By: Alex S. Tanouye
Lerch, Early & Brewer's Legal Update
The unintended consequences of failing to plan for one's incapacity and death are borne by those dearest to the incapacitated or deceased individual. While state and federal laws provide safety nets to mitigate many adverse consequences, those nets fail to provide soft landings for everybody.
Lack of Protection for Unmarried Couples
Persons in same-sex or unmarried relationships are particularly vulnerable to the default laws that determine who can make financial and health care decisions for incapacitated persons and to whom property devolves in the absence of a valid will or revocable trust. Those default laws offer a measure of protection to married couples, but no state other than Massachusetts recognizes or permits marriage between same-sex persons.
State governments, in their benevolent wisdom, provide an estate plan for everyone who fails to execute a valid will or revocable trust – it is known as intestacy. Generally, intestacy results in a deceased person's property devolving to his or her spouse, or in the absence of marriage, to the decedent's biological relatives. In most states, intestacy does not result in property passing to one's non-spousal partner.
Denial of Estate and Gift Tax Benefits
Same-sex and unmarried couples are also denied the estate and gift tax benefits afforded to married couples. While a spouse may make unlimited gifts to a U.S. citizen spouse without adverse tax consequences, a same-sex partner cannot give property to her or his partner in excess of $12,000 annually without triggering gift tax. Moreover, the estate of a deceased spouse enjoys an unlimited marital deduction – meaning that no estate tax is levied – for assets that pass to the surviving spouse. This deduction is unavailable to the estates of same-sex and unmarried persons whose property devolves to her or his partner. Raising sufficient funds to pay the estate tax, which is currently assessed federally at a rate of 45 percent on assets in excess of $2 million, often requires estates to sell real property and other assets at less than optimal market conditions to the detriment of the surviving partner who could otherwise benefit from beneficial enjoyment or outright ownership of the real property and other assets.
What Every Estate Plan Should Include
Every estate plan, particularly for unmarried and same-sex couples, should include a
- Durable power of attorney for financial assets,
- Health care power of attorney/advance health care directive, and
- Will (and in many cases a revocable trust).
Powers of Attorney
Powers of attorney allow an individual, or Principal, to name the person, or Agent, best suited to make decisions in the event of the Principal's incapacity. An advance health care directive allows the Principal to determine what medical treatments should be administered or withheld should the Principal become unable to make those determinations due to incapacity. In the absence of these documents, state law determines who among one's next-of-kin makes these decisions, and it is usually not the healthy partner of an unmarried or same-sex couple.
A valid will and revocable trust enable an individual to decide who should inherit her or his property, rather than defer to state intestacy provisions. These documents also allow an individual to name her or his Personal Representative (or executor), trustee, and the guardian of minor children, rather than leaving those decisions to the state court.
Designated Beneficiaries for Other Assets
For assets such as life insurance, IRAs, annuities, and certain pension plans which pass to "designated beneficiaries," periodic review of the plans' beneficiary designations is critical to ensuring that such assets do not fall into the hands of unintended beneficiaries. A number of tax planning strategies and techniques are also available to same-sex and unmarried couples who want to mitigate the impact of gift and estate taxes imposed during life and at death.
The need for an estate plan– which addresses all types of property – is particularly acute for same-sex and unmarried couples who cannot rely on the states' default decision-making and intestacy provisions to meet their needs.
Locally, the District of Columbia is the only jurisdiction that affords registered domestic partners many of the same rights that married couples enjoy with respect to incapacity decision making and intestate succession to property after death. However, same-sex and unmarried couples in the District of Columbia must affirmatively register as domestic partners in order to qualify for the statutory protections and elections available. Neither Maryland nor Virginia recognizes domestic partnerships.
For all unmarried couples, including domestic partners in the District of Columbia, none of the gift and estate tax benefits afforded to married couples are available. Moreover, Maryland imposes an inheritance tax in addition to state and federal estate tax on property passing to persons who are unrelated by blood or marriage. Consequently, tax planning for same-sex and unmarried couples is a critical component of estate planning that should be addressed when each partner is capable of handling her or his affairs and when sufficient time is available to effect certain property transfers that can mitigate the impact of gift and estate taxes.
Same-sex and other unmarried couples should meet with their attorneys, financial advisers, and accountants on a regular basis to discuss the various techniques and strategies available to avoid the unintended consequences of reliance upon default laws that often fail to accomplish their goals.
Alex Tanouye represents people in all areas of estate planning, including tax planning, the preparation of wills and trusts, and estate and trust administration. For more information about estate planning for same sex or unmarried couples, contact Alex at astanouye@lerchearly.com or (301) 347-1269.
This article originally appeared in the WInter/Spring 2008 edition of Lerch Early's Legal Update.
