Same-Sex Marriage Estate Planning is Evolving
When the Supreme Court declared the Defense of Marriage Act (DOMA) unconstitutional last year, they allowed states to change the definition of "spouse." At the same time, the Internal Revenue Service (IRS) began recognizing such couples as legitimately married. To date, 19 states and the District of Columbia are issuing marriage licenses to same-sex couples, and the pace of adoption seems to be accelerating. While it is true that the evolution of the law is behind society, as usual, it seems like estate planning for same-sex married couples is becoming far easier and more equal. That doesn't mean you don't need a plan, it just means the plan you make will entail fewer obstacles.
Keep in mind, the changes in the law apply only to same-sex couples who have been legally married in states that issue legal marriage licenses to them, at least for now. Those living together in civil unions or domestic partnerships are excluded from the law in the same way unmarried heterosexual couples are. However, those same-sex couples who do enter into a legal marriage now receive the same federal estate tax treatment as any other married couple. That means they will be able to transfer as much of their wealth to one another as they wish while they are alive without having to pay federal gift or estate taxes.
Those couples who are legally married are also now eligible for what is referred to as the portability benefit. The portability feature of the estate tax laws means if one spouse has relatively little wealth and dies, whatever is left over of their $5.34 million exemption passes to their surviving spouse. By marrying legally, couples are effectively able to double the tax-protected value of an estate, up to $10.68 million as of 2014. Put simply, if the couple has $7 million in wealth when one spouse dies, his surviving spouse can use the portability option to protect all of the couple's assets from estate taxes.
The fact that most same-sex couples won't die with more than $10.68 million in wealth doesn't mean they don't need an estate plan. There are several reasons for this. For one thing, if you don't live in a state that grants marriage licenses to same-sex couples, and you are not in position to do so, you're not subject to these rules. At least not yet. Another thing to consider is, while federal courts currently recognize legally married same-sex couples, states often do not. If a same-sex spouse dies without a will in a state that doesn't recognize same-sex marriage, it's likely that assets well pass through probate, and a state bureaucrat will decide what happens to your assets. That means, some of your assets could go to other blood relatives and family members, including some you may not want to have them. Also, without an estate plan, there is a great likelihood that the other spouse will not be recognized as a viable estate administrator or beneficiary.
There are ways to avoid probate with your assets, but they all require a comprehensive estate plan. Among the more common options available to couples include joint ownership of property with rights of survivorship. It's also possible for each spouse to specifically name the other as the beneficiary on insurance policies and other mechanisms, such as bank accounts, or IRA and 401(k) accounts. Couples who do that will avoid the probate process as long as they pass on via beneficiary designation. IRA, 401(k) and defined benefit pension plans fall under federal guidelines, though, so regardless of the state you live in, same-sex spouses should receive the same beneficiary treatment as traditional spouses. If all of that seems like legalese, don’t feel bad; that’s why you should hire someone to lead you through it all.
The bottom line on all of this is, there are benefits to the elimination of DOMA, including greatly expanded protection for same-sex couples when it comes to estate planning. These changes do not eliminate the need for an estate plan, however, especially if you live in a state that is among those who don't license same-sex marriages. Having a plan is always your best bet.