The modern American family is not so typical anymore. These days, the definition of family has expanded to accommodate the unmarried and same-sex marriages, as well as the circumstances of divorce, remarriage, stepchildren, adoption and surrogacy. Legalization of same-sex marriage has led to a re-evaluation of many traditional tax and estate planning presumptions.
The legalization of same-sex marriage opened up a multitude of previously unattainable tools and tax savings that come along with a legally recognized marriage. Yet, some couples may need to account for planning that was done before same-sex marriage was recognized, and others may face situations that require special planning. As a result, those who are developing estate plans should pay close attention to how the existing rules fit their particular family situation.
The first step in creating any estate plan should be to ensure all the potential “what if” questions are explored, by considering not only the amount of assets and the impact of taxes, but also the family’s structure and emotional needs. Each part of an estate plan has the potential to affect others, and given today’s complex family structures, the results can be surprising without proper planning.
For example, a will says, “I give 50% of my estate to my son, Josh Smith.” But what happens if when the will is probated, Josh now identifies as female and goes by the name Jennifer Smith? It may seem obvious that the decedent intended to identify their child, but in this case it would be up to the court in the appropriate jurisdiction to determine the intent.
No matter where those “what if” questions lead, the basic tools of estate planning remain the same. Wills, trusts, beneficiary designation forms, powers of attorney, directives for health care decisions and life insurance policies all play an important role. Additionally, legal and tax rules regarding estate planning can vary widely from state to state, so consultation with legal counsel is an essential step of the planning process.
With complex families, it’s not only a challenge to ensure the right assets go to the right people, but it can also be difficult to determine when those assets should be made available. It is critical to understand the different roles that specific planning vehicles play in distributing assets and assigning responsibilities. Exhibit A identifies the essential planning documents and materials that everyone should have.
A key part of any estate plan is to determine who will make important decisions about a number of issues, from health care and finances to guardianship of minor children. With same-sex marriages, having proper documentation is the only way to ensure that those who assume specific responsibilities are empowered to perform those duties.
The will contains several important provisions:
Financial and health care powers of attorney designate a person to make decisions on your behalf if you are ill or incapacitated.
A financial power of attorney is an important tool for legal and financial issues. It may allow the holder to sign tax returns, transfer assets to a trust and make financial decisions for a person who has become incompetent. The power of attorney can be set up to become active in the event you are incapacitated, or you can create one that is effective immediately. The power lapses upon death of the issuer, at which point the decision-making power passes to the executor of the estate and the person or persons named as trustee of any trusts.
The key health-related documentation begins with a health care power of attorney or living will. This instructs health care providers as to your wishes regarding basic decisions about maintaining life-prolonging procedures. A second, more flexible document is a health care proxy or power of attorney, which allows someone to make medical decisions when a person becomes incapacitated. If no one has been designated as health care agent, the responsibility then typically passes to spouses, children, parents, siblings or a court appointed guardian. In non-traditional families, these documents are particularly important because the customary definition of “next of kin” may not apply. In same-sex relationships, for example, long-term partners have been denied hospital access or the right to make health care decisions if they are not legally married.
It is important to pay attention to the technicalities associated with the way certain kinds of assets are passed to beneficiaries. For IRAs, 401(k)s and insurance policies, the name on the beneficiary designation form determines who gets the money. However, people often forget to update these forms, leaving an ex-partner or deceased family member as the named beneficiary. Although some states have enacted “safety clause” statutes to protect heirs of divorcees who forget to update their beneficiary designations, these may or may not apply to an individual’s specific circumstances, especially if the previous beneficiary was not a legal spouse. Therefore, it is not a good idea to rely on such provisions.
A revocable living trust is a written set of instructions for the management and distribution of the property held in the trust. Property is transferred to the trust by changing legal title or retitling investment accounts. The trust can be revised at any time prior to your incapacity or death.
A trustee is responsible for administering the trust according to the terms. In a living trust, you are typically the initial trustee and successor trustee(s) are named to administer the trust upon your incapacity or death. Often a professional is named solely or as co-trustee with family members.
Revocable trusts do not save estate taxes or provide any income tax benefits. However, the assets titled in the trust are not subject to probate. Your will and the inventory of your assets in probate are available to the public, therefore a revocable living trust can alleviate some privacy concerns.
Much of estate planning has historically focused on minimizing estate taxes, which can take a large bite out of any estate. Current rules allow for an unlimited marital deduction for assets gifted to or inherited by a spouse. Since the recognition of same-sex marriage, in the Windsor case1, couples who are validly married for state law purposes are also married for federal tax purposes.
If you were married or together prior to the legalization of same-sex marriage, there is a good chance some remediation may be needed. It could be helpful to contact an attorney to determine if there are ways to restore any exemption that was utilized or estate taxes that were paid.
Since the formal recognition, there are no tax difference for same-sex couples. The same transfer tax rules apply, and careful planning is important when making transfers to partners.
Over the past decade, it has become more clear that the future is unpredictable. Going forward, additional forms of marriage may be recognized, and gender could be defined differently or not at all. However, proper planning remains essential for today’s families.
It’s important to ensure your documents clearly define the wishes you desire to be carried out during incapacity or after death. Working with an advisory team to review and amend your estate plan is necessary to ensure it reflects your current goals and unique family structure.
1 United States v. Windsor, 133 S. Ct. 2675 (2013).
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