Published in the Probate Law Journal of Ohio
Based on a presentation by the author at the Ohio ACTEC meeting in Cincinnati on May 1, 2011.
As an effective advisor, you assist your clients in ensuring that their estate planning documents mirror the objectives they wish to achieve. Your clients have worked hard for their money and property; your job as an estate planning advisor is to find out what your clients’ goals are for disposition of that property at their death, and to use your specialized knowledge and expertise to help them achieve their estate planning goals. That job gets more difficult, however, when a couple seeking your advice cannot get or does not wish to get married, but still wants to craft an estate plan in which each partner gives the other partner spouse-like rights. As long as marriage for gay and lesbian couples is permitted in a few jurisdictions but prohibited in most states, effective advisors who have a gay and lesbian clientele (or who have a heterosexual clientele who have gay or lesbian children and grandchildren) must be familiar with what legal rights and protections exist for the gay and lesbian community and remain current on such topics as these issues continue to evolve during the coming years.
But what if you do not exactly have a gay and lesbian clientele? Is this really an issue you’ll ever come across?
If you have not yet been asked to help a gay or lesbian couple with their estate plan, it is likely you will before long. The 2000 Census counted over 600,000 same sex couple households in the United States, an increase of over 300% from the 1990 Census.1 The August 22, 2001 issue of the New York Times reported that a gay or lesbian couple leads a household in nearly every county in America.2 Interestingly, the results of a poll conducted by the Pew Research Center for the People and Press indicate a drop in Americans’ opposition to gay and lesbian marriage and an increase in support for civil unions in recent years; in the 2009 poll, 53% of the respondents said they opposed gay marriages, while 39% said they backed them. In the same poll, 57% of Americans indicated that they support civil unions.3 In 1996, 65% of poll respondents said they opposed such marriages, while 27% favored the idea.4 Although the 2010 Census results are still being compiled, we can imagine that the number of openly gay and lesbian households will have increased dramatically in the past decade.
Even in our own state of Ohio, we need to be prepared to effectively plan for gay and lesbian couples. Ohio’s constitutional amendment bans marriage or civil unions for gays and lesbians, or recognition of any legal union for gays and lesbians which was validly performed in another state. However, some of Ohio’s largest employers now offer private employee benefits to same sex couples. While many of these employers have cited equality concerns as a reason for their decisions to offer same sex partner benefits, most large employers have noted that in order to stay competitive for attracting and keeping top talent, they need to offer such benefits.5 Where there is demand for same sex benefits among major employers, there will also be demand for estate planning services for same sex couples.
As an advisor, you will first need to know what marital rights, or marriage-like rights, are available to gay and lesbian couples in your jurisdiction. The laws affecting gay and lesbian couples’ planning needs are in a great deal of flux. Only in 2003, the United States Supreme Court decriminalized sodomy, effectively overturning such laws in 12 states.6 That same year, in 2003, Massachusetts became the first state to extend marriage rights to gay and lesbian couples by a decision of its Supreme Judicial Court.7 Current court battles in other states challenging marriage laws in response to the recent onslaught of state constitutional amendments banning same sex marriage may extend to gay and lesbian couples the right to marry throughout the entire United States—at some point. For now in the United States, however, gay and lesbian couples are only permitted to marry in the District of Columbia8 and in five states: Iowa, Connecticut, Vermont, Massachusetts, and New Hampshire. Note that for a brief period, California allowed marriage for gay and lesbian couples, until 2008’s Proposition 8 banned it. However, the 18,000 same sex marriages granted prior to Proposition 8 are nevertheless still valid under California law. The fate of Proposition 8 is currently in the hands of the U.S. Ninth Circuit Court of Appeals in a case styled Perry v. Schwarzenegger and legal scholars predict the final decision on this matter will be made by the U.S. Supreme Court. And although same sex marriages are not permitted in New York, Maryland, or Rhode Island, all three of these jurisdictions seem to recognize same sex marriages validly granted elsewhere.9
Several jurisdictions afford gay and lesbian couples certain protections, through civil union statutes, domestic partnership acts and similar legislation, which have been traditionally reserved to heterosexual married couples. Nine states currently allow civil unions or domestic partnerships, which grant a range of benefits and responsibilities to same sex couples.10 Effective June 1, 2011, this number grows to ten. Recently, on January 31, 2011, Governor Patrick J. Quinn of Illinois signed a law legalizing civil unions for same sex couples in Illinois. And on January 1, 2012, Hawaii will begin recognizing same sex civil unions. Note, California’s 2005 domestic partnership legislation, which extends benefits to same sex couples nearly equal to those provided to heterosexual couples, remains in effect despite the controversial Proposition 8 banning same sex marriage.11
On the opposite side of the spectrum, three-fourths of the states have passed laws denying same sex couples the right to marry.12 Several states have added the prohibition to their state constitutions as well. In 2004, 11 states, including Kentucky and Ohio, added an amendment to their state constitution banning same sex marriage.13 At the federal level, a proposed constitutional amendment to ban same sex marriage failed in the Senate in June 2006. Nevertheless, it is possible Congress could raise the issue again in the future.
The federal government took its current position on marriage for gay and lesbian couples in 1996, when Congress passed the Defense of Marriage Act (“DOMA”). DOMA limits the federal government’s definition of marriage to the union of “one man and one woman” and prohibits the legal recognition of same gender couples.14 While historically the definition of marriage has been left to the individual states to determine, under DOMA the federal government has taken the position that it will not recognize state-sanctioned gay and lesbian marriages in any instance (for example, individual income tax matters15, Social Security benefit issues, etc.). However, on February 23, 2011, President Obama ordered the Justice Department to stop defending the constitutionality of DOMA. In response to President Obama’s order, on March 9, 2011, House Majority Leader John Boehner announced that the House General Counsel will take up the defense of DOMA on behalf of the federal government.
These explicit prohibitions have been challenged, with some success, on Constitutional grounds. Courts in some states have held that same sex couples have a constitutional right to marry.16 As similar equal protection challenges to bans on marriage for gay and lesbian couples are under review in courts across the country, in the coming years we may see more and more states declaring such bans unconstitutional.
A constitutional question arises when a gay or lesbian couple domiciled in a state that permits same sex marriage, such as Iowa, legally marries but the couple subsequently moves to a jurisdiction that prohibits same sex marriage, such as Kentucky and Ohio. Each spouse would have property rights in the other spouse’s property at death as any other surviving spouse, if they were domiciled in Iowa at the time of the first spouse to die. However, would an Ohio or Kentucky court enforce these rights? Who would be listed on probate pleadings as the decedent’s next of kin in an Ohio probate proceeding? What if the couple remained domiciled in Iowa, but an ancillary administration was required in Ohio to handle the Ohio vacation property? What if one of the parties to this same sex marriage was a beneficiary of a trust that permitted the trustee to distribute principal to the beneficiary’s spouse? What if under that same trust agreement, the beneficiary was granted (and in fact exercised) a testamentary special power of appointment permitting the assets remaining in the trust at the beneficiary’s death to be distributed to the beneficiary’s spouse? What if a same sex couple domiciled in Wisconsin who has entered into a valid Wisconsin civil union owns real estate outside of Wisconsin, let’s say in Cincinnati, Ohio—because they are big fans of the Cincinnati Reds? How should the relationship of the parties be referenced in the deed? Would this couple’s property rights be enforced by an Ohio court at the death of one of the domestic partners?
The answer to that question depends, at least in part, on whether the Full Faith and Credit clause applies to marriage for gay or lesbian couples, and in some jurisdictions it does. The Full Faith and Credit Clause of the United States Constitution, generally speaking, establishes that various states must recognize the legislative acts, public records and judicial decisions of the other states within the United States, which traditionally has included recognition of marriages. Applying this constitutional premise to a legally binding same sex marriage under Iowa law, for example, could potentially result in every state being required to recognize as a marriage a gay or lesbian couple’s union who were married in accordance with the laws of Iowa. A Florida court, however, reached a different conclusion and refused to recognize the valid marriage granted by the Commonwealth of Massachusetts to a same sex couple.17 For now, it appears unlikely that same sex marriages of Iowa, Vermont, Connecticut, Massachusetts, New Hampshire, and Washington, D.C. will have much, if any, impact outside of the respective jurisdictions. Meanwhile, as these issues are being litigated and voted upon, gay and lesbian couples must protect their relationship by implementing an estate plan that is specifically designed to meet their unique needs.
This issue is not limited to the United States. As more countries extend marriage rights to gay and lesbian couples, states now need to decide whether they will recognize same sex marriages performed in foreign countries. In June 2005, the Canadian House of Commons voted to extend marriage rights to gay and lesbian couples throughout Canada.18 As a result, anyone in a same sex relationship, regardless of where they reside since the Canadian law has no residency requirement, can travel to Canada and get married. While many countries (such as the United Kingdom, New Zealand, Norway, Finland, Denmark, Iceland, Germany, and France, among others) allow gays and lesbians to enter into legal partnerships that include certain protections afforded to heterosexual couples, Canada, Sweden, Iceland, Norway, the Netherlands, Belgium, South Africa, Spain, Argentina and, most recently, Portugal19 are the only other countries to grant full marriage rights to same sex couples. Whether the United States will recognize a same sex marriage granted in a foreign country seems unlikely in light of DOMA. However, the legal principle of “comity of nations,” defined by Black’s Law Dictionary as “the recognition in which one nation allows within its territory the legislative, executive, or judicial acts of another nation,”20 may have an impact on this issue. Applying the comity of nations concept in this instance would seem to result in the United States recognizing marriage granted to a gay or lesbian couple by the governments of other countries. Should this matter be taken to court to reconcile the differences between DOMA and the application of comity of nations, a same sex marriage granted by a foreign government could be recognized in the United States. Such recognition would significantly impact estate planning for gay and lesbian couples and the management of a gay man’s or lesbian woman’s medical and financial affairs in the event of incapacity.
If a gay or lesbian couple has children, advisors will need to be able to advise them of their parental and custodial rights. Like the law of marriage for gay and lesbian couples, the law of family and parental rights for gay and lesbian couples is also changing rapidly. Currently, adoption by same sex couples is recognized in several states, including Indiana, Illinois, California, Colorado, Iowa, Oregon, Wisconsin, and most of the Northeast, but in others it is banned. However, some bans on adoption by unmarried couples have been overturned on Equal Protection grounds. In April 2010, an Arkansas state judge held that Arkansas’ prohibition on adoption by unmarried couples (including gay and lesbian couples not allowed to marry in Arkansas) was a violation of the Equal Protection Clause. Because adoption orders, like marriage licenses, are court orders which create familial rights, the same Full Faith and Credit concerns which may apply to recognition of marriages have recently been applied to recognition of adoption orders issued to same sex couples. In 2007, the Tenth Circuit Court of Appeals in Oklahoma held that Oklahoma’s amendment banning recognition of other states’ adoption orders granting adoption to same sex couples was unconstitutional.21 While courts appear to be more willing to apply the Full Faith and Credit Clause to adoption orders, the law of adoption by same sex couples is also in a great deal of flux.
Similarly, where one partner in a gay or lesbian couple is the biological parent of a child, states differ on whether the other partner can obtain parental rights towards the child and on whether the other partner can qualify for a step-parent adoption. In Ohio, two former partners who had a child by using a sperm donor are set to argue the custodial rights of the nonbiological parent following a court of appeals decision that the nonbiological mother did not have custodial rights over the child.22 In some states, including Kentucky, a parent’s long-term partner can gain parental rights where the partner has been a significant part of a child’s life. In its January 2010 decision in Mullins v. Picklesimer, the Kentucky Supreme Court granted joint custody to a nonbiological mother who had planned for her former long-term partner’s pregnancy and helped raise the child. Effective advisors need to be able to assist their gay and lesbian clients who are planning for families together and help outline and protect their parental rights effectively.
Even with the best estate plan, federal and state laws create some planning obstacles for gay and lesbian couples which cannot be avoided. For example, gay and lesbian couples are unable to benefit under certain tort laws (such as a wrongful death action or loss of consortium), lay claim to certain property in the deceased partner’s estate, protect themselves under certain criminal laws (for example, the marital communications privilege), or participate in a partner’s employer-provided benefits (such as health insurance, retirement plan benefits, and medical or funeral leave) if the employer does not grant same sex benefits.23 Even if a state allows gay and lesbian couples to marry, they do not receive federal spousal benefits, such as Social Security survivor benefits, to file jointly a federal income tax return, or to qualify for federal military pension survivor benefits, among other things. As an advisor, you will need to be able to warn gay and lesbian couples of these issues and plan the rest of their estate in view of those matters.
The statutory protections opposite sex couples receive under state and federal law do not apply to protect gay and lesbian couples. For opposite sex couples, the law typically steps in to protect a spouse if an estate plan does not speak to a particular situation through preferences as next of kin, intestacy laws, elective shares, and dower/ curtesy. By contrast, unless gay and lesbian couples have taken steps to protect their relationship by implementing a comprehensive estate plan (which may include, among other things, a last will and testament, living trust, durable financial power of attorney, healthcare proxy, living will declaration, domestic partnership agreement) the homosexual couple runs the risk of encountering difficulties should one or both members of the relationship become hospitalized, incapacitated, or die.
An advisor should also review with their gay and lesbian clients their employer provided benefits to ascertain whether the domestic partner may participate in the employer’s health insurance plan or qualify for survivor benefits under the employee’s retirement plan—especially if the gay or lesbian client resides in a jurisdiction which requires employers to offer domestic partnership benefits to its employees. To create an effective estate plan for gay and lesbian couples, you will need a working knowledge of the rights same sex couples have under state and federal laws, a knowledge of how the couple holds title to their property, and a knowledge of what benefits the couples have through employers and under private insurance contracts. It is important for you as an advisor to be aware of the benefits, responsibilities, and protections your state affords to gay and lesbian couples in order to ensure that their estate plans conform as closely as possible with their intended result.
Estate Plan Issues
While dealing with estate plan issues can be difficult for a traditional heterosexual married couple, addressing estate plan issues for a gay and lesbian couple can be especially tenuous. The stress of discussing estate plan issues for a gay or lesbian couple can be intensified if either or both of their families disapprove of homosexuality or of same sex relationships in general. Gay and lesbian clients may fear that whatever estate plan documents they implement will be challenged later by their family members, either at their incapacitation or at death. Fear of future family problems can actually hinder gay and lesbian clients from tackling crucial estate planning issues. If minor children are involved in the gay or lesbian relationship (either through adoption, artificial insemination, or from a prior relationship—and do not assume that because it is a gay or lesbian couple children are not in the picture) another layer of complexity is added to the estate plan. This pressure can make the whole process seem unbearable. Nevertheless, gay and lesbian couples should be encouraged by their advisors to wade through these issues and start making the tough decisions. Perhaps reassuring the gay or lesbian client that so long as the individual executing the document does not become incapacitated, most of the estate plan documents he or she will implement can be revoked or amended (in whole or in part) at any time may help the individual move forward with these issues. Understanding what the term “estate planning” encompasses, becoming familiar with the purpose of each legal document that falls under the umbrella of “estate planning,” and ascertaining what documents are pertinent for the gay and lesbian client is a good starting point in the estate planning process.
Last Will and Testament.A Last Will and Testament is a legal document whereby one expresses his or her wishes as to the disposition of his or her property, to be performed or take effect after his or her death. Since there are so few laws that protect gay and lesbian couples, the couple should proceed with extreme caution and the attorney must draft this document with the utmost care. Under a Last Will and Testament, an individual can name a person (commonly referred to as an executor) to serve as the decedent’s legal representative. The executor, generally speaking, is responsible for gathering the decedent’s assets, paying the decedent’s debts and expenses, filing the appropriate income and estate tax returns, distributing the estate assets to the beneficiaries, and following other directives set forth in the document. Nominating such a person under a Last Will and Testament is important to ensure that it is a person whom the testator respects and trusts and who will honor and implement the testator’s wishes after (s)he dies. Without a Last Will and Testament, a court will appoint a legal representative for the estate, who typically is a person defined as next-of-kin of the decedent. Typically, the surviving partner in a same sex relationship is never included in the definition of next-of-kin. The Last Will and Testament can also name a guardian for any of the decedent’s minor children to ensure that such minor children are well cared for after the decedent’s death.
A large portion of a Last Will and Testament sets forth a specified desired distribution of the decedent’s assets. It is these dispositive provisions that are important to ensure that property is distributed to the surviving domestic partner, whether such disposition is outright to the domestic partner or in trust for his or her benefit. While it is not necessary, some gay and lesbian clients prefer to refer to their partner in the document as “domestic partner,” “life mate,” or some other term of endearment to describe the personal nature of their relationship. Furthermore, should a gay or lesbian client fear that his or her family members may contest the Last Will and Testament, the client should consider adding an “in terrorem” clause which, in sum, provides that should such a family member contest the validity of Last Will and Testament, any bequest or devise to such person shall be revoked. In terrorem clauses are not enforceable in every state and, more specifically, may not be appropriate in every situation. If this is the case, gay and lesbian clients should consider adding a statement or two in the Last Will and Testament confirming the testator’s intent to provide for certain individuals and affirmatively stating that others were not inadvertently omitted but rather intentionally excluded. However, be cautious when including such statements in a Last Will and Testament and make certain the information contained in such statements is factually accurate to prevent any false or factually incorrect statements from being used to support a next-of-kin’s challenge to contest the Will’s validity. Also, be sensitive to the type of statements included in a Last Will and Testament when affirmatively excluding certain family members so the estate does not have an unwarranted libel suit filed against it by an individual who may not be too happy that disparaging remarks about him or her were included in a legal document that is public record.
Lastly, if one fears a potential civil action contesting the validity of the Will, the attorney may consider whether the option is available to have the Will admitted to probate now during the life of the testator. Ohio is one of a few states to permit the testator to testify with regard to the probate of his or her will in a pre-mortem probate procedure.24
Remember to keep in mind that a Will, like most of the estate planning instruments referenced in this article, is not automatically revoked if the same sex couple separates, as is typically the case in a heterosexual marriage.
Living Trusts. A living trust (commonly referred to as “revocable trust agreement” or “inter vivos trust”) can be funded during life or receive assets at death by a “pour over” provision included in the trust creator’s Last Will and Testament. A living trust may be beneficial in order to provide a vehicle for the management of one’s assets in the event he or she should become incapacitated. If the trust is funded during one’s life, the trust-owned assets will avoid the probate administration process at such person’s death, which is public and can be cumbersome. Instead of being governed by the provisions of a Last Will and Testament, the trust assets would be administered by the trustee in accordance with the terms of the trust agreement. While the trustee can avail himself or herself of the jurisdiction of the probate court if need be, typically a living trust allows the trustee to manage and dispose of the trust assets without court intervention.
Obviously, choosing a trustee to serve at the trust creator’s death or incapacitation is of utmost importance. In addition, the creator of the trust can establish certain trusts to be created at his or her death. For example, directing that the trustee continue to hold the trust assets for the benefit of the surviving domestic partner so that the assets can be made available for the benefit of the surviving partner but not subject to estate taxation at the surviving domestic partner’s later death. The provisions of the trust may also structure distributions narrowly tailored to the client’s family makeup—especially if minor children are involved.
While a funded living trust can provide a gay or lesbian couple a great amount of privacy, a common misconception is that a funded living trust avoids estate and income taxes. Typically, this is not the case. However, there are other avenues available to gay and lesbian couples to help minimize their estate tax liability and these topics are reviewed later in this outline.
Durable Financial Powers of Attorney. Another useful tool to provide flexibility in the event of incapacity is for gay and lesbian couples to execute durable financial powers of attorney. These documents allow for another individual (commonly referred to as an “attorney-infact”) to act on one’s behalf should he or she become incapacitated. A properly drafted durable financial power of attorney can authorize the domestic partner to access bank accounts to pay the incapacitated partner’s bills, mortgage payments, etc., and allow the attorney-in-fact to manage the incapacitated partner’s financial affairs. Provisions may also be included to specifically authorize the attorney-in-fact to make gifts of the principal’s property to the principal’s domestic partner.
There are several types of durable financial powers of attorney in most jurisdictions, and gay and lesbian couples should review which type of financial power of attorney is best suited for their situation. For example, a durable financial power of attorney can be “general” and grant the attorney-in-fact authority to act at the moment the document is signed. However, in many jurisdictions, a “limited” or a “springing” durable financial power of attorney is permitted which grants the attorney-in-fact the power to act only in a certain specified circumstance or time period, typically a specific transaction (for example, selling a parcel of real estate) or a certain time period (i.e. the incapacitation of the principal). In the case of a “springing” durable financial power of attorney, the document permits the principal to retain exclusive power to manage his or her own financial affairs while able, and, at the same time, to ensure that such person’s domestic partner will have the authority to act in the event of the principal’s incapacitation.
If one becomes incapacitated and unable to manage his or her financial affairs and does not have a valid durable financial power of attorney, a guardianship court proceeding may be instituted whereby a judge would appoint an individual to serve as legal guardian for the incapacitated individual, who generally is an individual who falls under the definition of “next-of-kin” which typically excludes the domestic partner. Such a circumstance could be devastating to gay and lesbian couples where a court refuses to appoint the domestic partner as guardian and instead appoints a family member who may not look lovingly upon the homosexual relationship.
Healthcare Proxies. With respect to healthcare matters, gay and lesbian clients should be encouraged to execute healthcare proxies (commonly referred to as “durable powers of attorney for healthcare” or “medical directives”) which authorize another individual to make medical decisions for an individual when he or she is unable to do so. Such authorizations are typically very broad and allow another person to make all types of medical decisions on behalf of the incapacitated person, such as consenting to surgery, authorizing transportation to another healthcare facility, and accessing medical records. Most importantly, however, naming the domestic partner as the healthcare surrogate should provide assurance to the gay or lesbian partner that they should not be denied visitation rights or a voice in making decisions concerning the domestic partner’s health care matters.
Keep in mind that the policy of many hospitals is to allow only “family members” to visit a patient in certain circumstances. As a result, gay and lesbian couples may consider executing a visitation authorization form when being admitted to a hospital to make absolutely certain the domestic partner is not denied visitation rights. Such an authorization form is of paramount importance in the circumstance where the domestic partner is not designated as the health care surrogate.
Similar to a durable financial power of attorney, should one become incapacitated without executing a healthcare proxy, a guardianship court proceeding may be initiated in order for a court to appoint a guardian who would make medical decisions on behalf of the incapacitated patient. Again, in this instance, a court would determine who it feels is best suited to make such decisions on the incapacitated person’s behalf—who may or may not be the domestic partner. Without a valid healthcare proxy, very little protection is afforded to the gay and lesbian couple, and the domestic partner runs the risk of having his or her partner excluded from any participation in the healthcare decision process.
Living Will Declarations. A living will directive or living will declaration is a document expressing an individual’s desires concerning how he or she wishes to be treated from a medical perspective in certain circumstances. Typically a living will directive or declaration is only operative if the patient is in a terminal condition, a permanently unconscious state, or some other seriously grave condition. Such a directive or declaration sets forth a person’s desire to discontinue healthcare treatment in certain circumstances, including the administration of artificially supplied nutrition and hydration, and allow the patient to die naturally. Advisors should recommend to gay and lesbian clients that they execute both a healthcare proxy and a living will directive and deliver a photocopy of these documents to their healthcare providers. Also, recommend gay and lesbian clients have a candid discussion with their doctor to make certain the physician is aware of the nature of the relationship between the domestic partners. These steps should help ensure that the domestic partner is permitted to make healthcare decisions for the partner and guarantee that each of their wishes will be honored should either of them become terminally ill, permanently unconscious, or otherwise gravely ill.
Historically, hospitals have often denied gay and lesbian couples visitation rights and resisted enforcement of health care proxies given to nonfamily members. However, President Obama recently directed the Secretary of Health and Human Services to extend hospital decision-making and visitation rights to gay and lesbian partners for all Medicare and Medicaid participant hospitals (which is most hospitals in the United States). Once this directive is codified, it should be significantly easier for an ailing partner to make sure that his or her partner has decision-making rights. Even afterward these regulations go into effect, however, gay and lesbian couples will need to properly document their intent to give each other that authority so as to avoid confusion and unnecessary delay.
Domestic Partnership Agreements.While laws of every state grant various rights and privileges to the traditional heterosexual married couple in the event the relationship terminates by death, divorce, dissolution or otherwise, few states provide such protections to same sex couples. Therefore a domestic partnership agreement may be a vehicle where a gay or lesbian couple can establish certain legally enforceable rights between each other. Such an agreement can set forth the financial responsibilities of each partner and describe with particularity the rights of each party to the couple’s property—especially if such property is jointly owned. The agreement should outline the division of property in the event the relationship terminates by any means other than death. Note, however, there could be tax costs associated with any transfer of property, as Internal Revenue Code § 2516 provides that gift taxes will not apply to property transferred pursuant to a divorce decree because such transfers are deemed to be made for full and adequate consideration. If the jurisdiction does not permit a same sex couple to register their relationship with a clear means to document when the relationship has been terminated, the domestic partnership agreement should define in what circumstances the relationship will be deemed terminated so that the property rights can be established and financial obligations enforced.
There remain questions, however, whether a court will enforce such an agreement where the state legislature has not authorized domestic partner agreements or when the state has enacted a constitutional amendment prohibiting any protection to unmarried same sex couples. Presumably, courts would look favorably upon such agreements as they are analogous to any other financial contract whereby the parties outline their rights and responsibilities with respect to property, so long as mutual consideration is given by each party to the contract. If one party’s consideration for the contract is only his or her services of a domestic nature (such as the agreement by one party to take the laboring oar in the couple’s domestic and social undertakings) the validity of the agreement may not fare well if challenged. If the couple owns property in various states, the couple should pay careful attention to the law of each such jurisdiction so as to not violate any state’s laws on domestic partnership agreements. If there appears to be a question about the validity of such agreements in one of the states where the gay or lesbian couple owns property, they should consider executing a separate agreement for the property located in that state. Until further protections are provided to gay and lesbian couples, they should approach the implementation of a domestic partnership agreement as they would any other business contract.
Life Insurance and Long-term Care Insurance. Life insurance, if owned properly, can provide the necessary liquidity at a partner’s death as well as supplement the loss of the deceased partner’s income, should he or she die unexpectedly. Careful consideration should be given as to whose life will be insured, as well as who will be the owner and beneficiary of such policies. In some circumstances due to the inability to take advantage of the marital deduction, it may be appropriate for the gay or lesbian couple to have cross-owned insurance; that is, each partner is the owner and beneficiary of a life insurance policy on the life of the other partner. In this instance, at the death of one party, the surviving partner (as the owner and beneficiary of the life insurance policy) will receive the proceeds of such policy to help meet his or her living expenses after the loss of the loved one. Another advantage to this approach is that the proceeds from the policy will not be taxed in the deceased’s partner’s estate since such person was neither the owner nor beneficiary of the policy. However it is important to review the “insurable interests” rules when domestic partners purchase life insurance on the life of the partner. To be safe, make certain the insurance company being considered will recognize that the domestic partner has an “insurable interest” and will be permitted to own a policy on the life of the partner.
If cross-owned life insurance is not appropriate, the gay or lesbian couple may consider the creation of an Irrevocable Life Insurance Trust (“ILIT”) which could purchase a life insurance policy. If a life insurance policy is already in existence, such policy can be transferred to the trust by the policy owner. The trust would be the owner and beneficiary of the policy. At the insured’s death, the trust would be the recipient of the policy proceeds and the trustee would administer such funds in accordance with the provisions of the trust agreement, which could benefit the domestic partner for his or her life, with the remainder to the deceased partner’s family and/or to charity. If an ILIT is properly drafted and administered, the proceeds of the life insurance policy will escape estate taxation at the insured’s death.
Considering the advances in medical technology, the costs associated with receiving such medical treatment, and the ever-increasing longevity of our population, long-term care insurance is becoming an important component of one’s estate plan. Long-term care policies currently being issued are more comprehensive and affordable than they have been in the past. Further, the premiums for such policies may be deductible for income tax purposes (with some limitations) as a health insurance expense. Consequently, regardless of age, advisors should encourage their gay and lesbian clients to consider long-term care insurance to determine whether it is appropriate.
Designation of Heir at Law and Change of Name. If the gay or lesbian couple is concerned that family members may cause problems in the event he or she becomes incapacitated or at his or her eventual death, certain states provide a mechanism which permits a competent adult to designate another person as their “family,” or legal “next of kin.” Such a designation can provide further protections to the gay or lesbian couple to help insulate them from such problems. For example, Ohio law allows a competent adult to appear before a probate judge and file a written declaration stating that as a free and voluntary act, he or she designates and appoints another individual (presumably the domestic partner) to stand in relation as an heir at law in the event of his or her death. If satisfied that the declarant is of sound mind and memory and free from restraint, the probate court judge must approve such a designation. Thenceforward, the person designated will stand in the same relation, for all purposes, to such declarant as he or she could if he or she was a child born in lawful wedlock.25 Consequently, such a declaration should deter disgruntled family members from contesting a Last Will and Testament because if such contest were to be successful, the decedent may be considered to have died intestate and the decedent’s next of kin (the designated heir) would receive all of the decedent’s probate property. Furthermore, since the Ohio statute specifically notes that the designated heir is considered the person’s next of kin “for all purposes,” he or she should have priority in being appointed guardian of the estate and guardian of the person for their partner in the event disgruntled family members initiate guardianship proceedings. In Ohio, the designation of heir can be vacated or changed one year after the grant of the declaration by a probate court judge. This flexibility is typical in a designation of heir at law statute and can make this procedure attractive to gay or lesbian couples.
In addition to designating an heir at law, to help define their relationship gay and lesbian couples may consider petitioning the probate court for the purpose of legally changing their names so that the couple can have a common surname. This option may be of particular importance to the gay and lesbian couple if they have or intend to have children.
Titling of Property. When gay or lesbian couples are delving into estate planning issues, it is imperative that they consider how their property is titled and whether it is appropriate to retitle any property. Not taking into account how one’s property is titled can render a sophisticated estate plan ineffective.
Typically, a Last Will and Testament governs the distribution of probate property only. Probate property is generally defined as property held in the decedent’s name alone, for which no beneficiary designation applies. In other words, life insurance, retirement accounts, pay-ondeath accounts and jointly held property (with the right of survivorship) are non-probate assets that are not governed by the terms of one’s Last Will and Testament, to the extent that a beneficiary designation form has been properly completed. Similarly, a trust agreement, even if eloquently drafted, would be rendered ineffective if title to property ultimately is not transferred to the trust. Even if an individual transfers his or her property to the living trust during life, such individual should still prepare a Last Will and Testament containing a “pour over” provision—which states that any property not transferred to the living trust during the decedent’s lifetime should be transferred to such trust at his or her death—to ensure that all of one’s assets are distributed in a cohesive fashion in accordance with the trust agreement.
While most assets can be transferred to a living trust in order to avoid probate, certain assets are not eligible to be owned by a trust. For instance, the owner of an IRA account can not transfer title of the account to his or her living trust. However, the IRA owner can avoid probate administration of the IRA account proceeds remaining at the owner’s death by completing a beneficiary designation form. Therefore, to ensure that all of the assets pass to the intended beneficiaries, advisors should instruct their clients to review whether they own any assets that can pass via a beneficiary designation and if so, encourage the completion of a beneficiary designation form to ensure that such assets pass in a desirable fashion. If a gay or lesbian fears workplace problems if he or she designates the employer provided benefits to the domestic partner, the gay or lesbian client should consider creating a living trust (which could benefit the domestic partner). In that case he or she can simply designate the living trust as the primary beneficiary. While this approach may be beneficial in ensuring privacy, such approach may not be the most advantageous from an income tax standpoint when retirement account assets are involved. Designating a trust as the primary beneficiary of retirement accounts could result in such assets being distributed over a shorter time period than otherwise might be available if such retirement account assets were payable directly to the domestic partner. Consequently, an advisor should review such matters carefully with their gay and lesbian clients to understand which objectives (privacy v. delay in the recognition of income) is paramount.
Should the gay or lesbian couple decide to own property jointly, careful attention should be given prior to the titling of such property so as to avoid any adverse gift or estate tax consequences. From a creditor protection standpoint, converting property from individual ownership to joint ownership could subject the property to the creditors of the domestic partner. If gay and lesbian couples are considering retitling their assets to joint own ership to ensure that such property passes to the surviving partner at death, other options might be available to accomplish this objective. For example, one may designate an investment brokerage account titled in one partner’s individual name as “pay on death” to the surviving domestic partner or could re-title residential real estate titled solely in one partner’s name as “transfer on death” to the surviving domestic partner. If joint ownership is necessary, extreme care should be given to the creation of the joint tenancy and advisors must ensure that their gay and lesbian clients understand the gift and estate tax consequences of jointly owning property.
Gift, Estate, and Generation Skipping Taxes
Gift Taxes. Gratuitous transfers between same sex couples can inadvertently result in a gift tax liability. Currently, each person may make a tax-free annual exclusion gift of a present interest in property each year having a value up to $13,000 per donee. Any gift of a present interest in any one year exceeding $13,000 is considered a taxable gift. Whether any tax is actually due as a result of such gift depends on whether the donor has utilized his or her lifetime $5 million exemption. Gifting between a traditional heterosexual married couple typically is not a problem from a gift tax standpoint because gifts between husbands and wives qualify for an unlimited marital deduction. However, same sex couples are not permitted to utilize the marital deduction as a result of the non-recognition of their “marital” relationship. Advisors should remind their clients that payments made directly to an educational or medical institution on behalf of another person are exempt from gift tax entirely. Since there is no limit on such payments, significant gifts can be made on a partner’s behalf for medical and educational purposes, in addition to annual exclusion gifts, without incurring any gift tax liability.
Estate Taxes. In 2011, the federal unified credit and transfer tax exemption amount from federal estate taxes is $5 million. This exemption amount determines the amount of assets that can pass free of federal estate tax at one’s death (if not used during life). Similar to gift taxes, gay and lesbian couples are not afforded the opportunity to take advantage of the marital deduction for estate tax purposes if their taxable estates exceed the exemption amount. The inability to utilize the marital deduction can result in a significant estate tax liability at one partner’s death, as the maximum tax rate for assets in excess of $5 million will be 35%.26 Because of the severity of the estate tax, gay and lesbian couples should consider other means of transferring their assets to their loved ones, designed to incur the least amount of gift and estate tax liability.
Another trap for the gay or lesbian couple is the taxation of jointly owned property. Jointly owned property is taxed quite differently depending on whether the joint owners are married. The general rule in Internal Revenue Code § 2040 provides that the entire value of jointly owned property where the joint owners are not married is included in the gross estate of the first owner to die, except to the extent that the survivor can show that he or she contributed consideration toward the acquisition of the property. Conversely, if the joint owners are married, the general rule is that only one-half of the value of the jointly held property is included in the gross estate of the first owner to die regardless of who supplied the consideration. As a result, if the jointly owned property between a married heterosexual couple is held as “joint tenants with rights of survivorship,” the one half interest in the property included in the decedent’s estate will receive the benefit of the marital deduction and pass to the surviving spouse free of federal estate tax. For gay and lesbian couples, to prevent the inclusion of the entire value of jointly owned property in the taxable estate of the first partner to die (for which no marital deduction is available), they must document how much consideration each party contributed toward the acquisition of the property for future use in determining the extent such property will be taxed at the death of the first domestic partner to die.
Generation Skipping Transfer Tax.In addition to gift and estate taxes, a tax is imposed on a transfer of property to a “skip person” or to a trust for the benefit of a “skip person.” Similar to gift and estate taxes, there is an exemption amount available to each taxpayer for generation skipping transfers. In 2011, this exemption amount is equal to the unified credit for federal estate tax purposes.
Typically a “skip person” in a traditional heterosexual married relationship is a grandchild of the couple. However, since same sex partners are not married, the Internal Revenue Code provides that a person is a “skip person” if he or she is more than 371/2 years younger than the transferor. While it is possible to attract the generation skipping transfer tax if one of the domestic partners is significantly younger, it is more likely that one may inadvertently attract this tax by providing for the children, grandchildren, nieces and nephews of the domestic partner or other loved ones. Consequently advisors must be proactive in discussing generation skipping transfer taxes and inquiring about the ages of the beneficiaries under the estate plan so that the parties are aware of the potential additional tax.
Special Valuation Rules. The Internal Revenue Code provides for certain limitations on the valuation of property in the event the transfer is among certain family members. These restrictions pertain to traditional family members and as such, may not apply to gay and lesbian couples who wish to utilize certain estate planning vehicles to minimize gift and estate taxes. “Family member” is as an individual’s spouse, any ancestor or lineal descendent of such individual or such individual’s spouse, any brother or sister and any spouse of any individual described above.27 Missing from this list is a domestic partner. Consequently, gay and lesbian couples may not need to worry about these special valuation rules and can be proactive in transferring assets for the benefit of the domestic partner while at the same time leveraging the size of the gift.
For instance, a Grantor Retained Annuity Trust (“GRAT”) can be useful if property is appreciating but the domestic partner does not want to make an outright gift because he or she may need the income from the property currently or wants to reduce the amount of the gift so that the taxable portion of the gift is less than the donor’s remaining gift tax exemption amount. In this circumstance, the domestic partner can place property in trust for a number of years, retain the right to receive an annuity amount for that time period, and at the earlier of the domestic partner’s death or the term set forth in the agreement, the property would pass to the other domestic partner. The initial transfer of the property to the trust results in a gift. However, the value of the property placed in the trust is reduced by the actuarially determined value of the retained annuity interest. Consequently, gift taxes or use of gift tax exemption are minimized. A GRAT can be a useful tool for passing assets to a less wealthy domestic partner or to the children of the less wealthy partner at a reduced transfer tax cost. If the trustee is successful in investing the trusts assets for growth and the assets appreciate significantly during the term of the trust, the net worth of the gay or lesbian couple is enhanced.
A Grantor Retained Income Trust (“GRIT”) is similar to a GRAT, but the grantor retains only an income interest for a fixed number of years rather than a certain dollar amount. At the expiration of the term, the GRIT terminates and the assets of the trust are distributed to the remainder beneficiary. Again, the value of the retained interest is deducted from the value of the property transferred to the trust for gift tax purposes, which reduces the overall value of the taxable transfer. If the grantor retains a contingent reversion in the trust property, the value of the grantor’s retained interest is increased, further reducing the value of the gift.
The GRIT is rarely used in estate planning since the enactment of IRC § 2702 and can be overlooked by estate planners. However, a GRIT can be an extremely beneficial instrument in estate planning for a gay or lesbian couple since IRC § 2702 typically is not a factor. The tax benefits can be further enhanced if the GRIT is drafted to be a grantor trust for income tax purposes in which the grantor pays the income tax liability associated with both the ordinary income (which is typically distributed to the grantor) as well as on the capital gains (which remain in the trust). If the trust is structured in this fashion, the trust’s assets will not be used to pay any capital gains tax leaving more corpus for investment and eventual distribution to the remainder beneficiary.
With a Qualified Personal Residence Trust (“QPRT”) a domestic partner can transfer ownership interests in a principal residence or a vacation home to an irrevocable trust that operates in a manner similar to a GRAT and GRIT. In a QPRT, however, rather than retaining an annuity payment or income stream, the grantor retains the right to live in the home for a term of years. After the term expires, ownership of the property is transferred to the trust beneficiaries. The advantage of such a transaction, again, is the reduced value of the gift for transfer tax purposes. One disadvantage of a QPRT is that once the trust term expires, the creator of the trust may be required to lease his or her own residence from the trust beneficiaries if he or she still wants to live in the home. In some instances, the creator of the QPRT would purchase the home from the QPRT prior to the trust terminating and receive a stepped-up cost basis. Treasury Regulation § 25.2702-5(b)(1) prohibits the trust creator from such action if the beneficiaries of the QPRT are members of the trust creator’s family. So in the cases of same sex couples, this prohibition would not apply.
In cases of the GRAT, GRIT, and QPRT, if the creator of the instrument dies during the term, the assets of the trust will be includible in the creator’s estate. In this instance, the creator is no worse off for having created those arrangements, since such assets would have been included in his or her taxable estate had the GRAT, GRIT, or QPRT not been executed. Such result, in most circumstances, should not outweigh the benefits of leveraging the value of the gift by implementing a GRAT, GRIT, or QPRT.
Charitable Trusts. Gay and lesbian couples who are charitably inclined have an array of options to satisfy their charitable intentions. For example, clients may consider a gift annuity, which is part sale, part gift to the charity. The assets are transferred to the charity in exchange for the charity’s promise to pay an annuity to the donor. Certain income tax rules apply (for example, capital gains, and/or limitations on charitable deductions) and such rules should be carefully reviewed.
Another option is a charitable remainder trust or charitable lead trust. In a charitable remainder trust (“CRT”), the creator retains an income or annuity interest, with the remainder passing to charity at the end of a term. A charitable remainder trust is ideally suited to someone with low basis, low yield assets, who is seeking or intending to sell those assets to obtain a higher return without reducing the investible funds by capital gains tax. Also, a CRT funded at death with retirement account assets is an excellent estate tax planning tool to utilize in order to provide an income stream or annuity payment to the surviving domestic partner with the remainder of the property being distributed to charity.
In the alternative, gay and lesbian couples might consider creating a charitable lead trust (“CLT”) whereby a charity would receive income for a certain number of years and thereafter such assets pass to an individual beneficiary, for example, the poorer domestic partner. Such a vehicle can satisfy both a client’s charitable intentions and the desire to transfer assets to the domestic partner at a lower gift tax value.
Estate advisors must be keenly aware of what legal protections provided to gay and lesbian couples exist as well as be able to recognize what gaps exist in the law that could render gay and lesbian clientele and their estate plan documents vulnerable to attack. An advisor who understands what gaps exist in the law and is proactive in advising clients to take steps necessary to mitigate any ill effects of the law is an advisor who is truly serving his or her clients well.