Estate Planning for Same-Sex Couples and Unmarried Couples After Obergefell: Detriment or Opportunity?

Continuing with our reports from the 2016 Heckerling Institute on Estate Planning 

Joshua S. Rubenstein of Katten Muchin and Rosenman LLP and William P. LaPiana from New York Law School presented a very informative session on estate planning for same-sex and unmarried couples under the current environment. It provided several income tax and estate planning scenarios where the decision requires attention to estate plans in effect and income tax planning for 2015 and forward.

As a brief summary of where we stand now, on June 26, 2015, the U.S. Supreme Court ruled that a state ban on same sex marriage is unconstitutional, in violation of the equal protection clause of the Fourteenth Amendment. This landmark ruling in the combined cases known as Obergefell v. Hodges struck down every state ban on same-sex marriage in the  country, and by virtue of this ruling, Section 2 of DOMA was also struck down, which declared that states have the right to deny same-sex marriages licensed in other states.  In 2015, all states now follow federal law so for the very first time we are finally in a position where all married couples – same-sex or not – are treated equally for tax purposes.

For estate tax purposes, it is important that same-sex couples who may have done planning prior to marrying or prior to their marriage being recognized re-visit their estate plan.  Mr. Rubenstein provided some planning opportunities; the following outlines a few to consider: 

• Get married to take advantage of the unlimited marital deduction.  Now that same-sex marriage is legal in all 50 states and Washington DC, those couples who have been holding off getting married or who have entered into civil unions or domestic partnerships should get married if they desire to take advantage of the federal benefits afforded to married couples, such as the unlimited marital deduction from federal estate and gift tax.
• Review current estate planning documents to ensure that the amount and structure of any spousal bequests remain appropriate. Existing estate planning documents may have been prepared under the assumption that any gift or bequest to a spouse of the same sex couple over and above the individual’s Applicable Exclusion Amount would be subject to federal estate tax (currently at a rate of 40%). However, that assumption is no longer true, and 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 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.
• Review retirement account beneficiary designations and joint and survivor annuity elections to ensure that they remain appropriate.  A surviving spouse is entitled to roll over a decedent spouse’s retirement account into the surviving spouse’s retirement account without being required to take minimum distributions or lump sum distributions until such time as the surviving spouse ordinarily would be required to take minimum distributions (usually upon attaining age 70½). Since this benefit is now available to married same-sex couples, 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.
• Consider replacing individual life insurance policies with survivor policies. Many same-sex spouses previously purchased individual life insurance policies of which the other spouse is the beneficiary in order to provide the surviving spouse with sufficient liquid assets that may be used to pay federal estate taxes due upon the death of the first to die. With the unlimited marital deduction and DSUE available to married same-sex couples, there may be no need for such liquidity upon the death of the first spouse to die. Thus, a married same-sex couple should consider whether such policies should be maintained or replaced with so-called “second-to-die” policies that pay benefits only upon the death of the surviving spouse. Such policies provide liquidity to children or other beneficiaries of the married same-sex couple, and are generally less expensive than individual policies having the same death benefits.
• Consider splitting gifts between spouses.  Until now, each spouse could make gifts only up  to the  annual exclusion amount from federal gift tax and federal generation-skipping transfer 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. This way, both spouses currently may give up to $28,000 to any individual without using any portion of either spouse’s Applicable Exclusion Amount.  

While these are just a few suggestions that should be looked at immediately there are many reasons that married same-sex couples should be speaking to their attorney and accountant immediately.