The New Frontier of Same-Sex Estate Planning
Thomas D. Sims and Jonathan S. Coleman
Prior to the Supreme Court issuing its 5/4 decisions in Obergefell v. Hodges and United States v. Windsor, the only financial and estate planning vehicles available to Florida same-sex couples were those available to single people or legal strangers, such as powers of attorney and written medical directives. For them – no matter the duration or strength of their committed relationships – there was no Federal marital or estate tax deduction, or “elective share” to be claimed against marital property in the event of death; all taxes had to be filed separately; and same-sex couples could not take advantage of the ownership form known as “tenancy by the entireties” or avail themselves of other creditor protections.
All of that changed when the Supreme Court held first in Windsor (in 2013 regarding the Federal Government’s interpretation of “marriage” and “spouse” under the Defense of Marriage Act) and then in Obergefell (in 2015) that Florida’s statutory and state constitutional policy of denying all legal recognition to same-sex marriages violated both the Due Process and Equal Protection guarantees of the United States Constitution. The shifting legal landscape now means that same-sex couples, if they legally marry, are entitled to the same rights and protections as all married people, and a review of pre-Obergefell and Windsor estate planning should be a top priority. The IRS has followed up Obergefell by issuing proposed regulations changing, for all Federal tax purposes, the terms “spouse,” “husband,” and “wife” to mean an individual lawfully married to another individual, and the term “husband and wife” to mean two individuals lawfully married to each other. However, it should be noted that the proposed regulations would not treat registered domestic partnerships, civil unions, or similar relationships that are not denominated as marriage under state law, as marriage for Federal tax purposes.
In light of the Court’s June 26, 2013 and June 26, 2015 decisions and the accompanying proposed regulations, the areas that same-sex couples should now consider in developing an estate plan include:
Marital Deduction and Estate Tax Exclusion Amounts. Same-sex couples who decide to marry may now take advantage of the estate and gift tax unlimited marital deductions. With same-sex marriage becoming legal in all 50 states and Washington D.C., those couples who have been holding off getting married or who have entered into civil unions or domestic partnerships are now eligible to marry and take advantage of the Federal benefits afforded to married couples, such as the unlimited marital deduction from Federal estate and gift tax.
As a result of Obergefell and Windsor (and the proposed regulations discussed above), couples who are in a civil union or domestic partnership should consider applying for a marriage license, even if the state laws provide the same benefits of marriage to civil unions or domestic partnerships, because current Federal laws afford those same Federal benefits only to legally married couples. Federal recognition of marriages of same-sex couples leads to the availability of the unlimited marital deduction from Federal estate tax and gift tax for transfers between same-sex spouses, and couples no longer have to rely on an individual’s applicable exclusion amount from Federal estate tax and federal gift tax (currently $5.45 million, adjusted annually for inflation). Additionally, the “portability” provisions of Federal gift and estate tax laws also entitle a surviving spouse of the same sex to use any portion of the deceased spouse’s unused exclusion amount, allowing the surviving spouse to make additional tax-free gifts and reduce the amount of estate taxes owed upon the surviving spouse’s death.
Structure of Prior Gifts/Bequests. Planners previously advising same-sex couples may have drafted their estate planning documents under the assumption that any gift or bequest to a spouse of the same sex over and above the individual’s applicable exclusion amount would be subject to Federal estate tax (currently at a rate of 40%). However, in light of the current changes precipitated by Obergefell and Windsor such gifts and bequests, if properly structured, are now entitled to the unlimited marital deduction. Accordingly, a married same-sex couple may wish to modify their estate planning documents to provide that (i) any assets included in their estates in excess of the applicable exclusion amounts will pass to the surviving spouse, either outright or in a properly structured marital trust for the spouse’s benefit, thus deferring all Federal estate taxes until the death of the surviving spouse, and (ii) to include a separate marital trust that is designed to permit a spouse to use any of the individual’s unused Federal GST exemption that remains after the individual’s death.
Gift Taxes. Prior to the Windsor decision, each spouse could make gifts only up to the annual exclusion amount from Federal gift and GST tax (the “annual gift tax exclusion amount” and the “annual GST exclusion amount,” respectively – each currently $14,000) without using any portion of his or her applicable exclusion amount. Going forward, however, each spouse may now make gifts from his or her own assets and, with the other spouse’s consent, have such gifts deemed to have been made one-half by the other spouse for purposes of Federal gift tax and GST tax laws. By electing gift-splitting, a married couple currently may give up to $28,000 to any individual without using any portion of either spouse’s applicable exclusion amount.
Retirement Accounts. A surviving spouse is entitled to roll over a deceased spouse’s retirement account into the surviving spouse’s retirement account, treating such account as the surviving spouse’s account and thereby avoiding the necessity to take minimum distributions or lump-sum distributions until such time as the surviving spouse ordinarily would be required to take minimum distributions (e.g., age 70½). As a result of Windsor, this benefit is now available to married same-sex couples, and married same-sex spouses should consider naming each other as the beneficiary of his or her retirement accounts in order to defer income tax recognition as long as possible.
However, a spouse-participant in an ERISA-covered plan (e.g., a 401(k) plan) should consider that his or her spouse may now automatically be a beneficiary of the retirement plan. Accordingly, if such spouse desires to designate someone other than his or her spouse as a beneficiary, such participant will need to obtain the consent of his or her spouse to make such a designation effective. Prior to the Court’s decisions, consent was not needed from a spouse of the same sex.
Inheritance and Intestate Succession. Under Florida law, spouses are entitled to many preferences and rights upon the death of a spouse (e.g., family allowances, homestead, elective share etc.). Specifically, Florida has a strong policy against disinheriting spouses, and as a general rule, a surviving spouse can claim an “elective share” equaling 30% of an estate. These are complicated areas of the law and require considerable planning.
Homestead Protections and Other Property Ownership. One potential downside of marriage for spouses who own more than one residence is the removal of homestead protection for one of them: each married unit can claim only one homestead. On the other hand, a surviving spouse will be afforded homestead protection as to the descent and devise of the homestead, as well as against potential creditors. Another advantage available to married couples in the State of Florida is their ability to own property in what is called “tenancy by the entireties,” which provides that each spouse is deemed to own 100% of the property. Accordingly, the property is protected from attachment by a creditor of just one of the spouses.
The sea-change in the legal landscape relative to same-sex spouses brought about by the Obergefell and Windsor decisions requires the review of such couples’ existing estate plans in consultation with qualified legal professionals.