGBT) clients can be difficult because state and federal laws recognizing same-sex relationships are highly varied and constantly changing. On top of a patchwork of state laws is the Defense of Marriage Act (DOMA), which has two main parts. First, DOMA allows states to not recognize same-sex marriages legally performed in other states. Second, DOMA says the federal government does not recognize any same-sex marriages, civil unions, or other relationship designations. This prevents same-sex couples, including legally wedded couples, from receiving any federal benefits of marriage.
Basic protections for LGBT individuals, couples, and families. Gay couples who own property together often assume their property is owned with rights of survivorship. But there is a chance that the deed preparer assumed they wanted to own the property as tenants in common. Practitioners should check deeds to ensure every document works in the estate plan as expected with consideration given to the transfer tax implications.
LGBT couples and families require special advice when traveling to, moving to, or interacting with other states. Attorneys should advise their clients always to take copies of documents, especially powers of attorneys for health care, when traveling. But attorneys also should advise that such documents are not a shield against discrimination, and doctors and nurses will not necessarily follow the power of attorney. Practitioners also should warn clients to learn the laws and policies of other states they will be moving to or interacting with.
Many employers have benefits such as health insurance available to domestic partners of employees, but there are some caveats. Unlike benefits provided to opposite-sex spouses and dependents, which are excluded from an employee’s income, the benefits provided to a same-sex spouse are imputed as income to the employee partner at the fair market value of the coverage provided. The other issue to consider when receiving domestic partnership benefits is what happens when the employee partner leaves or loses a job. There is no guarantee that domestic partners will be able to get COBRA benefits.
When surviving spouses inherit an individual retirement account (IRA) or qualified defined contribution plan before required minimum distributions (RMD) have begun, they can roll over the IRA into their own IRA without incurring a tax and delay receiving payments until age 70 and one-half. Because of DOMA, same-sex spouses and partners do not receive this favorable tax treatment; they must begin taking payments from the IRA or qualified pension plan immediately.
Purchasing life insurance can be complicated in states without same-sex marriage because of state laws requiring insurable interests. Precisely who must have the insurable interest varies from state to state, but most states have a law that prohibits purchasing life insurance when the purchaser and/or beneficiary does not have an insurable interest. Same-sex couples without access to equal marriage rights in their states are prohibited from purchasing life insurance policies on their partners. This becomes an issue when one partner is wealthier than the other. The couple will want to have life insurance to provide for the less-wealthy partner but will not want the policy proceeds included in the wealthier partner’s taxable estate. There are two possible solutions. The first is to create an irrevocable life insurance trust for the wealthier partner and have it purchase the insurance policy. The second is to have the wealthier partner purchase the policy and transfer it to the less-wealthy partner.
Planning considerations and techniques. Avoiding inadvertent gifts. Careful planning may be required to avoid inadvertent gifts to a same-sex partner. The gift and estate taxes both allow unlimited marital deductions, but because of DOMA, even married same-sex couples cannot take advantage of them. An important part of avoiding inadvertent gifts is to keep good financial records. Another tip is to open a joint checking account for household purchases. If a couple purchases property together, fails to keep records of contributions, and fails to file gift tax returns, then the entire property will be included in the estate of the first partner to die. The disadvantage is that the entire property will pass through both partners’ estates.
Self-canceling installment notes. Same-sex couples also should be wary of adding a name to the deed of the property owned by one partner. Signing the deed creates a gift of half the fair market value of the property at the time the deed is signed, and the partner receiving the property gets the donor’s basis in the property. This situation can be avoided by using self-canceling installment notes to transfer large sums of money or property to a same-sex partner. The note is self-canceling so it is not included in the estate of the partner who lent the money, if the note is not paid off at the time of death.
GRITs vs. GRATs. Same-sex couples have an effective option that is not available to individuals who want to make large gifts to certain family members. Although the Internal Revenue Code eliminated the use of grantor retained income trusts (GRITs) for many family members, DOMA prevents same-sex couples from being considered family. So while most grantors only have the option to use grantor retained annuity trusts (GRATs) to gift large sums of money to their family, grantors in a same-sex relationship have the choice between GRITs and GRATs when making gifts to their partner or spouse.
No-contest clauses. When drafting estate plans, if a will or trust contest is likely, the attorney may want to consider incorporating a no-contest clause in the estate plan. Practitioners should be aware, however of some issues with these clauses. First, for no-contest clauses to be effective, the inheritances going to persons likely to contest the will or trust need to be significant to discourage a will or trust contest. Second, although many states honor no-contest clauses, they are often disfavored and will be construed to avoid disinheriting the beneficiary.
Living trusts. Another option for same-sex couples facing the possibility of a will or trust contest is to create a living trust that is funded with assets going to the domestic partner beneficiary and a will to provide for the blood relatives.
Drafting documents. Attorneys who use their clients’ legal marriage, civil union, or domestic partnership as a basis for determining whether the relationship is in existence at a future date are making a tremendous mistake. The best solution for clauses requiring the relationship to be in existence at a future date is to use language based on cohabitation. But attorneys need to include exceptions when the couple is unable to live together because of employment, hospitalization, or moving into a nursing home. Another suggestion, particularly for irrevocable trusts when the settler wants to name the partner as trustee, is to give an independent third party the power to remove the partner as trustee and beneficiary. This option works if the settler has an individual he or she can trust to determine whether a partner should be removed.
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